**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

**FORM 10-K/A**

Amendment No. 1

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

**Securities Exchange Act of 1934**

**For the fiscalyear ended December 31, 2005**

**WHITNEY INFORMATION NETWORK, INC.**

(Exact name of registrant as specified in charter)

| **Colorado**                     |   | **0-27403**               |   | **84-1475486**          |
|----------------------------------|--------|---------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (Commission File  Number) |   | (I.R.S. Employer        |
| incorporation or  organization)  |   |                      |   | 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) hasfiled all reports required to be filed by section 13 or 15 (d) of the ExchangeAct during the preceding 12 months (or such shorter period that the Registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” 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 non-votingcommon equity held by non-affiliates of the Registrant, computed by referenceto the closing sale price of such common equity as quoted on the NASD’s Overthe Counter Electronic Bulletin Board of $8.98 per share as of November 8, 2006was $105.3 million.

The Registrant had 11,729,109 shares of common stockoutstanding as of November 10, 2006

The Registrants’ revenues for the year ended December 31,2005 were $ 163.1 million.

Documents incorporated by reference:  None

 

 

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**EXPLANATORYNOTE**

**RESTATEMENT**

*Overview*

This amendment to Whitney Information Network, Inc.’sRegistration Statement on Form S-1 restates our Consolidated FinancialStatements and other financial information for the years endedDecember 31, 2005, 2004, 2003, 2002 and 2001 and for each of the quartersin the years 2005 and 2004. Certain of our material control weaknesses resultedin inaccurate financial reporting and restatements to our previously filedConsolidated Financial Statements from 2001 through 2005. The effect of therestatement on our statement of financial position at the end of the reportedperiods is summarized in the table below. The financial restatements reflect:

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

·                  reclassificationsin financial statement categories and the timing of accruals necessary forcomparability to the current period’s presentation; and

·                  arevision to the revenue recognition policy with respect to our teleconferencingproduct and service offering, and subscription services.

*Summary effects of restatement*

The following table sets forth the effects of therestatement on our previously reported Consolidated Statement of Operations forthe years ended December 31, 2005, 2004, 2003, 2002 and 2001.
| ** **                                         | ** ** | ** **                                                           | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Effects of restatement**               | ** ** | **Total**                                                            | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                         | ** ** | **(in thousands except per share amounts)** | ** ** |
| Revenue recognition  policy change                 |       | $                                                                    | (30,004    | )                                           | $          | (12,791 | ) | $ | (1,698 | ) | $ | (5,767 | ) | $ | (8,446 | ) | $ | (1,302 | ) |
| Teleconferencing and  subscription deferral policy |       | (1,116                                                               | )          | (746                                        | )          | (370 | ) |   |   |   |   |   |   |
| Net earnings (loss)                                |       | $                                                                    | (31,120    | )                                           | $          | (13,537 | ) | $ | (2,068 | ) | $ | (5,767 | ) | $ | (8,446 | ) | $ | (1,302 | ) |
| Earnings (loss) per  share as previously reported: |       |                                                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                                            |       |                                                                 |       | $                                           | 1.86       |   | $ | (3.48 | ) | $ | (0.19 | ) | $ | 0.71 |   | $ | 0.33 |   |
| Basic                                              |       |                                                                 |       | 1.96                                        |       | (3.48 | ) | (0.19 | ) | 0.78 |   | 0.33 |   |
| Earnings (loss) per  share as restated:            |       |                                                                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                                            |       |                                                                 |       | $                                           | 0.41       |   | $ | (3.72 | ) | $ | (0.89 | ) | $ | (0.28 | ) | $ | 0.16 |   |
| Basic                                              |       |                                                                 |       | 0.43                                        |       | (3.72 | ) | (0.89 | ) | (0.28 | ) | 0.16 |   |

 

***Background***

In May 2005, we changed the United Kingdom revenuerecognition policy to conform to our North American operations’ practice ofrecognizing revenue upon the expiration of the student’s contract. Ourworldwide business practice was to allow our students to attend coursessubsequent to the expiration of the contract. Our current business practiceshave not changed significantly.

The original revenue recognition policy was establishedat the inception of our European operations and was initially driven bycustomer service and capacity considerations. As the United Kingdom operationsmatured, we sought to establish conformity with our North American operationsrevenue recognition policy; therefore, the revenue recognition policy changedin May 2005 to recognize revenue upon the earlier of attendance or thestudent contract’s expiry. In the second quarter of 2005, we changed the UnitedKingdom revenue recognition policy and recorded approximately $1.3 millionin revenue in connection with expired contracts.

In connection with the review of our RegistrationStatement on Form S-1, we had discussions with Staff members of theSecurities and Exchange Commission (“SEC”) regarding the May 2005 changein policy with respect to revenue recognition in the United Kingdom. Throughthese discussions, we identified errors in the application of our revenuerecognition policy in compliance with generally accepted accounting principlesin the United Kingdom and in North America because our business practice of allowingstudents to complete courses after the expiration of their contracts was notconsistent with our revenue recognition policy in the United Kingdom and inNorth America between 2001 and 2005.

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Accordingly, we elected to restate our Consolidated FinancialStatements to correct these errors. Upon implementation of the new revenuerecognition policy, we restated our Consolidated Financial Statements from 2001through and including 2005. These restatements resulted in recognition ofrevenue based upon when the course is attended or once the likelihood ofattendance by the student becomes remote, as described further in our RevenueRecognition Policy below.

Our revenue recognition policy is consistently appliedworldwide. Moreover, our worldwide business practice to allow our students toattend courses subsequent to the expiration of the contract remains ourbusiness practice today and for the foreseeable future.

*Revenue recognition policy*

We are engaged primarily in the business of providingreal estate and financial markets education to individual investors 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 when it is received.Revenue is earned when the student attends the course.

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 theConsolidated 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:

—                                   percentage of students who never attended a courseand those students who never attended a course subsequent to expiration; and

—                                   highest number of days in which 95% of thosestudents who attended our courses subsequent 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, we calculate verifiable andobjective supporting data as of each balance sheet date.

To the extent our financial markets education division(EduTrades, Inc. a wholly owned subsidiary) and United Kingdom businessesdo not have three full years of data (subsequent to course expiration); werecognize revenue based on course attendance. Only at such time that we havedeveloped verifiable and objective data over a three year period subsequent tocourse expiration will we apply course breakage based on the methodologydescribed above.

With respect to our EduTrades division and theUnited Kingdom, we expect to have sufficient data to apply course breakage bythe end of 2006. Accordingly, we anticipate reflecting course breakage ascontemplated above in the quarter ending December 31, 2006, for thecourses sold as of the beginning of the first quarter of 2003 through the endof the fourth quarter of 2005 which remain expired and unattended. We expect torecognize between approximately $18 million and $22 million ofdeferred revenue in the fourth quarter of 2006 from initial application of thecourse breakage related to the period prior to January 1, 2006 to ourEduTrades division and United Kingdom businesses.

As a result of applying this policy, during the yearsended December 31, 2005, 2004 and 2003 we recognized $16.6 million,$18.1 million and $19.0 million, respectively, in revenue related tocourse breakage.

*Reclassifications*

We reviewed our financial statement classifications andrestated the 2004 and 2003 Consolidated Financial Statements as necessary forcomparability with the 2005 presentation. Certain expense items weremisclassified in 2004 and 2003. Reclassifications were required in prior periodline item expense categories and the timing of accruals necessary forcomparability to the current period’s presentation. Similar expense items arenow classified within the same Statement of 

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Operations line item for all periods presented. The need forreclassifications is a result of the lack of sufficient and qualified personnelover the accounting and reporting function. As qualified people were broughtinto the organization, consideration was given to the presentation of theparticular line items. It was determined the reclassification would betterdemonstrate the activities of our business. These reclassifications have nocumulative effect on reported earnings, cash flows or adjusted earnings beforeinterest, taxes, depreciation and amortization (Adjusted EBITDA) for 2004 and2003.

*Teleconferencing and subscription services*

Upon review of our revenue recognition policies for allservice and product offerings, we concluded the previous revenue recognitionpolicy with respect to our teleconferencing and subscription based offeringsneeded to be modified in order to comply with the Financial Accounting StandardBoard’s Emerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*andStaff Accounting Bulletin No. 104 (SAB 104). These restatements haveno cumulative effect on our Consolidated Statement of Cash Flows.

In response to the issues raised as described above, we

·                  completeda review of our revenue recognition practices and have implemented changes asnecessary to account for revenue recognition in accordance with the revisedpolicies as of January 1, 2006; and

·                  takenaction to assure material expense accruals are recorded in the appropriateperiod; and

·                  restatedour previously issued Consolidated Financial Statements to reflect the newrevenue recognition policies and accrual practices.

*Effects of restatement*

The following tables set forth the effects of therestatement on affected line items within our previously reported financial statementsfor the years ended December 31, 2005, 2004 and 2003 and for each of thequarters in the years 2005 and 2004.

 
| ** **                                | ** ** | **2005**                                                              | ** ** | **2004**         | ** ** | **2003**                     | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **As  previously  reported**                                          | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Consolidated  Statement of Operations** |       |                                                                  |       |             |       |                         |       |   |   |   |   |   |   |
| Revenue                                   |       | $                                                                     | 178,564    |             | $          | 163,107                      |       | $ | 139,859 |   | $ | 136,259 |   | $ | 94,958 |   | $ | 89,805 |   |
| Direct course  expenses                   |       | 96,520                                                                |       | 94,765           |       | 57,952                       |       | 91,763 |   | 46,804 |   | 51,868 |   |
| Advertising and  sales expense            |       | 50,003                                                                |       | 49,839           |       | 79,533                       |       | 49,664 |   | 27,508 |   | 30,092 |   |
| Earnings (loss)  from operations          |       | 4,377                                                                 |       | (9,161           | )          | (30,776                      | )          | (32,844 | ) | (1,709 | ) | (7,476 | ) |
| Net earnings  (loss)                      |       | $                                                                     | 17,388     |             | $          | 3,850                        |       | $ | (29,896 | ) | $ | (31,963 | ) | $ | (1,558 | ) | $ | (7,325 | ) |
| Per share amounts:                        |       |                                                                  |       |             |       |                         |       |   |   |   |   |   |   |
| Diluted earnings (loss) per share         |       | $                                                                     | 1.86       |             | $          | 0.41                         |       | $ | (3.48 | ) | $ | (3.72 | ) | $ | (0.19 | ) | $ | (0.89 | ) |
| Basic earnings  (loss) per share          |       | 1.96                                                                  |       | 0.43             |       | (3.48                        | )          | (3.72 | ) | (0.19 | ) | (0.89 | ) |

 
| ** **                                                           | ** ** | **2005**                     | ** ** | **2004**         | ** ** | **2003**                     | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**      | ** ** |
| **Consolidated  Statement of Changes in Stockholders’ Deficit** |       |                         |       |             |       |                         |       |   |   |   |   |   |   |
| Balance at  January 1                                           |       | $                            | (33,609    | )                | $          | (51,560                      | )          | $ | (4,157 | ) | $ | (19,930 | ) | $ | (3,102 | ) | $ | (12,865 | ) |
| Increase  (decrease) attributable to net earnings (loss)             |       | 17,388                       |       | 3,850            |       | (29,896                      | )          | (31,963 | ) | (1,558 | ) | (7,325 | ) |
| Currency  translation adjustments, net (a)                      |       | (155                         | )          | (100             | )          | 166                          |       | 55 |   | (348 | ) | (591 | ) |
| Balance at  December 31                                         |       | $                            | (9,052     | )                | $          | (40,486                      | )          | $ | (33,609 | ) | $ | (51,560 | ) | $ | (4,157 | ) | $ | (19,930 | ) |

 

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(a)                                  The change in foreign currency translation isattributable to the restatements arising from the change in revenue recognitionpolicies.
| ** **                                        | ** ** | **2005**                     | ** ** | **2004**         | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|------------------|------------|
| **At December 31**                      | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                        | ** ** | **(in thousands)**      | ** ** |
| **Consolidated  Balance Sheets**                  |       |                         |       |             |       |   |   |   |   |
| Deferred course  expenses                         |       | $                            | 9,513      |             | $          | 14,401 |   | $ | 8,825 |   | $ | 11,898 |   |
| Deferred course  expenses, noncurrent             |       |                         |       | 99               |       |   |   |   |   |
| Total assets                                      |       | 97,216                       |       | 102,203          |       | 56,955 |   | 60,028 |   |
|                                              |       |                         |       |             |       |   |   |   |   |
| Deferred revenue                                  |       | 80,580                       |       | 116,777          |       | 62,689 |   | 83,713 |   |
| Deferred  revenue, noncurrent                     |       |                         |       | 224              |       |   |   |   |   |
| Total  liabilities                                |       | 102,329                      |       | 138,750          |       | 88,587 |   | 109,611 |   |
| Foreign currency  translation adjustment          |       | (337                         | )          | (650             | )          | (182 | ) | (550 | ) |
| Accumulated  deficit                              |       | (19,757                      | )          | (50,878          | )          | (37,145 | ) | (54,728 | ) |
| Total  stockholders’ deficit                 |       | (9,052                       | )          | (40,486          | )          | (33,609 | ) | (51,560 | ) |
|                                              |       |                         |       |             |       |   |   |   |   |
| Total liabilities and  stockholders’ deficit |       | $                            | 97,216     |             | $          | 102,203 |   | $ | 56,955 |   | $ | 60,028 |   |

 
| ** **                                | ** ** | **2005**                                                              | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **First quarter**                                                | ** ** | **Second quarter** | ** ** | **Third quarter** | ** ** | **Fourth quarter** | ** ** |
| **Unaudited  quarterly information** | ** ** | **As  previously  reported**                                          | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Consolidated  Statement of Operations** |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                   |       | $                                                                     | 40,170     |   | $ | 38,434 |   | $ | 46,520 |   | $ | 40,898 |   | $ | 46,820 |   | $ | 44,050 |   | $ | 45,054 |   | $ | 39,725 |   |
| Operating  expenses                       |       | 36,062                                                                |       | 38,020 |   | 44,053 |   | 43,380 |   | 45,407 |   | 46,454 |   | 48,665 |   | 44,415 |   |
| Earnings (loss)  from operations          |       | 4,108                                                                 |       | 414 |   | 2,467 |   | (2,482 | ) | 1,413 |   | (2,404 | ) | (3,611 | ) | (4,690 | ) |
| Net earnings  (loss)                      |       | $                                                                     | 4,149      |   | $ | 811 |   | $ | 3,159 |   | $ | (2,120 | ) | $ | 9,069 |   | $ | 5,252 |   | $ | 1,011 |   | $ | (94 | ) |
| Per share  amounts:                       |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share         |       | $                                                                     | 0.48       |   | $ | 0.08 |   | $ | 0.35 |   | $ | (0.24 | ) | $ | 0.97 |   | $ | 0.56 |   | $ | 0.10 |   | $ | (0.01 | ) |
| Basic earnings  (loss) per share          |       | 0.48                                                                  |       | 0.09 |   | 0.36 |   | (0.24 | ) | 1.04 |   | 0.60 |   | 0.11 |   | (0.01 | ) |

 
| ** **                                | ** ** | **2004**                                                              | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **First quarter**                                                | ** ** | **Second quarter** | ** ** | **Third quarter** | ** ** | **Fourth quarter** | ** ** |
| **Unaudited  quarterly information** | ** ** | **As  previously  reported**                                          | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Consolidated  Statement of Operations** |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                   |       | $                                                                     | 38,509     |   | $ | 32,164 |   | $ | 38,607 |   | $ | 32,572 |   | $ | 32,154 |   | $ | 38,858 |   | $ | 30,589 |   | $ | 32,665 |   |
| Operating  expenses                       |       | 38,462                                                                |       | 37,368 |   | 43,578 |   | 42,762 |   | 44,348 |   | 45,285 |   | 44,247 |   | 43,688 |   |
| Earnings (loss)  from operations          |       | 47                                                                    |       | (5,204 | ) | (4,971 | ) | (10,190 | ) | (12,194 | ) | (6,427 | ) | (13,658 | ) | (11,023 | ) |
| Net earnings (loss)                       |       | $                                                                     | 208        |   | $ | (5,043 | ) | $ | (4,369 | ) | $ | (9,482 | ) | $ | (12,021 | ) | $ | (6,359 | ) | $ | (13,764 | ) | $ | (11,079 | ) |
| Per share  amounts                        |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per share         |       | $                                                                     | 0.02       |   | $ | (0.59 | ) | $ | (0.51 | ) | $ | (1.11 | ) | $ | (1.40 | ) | $ | (0.74 | ) | $ | (1.61 | ) | $ | (1.29 | ) |
| Basic earnings  (loss) per share          |       | 0.02                                                                  |       | (0.59 | ) | (0.51 | ) | (1.11 | ) | (1.40 | ) | (0.74 | ) | (1.61 | ) | (1.29 | ) |

 

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** **

**SPECIAL NOTEREGARDING FORWARD LOOKING STATEMENTS**

This prospectus contains certain forward lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 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 prospectus, including underthe heading “Risk Factors.” You should read these cautionary statements asbeing applicable to all related forward-looking statements wherever theyappear in this prospectus, in the materials referred to in this prospectus, inthe materials incorporated by reference into this prospectus, or in our pressreleases. No forward-looking statement is a guarantee of futureperformance, and you should not place undue reliance on any forward-lookingstatement. We undertake no obligation to update publicly any forward-lookingstatements for any reason, even if new information becomes available or otherevents occur in the future.

Industry data and other statistical information used in this prospectusare 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 OF CONTENTS**

 
| **PART I**   |   |                                                                                                |   |   |
|--------------|--------|-----------------------------------------------------------------------------------------------------|--------|--------|
|         |   |                                                                                                |   |   |
| Item 1.      |   | Business                                                                                            |   |   |
| Item  1A.    |   | Risk  Factors                                                                                       |   |   |
| Item  2.     |   | Properties                                                                                          |   |   |
| Item 3.      |   | Legal proceedings                                                                                   |   |   |
| Item 4.      |   | Submission of  matters to vote of security holders                                                  |   |   |
|         |   |                                                                                                |   |   |
| **PART II**  |   |                                                                                                |   |   |
| Item 5.      |   | Market for  common equity and related stockholder matters and issuer purchase of equity  securities |   |   |
| Item 6.      |   | Selected financial  data                                                                            |   |   |
| Item 7.      |   | Managements  discussion and analysis of financial condition and results of operations               |   |   |
| Item 7A.     |   | Quantitative  and qualitative disclosure about market risk                                          |   |   |
| Item 8.      |   | Financial  statements and supplemental data                                                         |   |   |
| Item 9.      |   | Changes in and  disagreements with accountants on accounting and financial disclosure               |   |   |
| Item 9A.     |   | Controls and  procedures                                                                            |   |   |
|         |   |                                                                                                |   |   |
| **PART III** |   |                                                                                                |   |   |
| Item 10.     |   | Director and  executive officers of the registrant                                                  |   |   |
| Item 11.     |   | Executive  compensation                                                                             |   |   |
| Item 12.     |   | Security  ownership of certain of beneficial owners and management related stockholder  matters     |   |   |
| Item 13.     |   | Certain  relationships and related transactions                                                     |   |   |
| Item 14.     |   | Principal  accountant fees and services                                                             |   |   |
|         |   |                                                                                                |   |   |
| **PART IV**  |   |                                                                                                |   |   |
| Item 15.     |   | Exhibits and  reports on form 8-K                                                                   |   |   |
|         |   |                                                                                                |   |   |
| Signatures   |   |                                                                                                |   |   |
|         |   |                                                                                                |   |   |

 

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**Forward Looking Statements**

Certain information includedin this report contains forward-looking statements made pursuant to the privateSecurities Litigation Reform Act of 1995 (“Reform Act”).  Such statements are based on currentexpectations and involve a number of known and unknown risks and uncertaintiesthat could cause our actual results and performance to differ materially fromany expected future results or performance, expressed or implied, by forwardlooking statements.  In connection withthe safe harbor provisions of the Reform Act, we have identified importantfactors that could cause actual results to differ materially from suchexpectations, including but not limited to those factors described in “RiskFactors” below.

**ITEM 1. BUSINESS**

**Current operations**

Since 1992 we have provided postsecondary educational andtraining courses for students throughout the United States. In recent years wehave expanded our operations to include course offerings to students in Canadaand the United Kingdom. Our courses provide instruction in:

·                  real estateinvesting

·                  businessstrategies

·                  stock marketinvestment techniques

·                  cash management

·                  asset protection

·                  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 markets education,which has come to represent a substantial part of our business, as reflected inthe following table showing the relative percentage of revenue by segment.
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| ** **                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Real estate education        |       | 71.1                                        | %          | 76.0 | % | 82.9 | % |
| Financial markets  education |       | 28.9                                        |       | 24.0 |   | 17.1 |   |
|                         |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |

 

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 27financially-oriented subjects which we provide either for free or on afee basis.

For the year ended December 31, 2005, approximately92.8% of our revenue was generated from domestic sales and 7.2% was generatedfrom sales made in Canada and the United Kingdom. Our tuition weighted averageis approximately $411 for a basic course and $14,159 for an advanced coursepackage. We conduct our coursework at:

·                  leased trainingand meeting facilities and conference centers;

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

·                  our ownfacilities 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 ishosted 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, United Kingdom and Costa Rica. Following the freeinformational training workshop, the 

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student may purchase reference materials on thesubject discussed or may elect to receive further fee-based training in themany courses we offer, either in the student’s hometown or in regional trainingcenters. We engage over 325 trainers, instructors and mentors in connectionwith our various educational course offerings.

Following the first fee-based training session, studentsinterested in learning more on the course topics may also subscribe to our periodicpublications, purchase books or software programs or attend advanced trainingcourses. In addition to our over 25 resource publications, we offer advancedcourses throughout the United States, in Canada and the United Kingdom. We alsoprovide post-training programs conducted by over 130 mentors, who travel tostudents’ hometowns for “hands on” business training.

Our telemarketing business is responsible forapproximately 25% of cash receipts. We telemarket our products and services tofour types of people, consisting of those who:

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

·                  attended one ofour workshop events, who purchased another of our courses, and who completedtraining within the last six months

·                  attended one ofour free introductory workshops and chose not to purchase anything

·                  contact us viathe Internet and request to be contacted

**Our strategy**

Our goal is to continue to expand our course work breadthand geographic reach within the real estate education and financial marketeducation industry. In order to do so, we have implemented a strategy thatincludes:

·                  *Increasing the number and types of our courseofferings both branded and private label, to reflect student interests.*We intend to continue to increase the number and type of our educational courseofferings in order to attract more students. New courses will further diversifyour offerings and include subjects which we believe are gaining in interest andpopularity among students.

·                  *Expanding our international markets.*  Consistent with our earlier expansions toCanada and the United Kingdom, we intend to add new markets in order to attractstudents we do not currently reach. Initially, we expect to focus our expansionefforts on English speaking European countries, beginning with Ireland,Scotland, Australia and India.

·                  *Marketing our reference materials and online courses.*  We intend to emphasize the direct marketingof educational products and reference materials which we currently useprimarily to support our training programs. These products will be marketed ona stand alone basis through direct mail campaigns and promotions on ourwebsites. We also intend to develop selected courses electronically, primarilyonline, as well as through traditional student-attended programs andclasses. Our electronic courses will be used to supplement our existing coursesand will be marketed using television infomercials developed and produced byus. Responses generated from our direct mail and infomercials will be used tomarket our existing training programs and courses to those who respond.

·                  *Identifying and developing strategic alliances withother education brands.*  Weseek to align ourselves with relevant consumer brands and leverage ourrespective strengths to deliver a superior student education experience.

·                  *Diversifying our media advertising.*  We intend to increase our print andtelevision advertising and test new forms of marketing, including direct mailcampaigns, e-mail campaigns, database marketing and conventions. We also intendto develop and produce television commercials and infomercials to specificallymarket our reference materials and our electronic courses.

·                  *Developing or acquiring accredited or licensedproprietary schools.*  We arelicensed in Texas as a proprietary school and intend to explore this portion ofour education business. We may seek to expand our proprietary school operationsby developing new schools that offer postsecondary education technical coursesor by acquiring existing schools or education brands from third parties. Wehave no understandings or agreements to develop or acquire any such schools atthe present time.

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** **

**Educational training**

Following a free informational 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 hometown or at local or regional camps. Our trainers take students step-by-stepthrough a curriculum that stresses a broad range of financial educationaltraining, money management and asset protection. We do not have any specificeducational requirements for our trainers, but we do require that they have experiencewith respect to the subjects they teach and that they have completed trainingprograms which we provide that prepares them to teach their particularsubjects. Our financial educational training is taught to students in theUnited States, Canada and the United Kingdom through traditional course studyand hands-on training, and includes the following subjects:

*Basic Training.*  Followingthe free educational training session, our students may elect to learn moreabout the subject by attending a basic course in the student’s home town.

*Real Estate.*  Our *Building Wealth*TM workshop training is alocal training program offering a curriculum that focuses on the generalbusiness of real estate and teaches the fundamentals of negotiating real estatepurchases with sellers, rehabilitating distressed properties, leasing rental unitsto tenants and using a database to generate multiple sources of cash flow.Students are taught the mechanics of completing a real estate transaction intheir community, from making an offer to closing the transaction, with emphasisupon creative financing strategies.

Our *Cash FlowGenerator*® training is also a local training program offering acurriculum in real estate but with a different emphasis. It concentrates on the“buy, fix up and sell concept.” It emphasizes turning real estate quicklyrather than holding long-term.

*Business.*  Ourthree-day business local training workshops currently are in development andare being designed to teach students how to organize and build a business, howto broker or buy judgments, discount notes and mortgages, how to fund aretirement plan at maximum levels, how to purchase property at discount pricesthrough auctions or online trading and how to arrange E-commerce accounts forclients and customers.

*Financial.*  Our *Teach Me To Trade*® is a local trainingprogram offering a curriculum that focuses on stock market trading strategiesand uses software and specific teaching techniques designed by us. Students aretaught to understand the stock markets, investment strategies, risks and how tomaximize returns in both bull and bear markets.

Our *Star Trader*®training is similar to the *Teach Me To Trade*®training, but with different emphasis. *StarTrader*® emphasizes stock trading and the use of options and optiontrading in its program. Similar to our two real estate training brands, *Star Trader*® appeals to students who havea higher risk tolerance than Teach Me to Trade students.

*Advanced Real Estate Courses*

Upon completion of a local basic training program,students may seek more advanced training at our specialized regional trainingcenters, which are generally three days in length and are held in locationsaround the country. Many of these programs offer local tours so that studentscan observe negotiating techniques and view properties in the area. Studentsare led through real estate acquisition and financing transactions frombeginning to end and are provided with a number of real estate acquisitionstrategies.

*MillionaireU*TM*Real EstateTraining.*  Our IntensifiedReal Estate Training course is offered at training centers in Cape Coral,Florida and in other locations in Florida and in other states. This courseexpands upon the students’ knowledge of real estate gained from our basiccourse. During Real Estate Training, students learn how to locate and analyzevarious property types and how to effectively analyze property income andexpense. Students telephone actual sellers and then tour properties offered forsale throughout the Cape Coral and Fort Myers, Florida areas. Students thenconduct real estate investment negotiations and may complete transactions underthe supervision of their instructor. Guest speakers including investors,property managers, developers, grant officers, loan officers, realtors andmortgage brokers explain how students can locate financing for a variety oftransactions, from multi-unit apartment complexes to unimproved land.

*Wholesale Buying.*  OurWholesale Buying training course instructs students on the fundamentals ofidentifying, 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.

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*Foreclosure.*  OurForeclosure Training course teaches the intricacies of the real estateforeclosure process, how and why foreclosures occur and the role of securedlenders in foreclosure actions. Students visit a local county courthouse tosearch foreclosure records and review title and tax information. Students visitwith owners of properties that are in foreclosure and learn how to negotiate transactionsfor properties in foreclosure. 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.*  OurPurchase Option training 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 and how to generate cash from purchase real estatetransactions. Included with the course is a field trip and detailed informationon how to select appropriate properties for option or purchase. Other sessionsinclude negotiating with prospective sellers and prospecting for tenants,buyers and lessees.

*Property Management Cash Flow.*  OurProperty Management & Cash Flow training 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.

*Investing in Manufactured/Mobile Homesand RV Parks.*  Our Manufactured/Mobile Homes & RVParks training course teaches students how to buy, sell and rent mobile homesand parks, an often overlooked segment of the real estate market. While mobilehomes cost far less than frame constructed homes, they can yield a significantrate of return on investment. Other subjects include developing and operating amobile home park, expanding rental “pads” and lots to hold more units,obtaining standard and unconventional financings, estimating fix-up,improvement and moving costs, obtaining seller financing terms and identifyingattractive properties at foreclosures and repossessions.

*Commercial Real Estate Investing.*  OurCommercial Real Estate Investing training 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 describe forms used incommercial property management. Students finish their training with a four-houranalysis tour of commercial properties.

*Keys to Creative Real Estate Financing.*  Our Keysto Creative Real Estate Financing course teaches students how to create andrefinance mortgages and how to structure financings in light of prior creditproblems. Discussions also include determining home equity, engaging in realestate negotiations and the use of hard-money lenders.

*Business Success Training*

Our Business Success programs offer a series of trainingcourses associated with starting a business, growing a business and protectingassets.

*Asset Protection and Tax Relief.*  Our AssetProtection and Tax Relief training course describes various legal entities usedto hold property such as partnerships, corporations, and land and internationaltrusts and the use of these entities to protect assets. Students also learn howto minimize income tax and estate tax liabilities and to develop their ownpersonal investment plans.

*Discount Notes and Mortgages.*  OurDiscount Notes and Mortgages training course teaches students how to broker andbuy commercial paper at a discount. Students learn how to locate fundingsources for discounted notes and mortgages. Trainers also teach students how todiscount other sources of debt such as business leases, business notes,inheritances, lotteries, life insurance policies and structured settlements.

*Financial Markets Education Courses*

Our Financial Training programs are designed to helpstudents learn about stock market and international equity investing.

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*Master TraderTM.*  Our MasterTrader Advanced Training course is a three-day program offering intensifiedtraining designed to provide traders and investors with the knowledge needed toprosper in various market environments. This program offers the students aselection of long and short-term strategies and uses state of the artproprietary software. Course work includes technical analysis, fundamentalanalysis and our Master Training techniques.

*Trading P.I.T.TM*  OurTrading P.I.T. (“pros-in-training”) course describes the trading approaches oftop money managers. The course teaches students how to create an income streamusing more conservative trading techniques and other strategies designed tolimit risk while increasing the probability of success. Strategies coveredinclude a number of trading approaches such as bidirectional trading, hedgeddirectional trading, non-directional trading, floor-trading strategiesand capital preservation. Our 5-Point STAR Trader Formula allows users toquickly scan the market, generate forecasts and select strategies.

*H.I.T.S.*  Our SingleStock Futures course addresses changes in rules regarding single stock futures.We discuss new 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 fit into their diversifiedportfolios.

*Advanced P.I.T.TM Training Camp.*  OurAdvanced P.I.T. TrainingTM 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, portfolio repair andcreating a personal mutual fund.

*International Finance and InvestmentTraining Course.*  We have recently developed a new advancedtraining program in international finance and investment which is offered inour Costa Rica conference center. This program offers a curriculum thatincludes wealth building and investment opportunities overseas. The training alsoaddresses the benefits of establishing a business internationally, investing inforeign markets, raising venture and working capital internationally and assetprotection.

*Mentoring Programs*

We offer advanced training programs conducted by our over130 mentors, who work with students individually in “hands-on” businesstraining.

*Real Estate.*  Our realestate mentoring program applies the curriculum of the basic real estate campsto the student’s city of choice. Under this program, one of our mentors travelsto the student’s city for three to four days. Students review the real estateacquisition techniques involved and learn the real estate characteristics ofthe local market. Students can put to practice the skills they have gainedwhile working directly with an experienced mentor.

*Financial Markets.*  Formentored financial markets education, our students typically travel to ourstate-of-the-art learning center in Salt Lake City and spend three and one-halfdays coached by an experienced stock market trader.

Each of these brands appeals to different studentsdepending upon business acumen and risk tolerances.

*Additional Offerings*

We market directly to customers a wide range ofeducational and reference products that supplement our training programs, such asour *Building Wealth*TM Real EstateHome Study Course; Real Estate Success System Software; Business Success SystemSoftware; Discount Notes and Mortgages Home Study Course; self-help courses andmanuals that provide students with information about their credit along withfirst-time homebuyers’ manuals.

**Marketing**

We create interest in and demand for our educationalprograms, products and services through a mix of television advertising, printadvertising, direct mail, e-mail, attendance at trade shows and Internetmarketing. We employ a sales force of over 100 individuals trained to handlethe needs of new students, to promote new products and services to existing andformer students and to respond to customer inquiries via phone, e-mail or theInternet.

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 

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advertising is often used in coordination with directmail marketing and newspaper advertising, in order to maximize sales effortsand create greater name recognition within the target population. For thefuture, we are investigating the use of television infomercials to sell our newelectronic course offerings.

·                  Limited newsprint advertising, which we also purchase in markets where our training coursesare scheduled to be held.

·                  Direct mail ande-mail marketing, which we use in promoting our educational training coursesand 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 our Web site at http: //www.russwhitney.com.The site contains information about our products, programs and services, manyof which may be purchased online.

·                  Crosspromotional advertising campaigns, which we employ from time to time inconjunction with other financial education service providers.

We also enter into strategic alliances with promotersthat market products and services other than ours to potential students inlarge and small venues. These alliances allow us an agreed upon amount of timeat the programs to attract students for our introductory courses. Our alliancesare with unrelated third parties and create students for us with no requirementfor us to expend funds on initial advertising or marketing. Our strategicalliances receive from us a commission on any advanced course tuition wecollect as a result of us being provided access to their students. The amountof compensation these alliances receive varies depending on the quality of thestudent, the negotiated amounts with the strategic alliance partner, the costsassociated with enrollment and the cost of delivery.

Cash received and commissions paid from course andproduct sales through strategic alliances are shown in the following table (inthousands, except number of strategic alliances):
| ** **                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Strategic alliances                      |       | 6                                           |       | 6 |   | 5 |   |
| Cash received from  courses and products |       | $                                           | 16,249     |   | $ | 17,799 |   | $ | 10,087 |   |
| Commissions paid                         |       | $                                           | 2,916      |   | $ | 3,803 |   | $ | 3,119 |   |

 

**Competition**

The financial 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. and United Technical Institute, Inc.,which offer technical and industrial training and career training. We do not, however,compete with these or other companies that offer undergraduate or advanceddegrees or continuing education programs. More specifically, we compete with anumber of smaller companies, such as Investools, Inc., WizetradeTM, RobbinsResearch International and Dynetech Corporation, which offer training onspecific 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 own teachers and trainers and we prepare mostof our own course materials which we believe offer us competitive advantagesover companies that do not train their own teachers or develop their own educationalmaterials. As a result of constantly attending the training sessions of ourcompetitors, we believe that the quality of our teachers, trainers andreference materials are consistent or superior to those of our competitors. Ourcharges for our educational courses are also consistent with those of ourcompetitors.

**Intellectual property**

We regard our educational materials and products,trademarks, service marks and trade symbols as proprietary and we relyprimarily on statutory and common law protections, such as copyrights andtrademarks, to protect our interests in these materials. While some of ourproducts and trade names are commonly used terms and do not afford ussignificant copyright or 

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trademark protection, we also use employee and third-partynoncompetition and nondisclosure agreements and other contractual methods ofprotecting proprietary rights to safeguard our intellectual property.

**Employees**

At October 30, 2006, we had approximately 490employees, plus 304 independent contractors who act as trainers, instructorsand mentors. Our employees are not represented by a labor union, and we believeour relations with our employees are satisfactory. Our independent contractorsare paid commissions based upon the tuition dollar value of courses selected bystudents at our free informational workshops and three day sessions, and arepaid fixed fees for teaching and mentoring individual courses. All independentcontractors execute letter agreements with us which set forth commissionstructure and provide for confidentiality and covenants not to compete.

**Government Regulation**

We rely on advertising to attract new students and moststates regulate postsecondary education advertising practices. Since ourinception we are aware of four occasions in which states have investigated ouradvertising practices. These states were Florida, Michigan, Pennsylvania andTennessee. In 1996 Florida terminated its investigation into our advertisingpractices without charges or penalties. In 1998 we agreed to a Michigan Assuranceof Discontinuance that required us to be licensed to sell businessopportunities. We paid an investigation fee of $250, did not admit wrongdoingand have been conducting business in Michigan since 1998 without incident. In1998 we agreed to a Pennsylvania Assurance of Voluntary Compliance pursuant towhich we agreed to comply with all applicable requirements of the ConsumerProtection Law. We did not admit wrongdoing and have been conducting businessin Pennsylvania since 1998 without incident. We paid Pennsylvania $4,000 tocover investigative costs. In 1997 we agreed to a Tennessee Agreed Final Orderin which we agreed not to violate the Tennessee Consumer Protection Act inconnection with our advertisements. We did not admit wrongdoing and have beenconducting business in Tennessee since 1997 without incident. We paid Tennessee$9,500, of which $7,500 was to cover investigative costs.

From time to time, we receive inquires from stateregulators relative to our business operations and our advertising efforts toattract new students. Although we believe we are currently in full compliancewith all applicable state regulations, we are aware of four current inquiriesor investigations in the states of Florida, Kansas, Wisconsin and Indiana.

The Florida investigation was commenced in 2005 and stemsfrom consumer complaints made to the state from years 2002-2005. Accordingto information provided to us by the state, there were approximately 50complaints from across the country made to the Attorney General’s telephonehotline over the past four years. This averages about 13 complaints peryear or approximately 1 complaint for every 21,000 students we have educatedover the four year period. Our records indicate that many of these complaintswere already handled directly with the consumer or resolved through anotheragency. Our legal team has worked diligently to resolve the few remainingcomplaints and we believe that our continued cooperation with Floridaregulators will result in closure of the investigation without any furtherlegal proceedings.

Indiana filed a lawsuit against us in March 2005alleging that our operations fall within certain business opportunityregulations and that we failed to register accordingly. We believe the lawsuithas no merit and are aggressively defending the action.

In March 2005 and February 2006 we received subpoenasfrom Wisconsin and Kansas, respectively, requesting information about ouradvertising and student testimonials. We believe these are routine inquires andexpect no further action.

**Subsidiaries**

We conduct a significant portion of our business throughthe following nine subsidiaries.

·                  WhitneyEducation Group provides educational programs in the U.S.

·                  WealthIntelligence Academy® provides advanced educational programs in the U.S.

·                  Whitney Canada,Inc. provides educational programs in Canada.

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

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

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·                  Whitney U.K.Limited provides educational programs throughout the United Kingdom.

·                  WhitneyLeadership Group formerly held all of the copyright and intellectual propertyrights associated with our educational materials and licenses these rights forpayments.

·                  MRS Equity Corp.manages the processing of the payments of homeowners that purchase a program weoffer that allows for them to pay their mortgages every two weeks instead ofmonthly.

·                  EduTrades, Inc.provides financial markets education courses.

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**ITEM 1A.**           RISK FACTORS

You should carefully consider the risks anduncertainties described below and the other information in this prospectusbefore deciding whether to invest in the common stock.

**We have expended significant time and resources torestate our previously submitted Consolidated Financial Statements for years2001 through 2005. As a result, our business was adversely effected by the timeand expense devoted by our staff and management. In addition, our investors maycall into question future consolidated financial statements issued by us.**

The time and resources expended to restate theConsolidated Financial Statements for years 2001 through 2005 increased ourcost and required the attention of our financial management personnel. Inaddition, our future stock price and volume may be adversely effected by thelack of investor confidence in the accuracy of our future ConsolidatedFinancial Statements.

**We currently have material weaknesses in ourinternal control over financial reporting which resulted in inaccuratefinancial reporting, restatements and may result in inaccurate financialreporting and /or the inability to prevent fraud.**

In connection with the 2005 audit of our ConsolidatedFinancial Statements, our independent registered public accounting firm issueda management letter which noted that we had the material weaknesses describedbelow in our internal control over financial reporting. These deficienciesincluded:

·                  Bankreconciliations were incorrectly prepared containing improper reconciling itemsresulting in misstatements to the recorded balance in the general ledger.

·                  Errorsin deferred revenue and revenue recognition were noted. We place excessivereliance on our systems in certain circumstances without adequate review oversystems and processes.

·                  Ageneral lack of review over the accounting and reporting functions andinadequate reconciliation procedures exist in many areas of the accountingfunction.

·                  InadequateEDP controls including general access controls.

·                  Wedo not currently maintain complete records and adequate supportingdocumentation over our stock options and warrants.

·                  Ourcalculation of foreign currency translation adjustments contained errors.

·                  Wedo not have adequate procedures to provide for inventory obsolescence.

These material weaknesses are a result of a lack ofsufficient and qualified personnel over the accounting and reporting function,a lack of formalized processes and procedures over key areas in the accountingand reporting functions and inadequate supervision and review over thefinancial reporting function. Certain of our material control weaknessesresulted in inaccurate financial reporting and restatements to our previouslyfiled Consolidated Financial Statements from 2001 through 2005.

Subsequent to identifying the material weaknesses inour internal control over financial reporting, we initiated corrective actionsto address these internal control deficiencies. We will continue to evaluatethe effectiveness of our disclosure controls and internal controls andprocedures on an ongoing basis, taking corrective action as appropriate. Thusfar in 2006, we hired an experienced Chief Financial Officer. In addition, wehired or appointed a Chief Financial Officer for our EduTrades division, aDirector, Corporate Accounting, a Director, Accounting Operations, a Director,Financial Systems, a Director, Sarbanes-Oxley Compliance andImplementation, a Manager, Information Technology Sarbanes-OxleyCompliance and Implementation, a Director, Planning and Analysis, two SeniorFinancial Analysts, a Vice President, Strategy and Business Development and aSenior Business Development Analyst. 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, financial systems andcontinued upgrades in the Controller’s department. We also upgraded our currentaccounting and financial reporting systems. In the interim, we have retainedthe services of two certified public accountants and other accountingprofessionals to assist in the preparation of our Consolidated FinancialStatements until the positions are filled.

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**If we fail to develop a system to evaluate theeffectiveness of our internal controls we may not be able to accurately reportour financial results or prevent financial fraud. As a result, current andpotential stockholders could lose confidence in our financial reporting, whichcould reduce our ability to obtain subsequent financing, if necessary, as well asreduce the trading price of our common stock.**

We will need to document and test our internal controlprocedures, our management will need to assess and report on our internalcontrol over financial reporting and our independent accountants will need to issuean opinion on that assessment and the effectiveness of those controls, subjectto the requirements of Section 404 of the *Sarbanes-OxleyAct of 2002*. We will be subject to Section 404 requirements atthe end of our fiscal year ending December 31, 2007. This will require usto develop, fund and staff a department to document and test the design andeffectiveness of our internal controls.

**If we fail to maintain an effective system ofinternal controls we may not be able to accurately report our financial resultsor prevent financial fraud. As a result, current and potential stockholderscould lose confidence in our financial reporting, which would reduce ourability to obtain subsequent financing, if necessary, as well as reduce thetrading price of our common stock.**

We cannot be certain that our efforts to improve ourinternal controls will be successful or that we will be able to maintainadequate controls over our financial processes and reporting in the future. Wemay be hampered in this regard by our current level of staffing or our currentaccounting system. Any failure to develop or maintain effective controls, ordifficulties encountered in the effective improvement of our internal controls,could harm our operating results, cause us to fail to meet our reportingobligations, result in misstatements in our Consolidated Financial Statementsor cause investors to lose confidence in our reported financial information,which would likely have a negative effect on the trading price of our commonstock.

**Issues discovered while evaluating the internalcontrols could result in having to expend significant time and resources toimprove our internal controls which if not successful could adversely affectour reputation and /or the investor’s perception of us and lead to otherissues.**

Efforts to improve our internal controls could requireus to expend significant personnel time, management resources and capitalassets or make other substantial changes. If our internal controls are deemedto be inadequate, or if other unforeseen events occur, our external auditorscould resign, leading to a delay in the preparation of our ConsolidatedFinancial Statements and an increase in our audit fees. If we were required toobtain new external auditors, those auditors could require a lengthy period tobecome familiar with our operations. The process of retaining new externalauditors could also limit our access to the capital markets for an extendedperiod of time. Multiple issues listed above could lead to reputation and perceptionissues that could adversely affect the trading price of our common stock.

**Accounting errors could adversely affect ourability to meet our reporting obligations, could result in future restatementsand/or cause material weaknesses in our internal control over financialreporting.**

The accounting errors are directly related to a lackof sufficient and qualified personnel over the accounting and reportingfunction, a lack of formalized processes and procedures over key areas in theaccounting and reporting functions and inadequate supervision and review overthe financial reporting function.  Theseerrors, if not corrected, could cause us to fail to meet our reportingobligations, result in misstatements in our Consolidated Financial Statementsor cause investors to lose confidence in our reported financial information,which would likely have a negative effect on the trading price of our commonstock.  The accounting errors, if notcorrected, could also result in future material weaknesses in our internalcontrol over financial reporting.

**Inadequate review of our systems and processescould result in accounting errors, inaccurately reported financial results,financial fraud, and an inability to adequately safeguard our assets.  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.**

An inadequate review of our systems and processes hasled to an unestablished baseline to build upon for an acceptable level ofinternal control.  If this result is notremediated, additional material weaknesses could be discovered and disclosedwhich would result in an inability to rely on our internal controls.

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**Volatility in the real estate or securitiesmarkets may reduce interest in our educational courses, thereby reducing ourrevenue.**

The level of public interest in investing in realestate or in securities significantly influences the demand for our educationaland training programs. The real estate and securities markets have experiencedvarying levels of volatility in recent years. Negative developments in eithermarket could cause a reduced demand for our programs, products and services,thereby reducing our revenue.

**Failure to comply with state laws regulating themarketing and sale of our educational courses could harm our reputation andreduce the demand for our course offerings.**

Many states regulate the marketing and sale of oureducational courses, including the content of advertisements to attractstudents. Failure to comply with these regulations could result in legal actioninstituted by the states, including cease and desist and injunction actions. Inthe event we are subject to such legal action, our reputation would be harmedand the demand for our course offerings could be significantly reduced. In thepast, we have been involved in four state regulatory investigations which wehave resolved and we are currently involved in four other such regulatoryinvestigations. See “Business—Government Regulation” for a detailed discussionof these regulatory investigations.

**If we do not successfully introduce new programs,products and services, our growth rate and revenue will be reduced.**

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 common stocksignificantly exceeds our book value per share and increases the risk that ourmarket price per share may decline in the future.**

The market price of our common stock was $9.50 pershare at the close of business on October 30, 2006 and greatly exceededour December 31, 2005 book value, which was a stockholders’ deficit of$40.8 million or $(3.90) book value per share deficit. Moreover, our stockprice increased significantly in the fourth quarter of 2005. The lower bookvalue per share compared to our market price per share and the recentsignificant increase in our market price increase the risk that our marketprice per share may decline in the future.

**Our Chairman and Chief Executive Officer ownsapproximately 50% of our outstanding capital stock, which means that he has theability to approve or disapprove any matter requiring stockholder approval orprevent a change of control in our Company.**

Russell A. Whitney, our Chairman and Chief ExecutiveOfficer, owns approximately 50% of our outstanding capital stock. As such,Mr. Whitney can approve or disapprove any matter requiring the vote of ourstockholders, including the election of directors. Mr. Whitney could,without 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, Mr. Whitney’s 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. Mr. Whitney’s stock ownership would likely prevent such anevent from occurring.

**Outside business interests of Mr. Whitneycould result in conflicts of interests that could negatively impact investorinterest in our Company.**

Mr. Whitney has outside passive investmentinterests in real estate and owns a 25% interest in Gulfstream DevelopmentCorp., a construction company. In the past, Mr. Whitney owned residentialreal estate lots in Cape Coral, Florida, some of which were purchased by ourstudents. From time to time, some of our students used Gulfstream to buildresidences upon lots which they have purchased from Mr. Whitney or others.These kinds of arrangements could create, or appear to create, conflicts ofinterest if our students purchased lots from Mr. Whitney or contractedwith Gulfstream to construct residences on such lots. Any conflict of interestor appearance of a conflict of interest in connection with our arrangementswith our students could negatively impact investor interest in our company and thereforeour stock price and liquidity. We do not have any formal procedure forresolving any such conflicts of interest. See “Related Party Transactions” fora more detailed discussion of these potential conflicts of interest.

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**The loss of any of our key personnel, especiallyMr. Whitney, could disrupt our operations and reduce our profitability.**

Our future success depends to a significant extent onthe continued services of our senior management, including Mr. Whitney. Wedo not maintain key-man life insurance on the life of Mr. Whitney. Theloss of the services of Mr. Whitney or other senior management coulddisrupt our operations and reduce our profitability.

**Our Board of Directors, without stockholderapproval, may issue preferred stock which could reduce the voting power orrights of our other stockholders and make it more difficult for a third partyto acquire a majority of our outstanding voters stock.**

Our Board of Directors, without stockholder approval,may issue up to 10.0 million shares of preferred stock. The Board ofDirectors can fix the rights, preferences and privileges of the shares of eachseries and any qualifications, limitations or restrictions, which could reducethe voting power or other rights of the holders of common stock. Issuance ofpreferred stock could also have the effect of making it more difficult for athird-party to acquire, or of discouraging a third-party fromattempting to acquire, a majority of our outstanding voting stock.

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**ITEM 2.**                    PROPERTIES

The followingchart summarizes our office locations (in thousands, except square footage).
| **Purpose**                                            | ** ** | **Location**                  | ** ** | **Own/Lease** | ** ** | **Approximate  square footage** | ** ** | **Lease expiration** | ** ** | **Annual  rental** |
|--------------------------------------------------------|------------|-------------------------------|------------|---------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------|
| Corporate headquarters                                 |       | Cape Coral, FL                |       | Own           |       | 40,734                               |       | —                    |       | —             |
| Conference center                                      |       | Monterey del Mar, Costa  Rica |       | Own           |       | 7,000                                |       | —                    |       | —             |
| European headquarters                                  |       | London, England               |       | Own           |       | 5,600                                |       | —                    |       | —             |
| Existing EduTrades and telemarketing headquarters |       | Draper, UT                    |       | Lease         |       | 13,553                               |       | October  2007             |       | $                  | 168 |
| New 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                 |
|                                                   |       |                          |       |          |       | 123,518                              |       |                      |       | $                  | 969 |

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(1)             Relatedparty lease.

We own the land and building of our executive officesat 1612 East Cape Coral Parkway, Cape Coral, Florida. Our executive officebuilding is approximately 40,734 square feet in size and is situated onapproximately 4.5 acres. We own an approximately 7,000 square footconference and training center in Costa Rica, which we designed and built in 2002.We also own an approximately 5,600 square foot building on Bath Road, Chiswick,London, England which is our European headquarter offices and a trainingfacility.

We lease 13,553 square feet of office space at 12244South Business Park Drive, Suite 230, in Draper, Utah. The lease expires inOctober 2007 and is payable at the rate of $13,975 per month. To supportour expanding business operations, we entered into a 72-month officelease in Murray, Utah. The lease is for 32,646 square feet. We intend to assignor sublease our existing space in Draper, Utah. We will receive a credit on ourlease in Murray, Utah, prior to any assignment or sublease of the Draper, Utahlease.

Our Canadian subsidiary leases approximately 1,200square feet of office space at 3780-14th Avenue, Unit 20, Ontario, Canada. The leaseexpires in April 2010 and is payable at rates increasing from $1,081 to$1,654 per month over the term of the lease.

We lease approximately 6,783 square feet of officespace at 2 South 400 West in Salt Lake City, Utah. The lease expires in 2010and is payable at the rate of $9,327 per month. The facilities are being usedas a training center.

*Related partyleases*

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 SE 47th Terrace which we use as a training facilityand for storage, all in Cape Coral, Florida from Cape Promenade Trust which isfor the benefit of Russell A. Whitney, our Chief Executive Officer, and hiswife, 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 30, 2009.

We locate what we refer to as regional trainingcenters in hotels in a number of cities across our market areas. We rent,generally for three to five days, meeting rooms in these hotels for use intraining our students.

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**ITEM 3.**                    LEGALPROCEEDINGS

From time to time, Whitney is involved in legalproceedings that we consider to be in the normal course of business.  We do not believe that any of theseproceedings will have a material adverse effect on our business.

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

None

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**PART II**

**ITEM 5.   MARKET FOR COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

Our common stockis quoted on NASD’s Over-the-Counter Bulletin Board under the trading symbol “RUSS”since August 1998.  The high and lowclosing prices of our common stock for the last two years, by calendar quarter,are set forth below.  These quotationsreflect inter-dealer prices, without retail mark-up, markdown or commissionsand may not represent actual transactions.

|                                   | ** ** | **High closing  price** | ** ** | **Low closing  price** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                              |       |                         |       |                        |       |
| **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 |   |
|                              |       |                         |       |                        |       |
| **Year  ended December 31, 2004** |       | $                            | 4.00       |                        | $          | 1.90 |   |
| Fourth Quarter                    |       | $                            | 4.65       |                        | $          | 3.25 |   |
| Third Quarter                     |       | $                            | 4.90       |                        | $          | 3.95 |   |
| Second Quarter                    |       | $                            | 5.05       |                        | $          | 4.20 |   |
| First Quarter                     |       |                         |       |                        |       |

 

As of November 7, 2006, we had approximately 500record and beneficial stockholders.

**DIVIDEND POLICY**

During our two most recent fiscal years we paid a special$1.00 per share dividend to holders of record, on September 15, 2006, andpaid on October 2, 2006, of our common stock. However, we do not have anyplans to pay dividends in the future.

**CAPITALIZATION**

The followingtable sets forth our cash, cash equivalents and restricted cash and ourconsolidated capitalization at June 30, 2006 and December 31, 2005.You should read this data in conjunction with the Consolidated FinancialStatements and notes to the Consolidated Financial Statements containedelsewhere in this prospectus (in thousands, except share amounts).

|                                                                                                                               | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                    | ** ** | **(restated)**                  | ** ** |
| Cash, cash  equivalents and restricted cash                                                                                   |       | $                               | 38,650     |   |
| Total long term  debt                                                                                                         |       | $                               | 3,374      |   |
| Stockholders’  deficit:                                                                                                  |       |                            |       |
| Common stock, no  par value, 25,000,000 shares authorized, 11,025,516 and 10,455,910(1) issued  and outstanding, respectively |       | $                               | 10,593     |   |
| Paid in capital                                                                                                               |       | 449                             |       |
| Foreign currency  translation adjustment                                                                                      |       | (650                            | )          |
| Accumulated  deficit                                                                                                          |       | (50,878                         | )          |
| Total  stockholders’ deficit                                                                                             |       | $                               | (40,486    | ) |
| Total capitalization                                                                                                          |       | $                               | (37,112    | ) |

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(1)             Excludes1,415,000 shares of common stock issuable on the exercise of outstanding stockoptions, 570,350 shares of outstanding nonvested common stock options, 153,575shares of common stock reserved for future issuance under the 1998 Stock OptionPlan, 200,000 warrants issued in 2004, 875,000 shares of common stockunderlying common stock purchase warrants in connection with the Offering, andthe unit purchase warrant issued to our placement agent for 300,000 sharesof common stock and 150,000 unit warrants. An additional 625,000 shares of

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                           common stock underlyingcommon stock purchase warrants will be personally provided by our Chairman andChief Executive Officer.

***Recent Sales of Unregistered Securities.***

During the lastthree years, the Registrant has not sold any securities which were notregistered under the Securities Act, except:

(i)                                     InOctober 2003, the Registrant issued 200,000 shares to the principals ofSpeakTek, Inc. to acquire all of its outstanding common stock.

(ii)                                  InDecember 2005, the Registrant issued 1,750,000 shares and 875,000 warrantsand Russell A. Whitney, its Chief Executive Officer, issued 1,250,000 sharesand 625,000 warrants to the 17 accredited investors whose names and securitiesamounts are listed in the prospectus under “Selling Stockholders.” Thesecurities were issued in units consisting of one share and one-half warrantfor $4.50 per unit. The Registrant also issued a unit purchase warrant to NobleInternational Investments, Inc. to purchase up to 300,000 units at $4.50per unit as part of its compensation for acting as the Registrant’s placementagent in the offering, each unit consisting of one share of common stock andone warrant to purchase one half share of common stock.

(iii)                               InSeptember 2006, we received $5,395,851 of cash proceeds from holders whoexercised the following outstanding warrants and stock options:
| **Form of  security** | ** ** | **Description**        | ** ** | **Number of  holders** | ** ** | **Number of  common shares** | ** ** | **Exercise price  per share** | ** ** | **Proceeds** |
|-----------------------|------------|------------------------|------------|------------------------|------------|------------------------------|------------|-------------------------------|------------|--------------|
| Warrants              |       | PIPE warrants          |       | 11                     |       | 859,743                      |       | $6.00                         |       | $            | 4,915,602 |
| Options               |       | 1998 Stock Option Plan |       | 4                      |       | 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 bythe our Chairman and Chief Executive Officer exercised by three holderstotaling 375,000 shares of common stock with proceeds amounting to $2,250,000.These proceeds were issued to the Chairman and Chief Executive Officer inOctober 2006.

We paid no incremental placement fees in connectionwith the warrants or options. We expect to use the cash proceeds from warrantand option exercises for working capital purposes.

We offered andsold the warrants without registration under the Securities Act of 1933 to alimited number of accredited investors in reliance upon the exemption providedby Rule 506 of Regulation D there under. The warrants and any sharesissuable upon exercise may not be offered or sold in the United States in theabsence of an effective registration statement or exemption from theregistration requirements under the Securities Act. An appropriate legend wasplaced on the warrants issued, and will be placed on the shares issuable uponexercise of the warrants, unless registered under the Securities Act prior toissuance.

(iv)                              Fromtime to time, the Registrant issues stock options under its 1998 Stock OptionPlan and shares issuable upon exercise of these stock options.

With respect to common stock issued underparagraph (i) and (ii) above, the Registrant relied onSection 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”) and/or Rule 506 promulgated there under. No advertising or generalsolicitation was employed in offering the securities. The securities wererestricted pursuant to legend printed on each certificate. The purchasers wereall accredited investors, capable of analyzing the merits and risks of theinvestment, who acknowledged in writing that they were acquiring the securitiesfor investment and not with a view toward distribution or resale and understoodthe speculative nature of the investment.

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**ITEM 6. SELECTED FINANCIAL DATA**

The following table sets forth our selected consolidatedfinancial information as of and for the five year period endedDecember 31, 2005. The data for the five years are derived from ouraudited Consolidated Financial Statements, which appear elsewhere in thisprospectus. The following selected consolidated financial data should be readin conjunction with the Consolidated Financial Statements and the notesthereto.

All financial information, except per share data, isexpressed in thousands.
| ** **                                       | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                       | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| **Statement of Operations data:**                |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenue                                          |       | $                                           | 163,107    |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   | $ | 41,274 |   |
| Earnings (loss) from  operations                 |       | $                                           | (9,161     | ) | $ | (32,845 | ) | $ | (7,476 | ) | $ | (2,486 | ) | $ | 979 |   |
| Net earnings (loss)                              |       | $                                           | 3,850      |   | $ | (31,963 | ) | $ | (7,325 | ) | $ | (2,216 | ) | $ | 1,232 |   |
| Diluted earnings (loss)  per share               |       | $                                           | 0.41       |   | $ | (3.72 | ) | $ | (0.89 | ) | $ | (0.28 | ) | $ | (0.16 | ) |
| **Statement of Cash Flows data:**                |       |                                        |       |   |   |   |   |   |   |   |   |
| Cash provided by  operations                     |       | $                                           | 17,022     |   | $ | 600 |   | $ | 10,732 |   | $ | 7,873 |   | $ | 5,290 |   |
| Cash provided by (used  in) investing activities |       | $                                           | 8,640      |   | $ | (10,604 | ) | $ | (7,732 | ) | $ | (4,907 | ) | $ | (829 | ) |
| Cash provided by (used  in) financing activities |       | $                                           | 3,015      |   | $ | 1,387 |   | $ | 599 |   | $ | 367 |   | $ | (875 | ) |
| Increase (decrease) in cash and cash equivalents |       | $                                           | 28,577     |   | $ | (8,562 | ) | $ | 3,008 |   | $ | 3,333 |   | $ | 3,585 |   |

 

*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 the stockportion of the gift to the estate of the former President, interest andnonoperating income, stock based compensation, minority interest and equityearnings in related parties and gain from the sale of assets, interest andnonoperating income, minority interest and equity earnings in related parties.We refer to “Adjusted EBITDA” to mean EBITDA adjusted for the net change indeferred revenue less the net change in deferred course expenses. AdjustedEBITDA is not a financial performance measurement under generally acceptedaccounting principles.

We use Adjusted EBITDA as a key measure in evaluating ouroperations and decision-making. We feel it is 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. In addition, we provide Adjusted EBITDA because webelieve investors and security analysts find Adjusted EBITDA to be a usefulmeasure for evaluating our performance.

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 inthe form of cash flows and in the form of our Consolidated Statement ofOperations. As a result of these factors, our operating cash flows can vary significantlyfrom our results of operations for the same period. For this reason we believeAdjusted EBITDA is an important non U.S. GAAP financial measure.

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 indicators of financial performanceor liquidity. Items excluded from Adjusted EBITDA are significant components inunderstanding our financial performance. Because Adjusted EBITDA is not ameasurement determined in accordance with U.S. GAAP and is susceptible tovarying calculations, Adjusted EBITDA as presented may not be comparable toother similar titled measures of performance from other companies.

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All financial information is expressed in thousands.
| ** **                             | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                             | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Net earnings  (loss)                   |       | $                                           | 3,850      |   | $ | (31,963 | ) | $ | (7,325 | ) | $ | (2,216 | ) | $ | 1,232 |   |
| Other income                           |       | (1,801                                      | )          | (892 | ) | (154 | ) | (81 | ) | (357 | ) |
| Interest expense  (income), net        |       | 28                                          |       | 499 |   | 3 |   | (86 | ) | 104 |   |
| Income tax  benefit                    |       | (6,798                                      | )          |   |   |   |   |   |   |   |   |
| Depreciation and  amortization         |       | 1,856                                       |       | 1,610 |   | 950 |   | 598 |   | 293 |   |
| Minority  interest and equity earnings |       | 2,138                                       |       | (182 | ) |   |   | (102 | ) |   |   |
| Gain on sale of  assets                |       | (6,579                                      | )          | (305 | ) |   |   |   |   |   |   |
| EBITDA                                 |       | (7,306                                      | )          | (31,233 | ) | (6,526 | ) | (1,887 | ) | 1,272 |   |
| Net change in  deferred revenue        |       | 33,288                                      |       | 27,828 |   | 19,468 |   | 11,581 |   | 2,196 |   |
| Net change in  deferred course costs   |       | (2,602                                      | )          | (3,546 | ) | (3,339 | ) | (1,791 | ) | (578 | ) |
| Adjusted EBITDA                        |       | $                                           | 23,380     |   | $ | (6,951 | ) | $ | 9,603 |   | $ | 7,903 |   | $ | 2,890 |   |

 

All financial information, except per share amounts, isexpressed in thousands.
| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                   | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Cash received  from course and product sales |       | $                                           | 196,395    |   | $ | 164,087 |   | $ | 109,273 |   | $ | 62,759 |   | $ | 43,470 |   |
| Less: Net change  in deferred revenue        |       | (33,288                                     | )          | (27,828 | ) | (19,468 | ) | (11,581 | ) | (2,196 | ) |
| Revenue for financial  reporting purposes    |       | $                                           | 163,107    |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   | $ | 41,274 |   |

 

**Consolidated Balance Sheet data:**
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                    | ** ** | **(restated)**        | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Total asset                   |       | $                     | 102,203    |   | $ | 60,028 |   | $ | 55,552 |   | $ | 28,272 |   | $ | 16,128 |   |
| Long term debt                |       | $                     | 3,374      |   | $ | 12,312 |   | $ | 10,953 |   | $ | 1,650 |   | $ | 700 |   |
| Stockholders’  deficit   |       | $                     | (40,486    | ) | $ | (51,560 | ) | $ | (19,930 | ) | $ | (12,865 | ) | $ | (11,698 | ) |
| Book value per  share deficit |       | $                     | (3.87      | ) | $ | (5.98 | ) | $ | (2.33 | ) | $ | (1.59 | ) | $ | (1.48 | ) |
| Shares outstanding            |       | 10,456                |       | 8,618 |   | 8,548 |   | 8,097 |   | 7,878 |   |

 

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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 prospectus. 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 prospectus.*

**Executive Overview**

Inthe United States, the United Kingdom and Canada, we offer postsecondarynonaccredited introductory workshops, primary and advanced courses and trainingin two primary fields of study:

·                  Realestate investing

·                  Financial marketsinvesting

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:

—*                                   Building Wealth*TM

—*                                   Cash Flow Generator*®

—                                   Private label brands:

·                  *M2 Advantage*®

·                  RESuccess System

·                  Forfinancial investment workshops and introductory courses:

—*                                   Teach Me to Trade*®

—*                                   Star Trader*®

—*                                   Options Success*TM

—                                   Private label brand:

·                  *Stock Success System*TM

·                  Our umbrellabrand for advanced courses:

—*                                   Wealth Intelligence Academy*®

The advanced courses of study under the *Wealth Intelligence Academy*® brandinclude:
|        | · | Millionaire UTM Real Estate Training                    |                                             |
|--------|--------|-------------------------------------------------------------|--------------------------------------------------|
|   | · | 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 advanced technical analysis     |
|   | · | *The Trading P.I.T.TM*                                  | — hedging techniques                        |
|   | · | *The Advanced P.I.T.TM*                                 | — spread strategies                         |
|   | · | *H.I.T.S.TM*                                            | — single stock futures and ETFs             |
|   | · | *The Trading RoomTM*                                    | — practical trading structures and routines |

 

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|        | · | *Advanced Covered Calls* | — strategies to use options to improve cash flow and  hedge risk |
|--------|--------|------------------------------------|-----------------------------------------------------------------------|
|   | · | *Advanced Technical Analysis*      |                                                                  |

 

                We offer our students severalways to access our educational content:

·                  Liveinstruction in classroom settings

·                  Onsitementoring

·                  Telephoniccoaching

·                  Electronicaccess

·                  Conferences

We enter into strategic alliances with promoters thatmarket products and services to potential students.

We are also aware of other macroeconomic trends—includingchanges in the real estate markets, financial markets, overall employment,early retirement, consumer confidence that may impact overall demand, andbelieve we can adapt our curriculum development and marketing messageaccordingly to changing trends. Moreover, we are also cognizant that we competein an area where the barrier is low with respect to content development,however, access to students and the fulfillment of the courses requiresubstantial cash outflow before cash inflow is realized in the form of tuition.

Our international presence in the United Kingdom andCanada represents approximately 7.2% of revenue in 2005 which is below theapproximate 10.8% of revenue in 2004. We intend to review our entireinternational strategy during the upcoming year. The review is taking place sothat we can assess whether market conditions support a further investment ofresources in the international market and conversely, if we should considerexiting the international market.

The review will consist 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 advantages 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

·                  Prioritizing ourinitiatives over the near term and developing a near term tactical plan

Over the past five years, revenue grew at a compoundedannual rate of 37.7%. Our operating expenses grew at a 32.7% compounded annualgrowth rate during the same period. Through continued leveraging of our fixedcosts, improving our overall marketing efficiency and course delivery, andprudently increasing our prices, we endeavor to grow revenue at a faster ratethan the growth of operating expenses.

Our unaudited operating results are expressed as apercentage of revenue below:

Our operating results are expressed as a percentage ofrevenue below:
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                          | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Revenue                             |       | 100.0                                       | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Operating expenses:                 |       |                                        |       |   |   |   |   |   |   |   |   |
| Direct course  expenses             |       | 58.1                                        |       | 67.3 |   | 57.8 |   | 50.5 |   | 48.8 |   |
| Advertising and  sales expense      |       | 30.6                                        |       | 36.4 |   | 33.5 |   | 27.2 |   | 28.0 |   |
| General and  administrative expense |       | 17.0                                        |       | 20.3 |   | 17.1 |   | 27.1 |   | 20.8 |   |
|                                |       | 105.7                                       |       | 124.1 |   | 108.3 |   | 104.9 |   | 97.6 |   |

 

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| Earnings (loss) from  operations      |   | (5.7   | )      | (24.1  | )      | (8.3   | )      | (4.9   | )      | 2.4    |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Other income (expense):               |   |   |   |   |   |   |   |   |   |   |   |
| Other income                          |   | 1.1    |   | 0.7    |   | 0.2    |   | 0.1    |   |   |   |
| Interest  (expense) income, net       |   | (0.0   | )      | (0.4   | )      | (0.0   | )      | 0.2    |   | 0.6    |   |
| Equity earnings  from related parties |   | (0.1   | )      | 0.1    |   |   |   | 0.2    |   |   |   |
| Gain on sale of  assets               |   | 4.0    |   | 0.2    |   |   |   |   |   |   |   |
|                                  |   | 5.0    |   | 0.6    |   | 0.2    |   | 0.5    |   | 0.6    |   |
| Earnings (loss) before  income taxes  |   | (0.7   | )      | (23.5  | )      | (8.2   | )      | (4.3   | )      | 3.0    |   |
| Income tax benefit                    |   | 4.2    |   |   |   |   |   |   |   |   |   |
| Minority  interest                    |   | (1.2   | )      |   |   |   |   |   |   |   |   |
| Net earnings (loss)                   |   | 2.3    | %      | (23.5  | )%     | (8.2   | )%     | (4.3   | )%     | 3.0    | %      |

 

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 related costs which are primarily a function ofsales realized.

We obtain the majority of our students throughintroductory 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, 2005 (in thousands):
| ** **                     | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| **Expense category**      | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Television  expense            |       | $                                           | 33,179     |   | 66.6 | % | $ | 31,659 |   | 63.7 | % | $ | 19,974 |   | 66.4 | % |
| Direct mail  expense           |       | 5,041                                       |       | 10.1 |   | 6,938 |   | 14.0 |   | 3,895 |   | 12.9 |   |
| Newspaper  expense             |       | 3,345                                       |       | 6.7 |   | 3,030 |   | 6.1 |   | 1,202 |   | 4.0 |   |
| Internet expense               |       | 10                                          |       | 0.0 |   | 466 |   | 1.0 |   |   |   |   |   |
| Radio expense                  |       |                                        |       |   |   | 860 |   | 1.7 |   | 146 |   | 0.5 |   |
| Other                          |       |                                        |       |   |   |   |   |   |   | 1,278 |   | 4.2 |   |
| Media spending                 |       | $                                           | 41,575     |   | 83.4 |   | $ | 42,953 |   | 86.5 |   | $ | 26,495 |   | 88.0 |   |
| Direct sales  commissions      |       | 8,264                                       |       | 16.6 |   | 6,711 |   | 13.5 |   | 3,597 |   | 12.0 |   |
| Advertising and sales  expense |       | $                                           | 49,839     |   | 100.0 | % | $ | 49,664 |   | 100.0 | % | $ | 30,092 |   | 100.0 | % |

 

Direct sales commissions represented the largestpercentage increase in advertising and sales expense. In 2005 and 2004, directsales commissions increased 23.1% and 86.6%, respectively, over the yearearlier comparable period. Our outreach programs revenue increased by 70.4% and121.7% in 2005 and 2004, respectively, over the prior year.

Our advertising and sales expense representedapproximately 30.6% of our revenue in 2005. Overall advertising and salesexpense over the past five years increased at a 32.5% compound annual growthrate, 5.2 percentage points below revenue’s compound annual growth rate of37.7%.

Approximately 22.4% 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).
| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                   | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Cash received  from course and product sales |       | $                                           | 196,395    |   | $ | 164,087 |   | $ | 109,273 |   | $ | 62,759 |   | $ | 43,470 |   |
| Less: Net change  in deferred revenue        |       | (33,288                                     | )          | (27,828 | ) | (19,468 | ) | (11,581 | ) | (2,196 | ) |
| Revenue for financial  reporting purposes    |       | $                                           | 163,107    |   | $ | 136,259 |   | $ | 89,805 |   | $ | 51,178 |   | $ | 41,274 |   |

 

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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. As reflectedin the table below, our deferred revenue as a percentage of total revenue hasranged from 60% to 72% range since 2001 (in thousands).
| ** **                                | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Deferred revenue                          |       | $                                           | 117,001    |   | $ | 83,713 |   | $ | 55,885 |   | $ | 36,417 |   | $ | 24,836 |   |
| Revenue for  financial reporting purposes |       | 163,107                                     |       | 136,259 |   | 89,805 |   | 51,178 |   | 41,274 |   |
| Deferred as a  percentage of revenue      |       | 71.7                                        | %          | 61.4 | % | 62.2 | % | 71.2 | % | 60.2 | % |
|                                           |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The vast majority of our costs to acquire the student havebeen 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 received the coursecontent in an electronic format, or the contract expires, at which time therevenue 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 the form of cashflows and in the form of our consolidated income statement. As a result ofthese factors, our operating cash flows can vary significantly from our resultsof operations for the same period. For this reason, we believe Adjusted EBITDAis an important nongenerally accepted accounting principles 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. Theseindividuals are compensated primarily on a commission basis or sometimes on afixed fee basis.

***EduTrades, Inc.***

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

One-half of all U.S. households own stocks, eitherdirectly or through a mutual fund or retirement plan, according to a 2005survey by the Securities Industry Association. Federal Reserve Board and U.S.Census Bureau. This represents 56.9 million households in 2005, whencompared to 40.0 million ten years ago, and 15.9 million in 1983.Investment in the stock market and in mutual funds continues to be significant.In 2005, equity fund inflows amounted to $147.6 billion.

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 individuals in the U.S., individuals who ownequities, the median household income is $65,000, the median financialhousehold assets are $125,000, 70% are married, 56% are college graduates and70% are employed.

Since that time, investment in the stock market andmutual funds continues to be substantial, and there has been significant growthin investments in alternate financial instruments such as options, single stockfutures and indexes. Trading in option contracts reached record levels in 2005.According to the Chicago Board of Options Exchange, there were468.2 million option contracts traded in 2005 compared to361.1 million in 2004, a 29.7% increase. This trend has continued throughthe first six months of 2006, where trades in option contracts have increased56% to 338.4 million contracts from 216.6 million contracts over thesame period in 2005.

Accordingly, in July 2005, we established EduTradesas a separate subsidiary for our financial markets education division. Reasonsbehind establishing EduTrades as a separate subsidiary and positioning it as apublic company subsidiary include:

·                  Affordinginvestors an opportunity to invest exclusively in our financial marketseducation business;

·                  Allowing themarket to isolate and judge the performance of EduTrades, Inc., making iteasier to value;

·                  Shares inEduTrades can be used for strategic acquisitions;

·                  Presentingan opportunity to provide stock options to attract and reward EduTradesemployees;

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·                  Allowingmost of EduTrades’ senior management team to focus exclusively on the financialmarkets education sector; and

·                  Supplyingcapital for product and service development, infrastructure and generalcorporate purposes

In November 2005, EduTrades filed a registrationstatement with the Securities and Exchange Commission to sell a minorityinterest to the public. The registration statement has not been declaredeffective by the SEC. We have agreed to various agreements to provide sharedadministrative services for both EduTrades and us to maximize our cost leveragein both companies.

We entered into an Administrative Services Agreement, aFulfillment Agreement, a Lead Marketing Agreement, an Assignment Agreement anda Voting Agreement with EduTrades. A summary of each agreement follows:

*Administrative Services Agreement:*

We provide administrative and operational assistance asneeded, in the following areas:

·                  Executivemanagement

·                  Finance andbusiness planning

·                  Accounting andcontrol

·                  Businessdevelopment

·                  Strategicalliances

·                  Legal

·                  Bookkeeping

·                  Confirmations

·                  Educationcontent and product development

·                  Facilitiesmanagement

·                  Human resources

·                  Informationtechnology

·                  Marketing

·                  Operations

·                  Sales

·                  Shipping

We are compensated for all services under this Agreementat a monthly rate of:

·                  Actual expensesincurred

·                  An allocation ofshared expenses based primarily upon the revenues of both EduTrades and us

·                  Anadministrative fee of 15% of the shared expense

*Fulfillment Agreement:*

EduTrades agreed to fulfill all outstanding financialmarket education obligations sold to students prior to August 1, 2005.These training obligations encompass all obligations related to the financialmarkets education training, including mentoring sessions, sold by us or any ofour business entities prior to August 1, 2005 that have not yet beenfulfilled. Each outstanding course or mentorship that has not been fulfilled isdeemed an unfulfilled training obligation. We will pay to EduTrades acontractually fixed amount each month per student for each training sessionfulfilled by it. This agreement terminated on August 1, 2006.

*Lead Marketing Agreement:*

We provide marketing services to EduTrades to beconducted and targeted at our customer leads database. Direct advertising andmarketing services which relate to EduTrades are reimbursed to us and sharedexpenses are billed with a 15% administrative fee as provided in theAdministrative Services Agreement. This agreement can be cancelled by EduTradesor us upon 90 days notice.

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*Assignment Agreement:*

We assigned to EduTrades as of July 25, 2005 all ofour rights, title and interest, on a worldwide basis, including, withoutlimitation, all intellectual property rights, including copyrights, studentlists and moral rights, in and to certain proprietary products, patentapplications, copyrights, internet property and proprietary information. Thisagreement includes a right of first refusal for us to repurchase the assignedassets if we propose to transfer the assets to a third party through a mergeror acquisition.

*Voting Agreement:*

Commencing on the date of the consummation of EduTradesinitial public offering and for a period of five years thereafter, we agreedthat the voting securities we own or hereafter acquire in EduTrades would voteby a majority vote of the independent directors serving on our Board ofDirectors with respect to any vote submitted to our shareholders at any annualor special shareholders’ meeting. In the event there are no independentdirectors serving on our Board at the time of any such meeting during the fiveyear term of the agreement, we agreed that the voting securities we now own orhereafter acquired in EduTrades will be voted by the remaining directorsserving on the our Board at any such meeting in the same manner as the majorityof the voting securities not owned by us are voted at the shareholders’meeting.

EduTrades has been operated by us since we started thefinancial markets education in 2002. We do not expect a significant disruptionto our day to day operations of the business as a result of EduTrades’ publicoffering. However, additional staff is being added to support theadministrative needs of EduTrades as a public company.

EduTrades contributed approximately 22.1%, 23.5% and16.2% of our revenue for 2005, 2004 and 2003, respectively.

***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 Chief Executive Officer and management team inreal estate development. The investments we currently hold have not materiallyimpacted our liquidity.

As of December 31, 2005, our noncore investmentsconsisted of equity interests in real estate ventures in Costa Rica andSouthwest Florida.

*Costa Rica Investment*

Our total investment, including initial and workingcapital advances, in Costa Rica as of June 30, 2006, December 31,2005 and 2004, amounted to $2.2 million (unaudited), $2.1 million and$1.8 million, respectively, representing a:

·                  30%equity interest in a company, Rancho Monterey, S.A., that owns approximately350 acres of undeveloped land on the Pacific coast;

·                  20%equity interest in a company, Monterey del Mar, S.A. that owns an ocean fronthotel on the Pacific coast of Costa Rica;

·                  8% equityinterest in a company, Monterey del Este, S.A. organized to develop unimprovedland in Costa Rica consisting of approximately 425 acres contiguous to ourinvestment in Rancho Monterey, S.A.

Included in these amounts are working capital advances of$1.5 million (unaudited), $1.4 million and $1.1 million as ofJune 30, 2006, December 31, 2005 and 2004, respectively.

For the year ended December 31, 2005, 2004 and 2003,under the equity method of accounting, we reflected our share of the (loss)earnings in the amounts of $(0.2) million, $0.2 million and nil,respectively.

Not included above is the land, building and fixtureswith respect to a 7,000 square foot conference center we own in Monterey delMar, Costa Rica. Our historical cost and related accumulated depreciation arereflected in our Consolidated Balance Sheets under the caption “property andequipment”.

It is our intention to divest our interests in Costa Ricaat the appropriate time.

*Southwest Florida 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 

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interest as a long term holding and will divest this investment at theappropriate time. The investment entity has no ongoing activity other thanminimal costs of carrying the land. Under the equity method of accounting, werecord our share of these costs which were less than $0.1 million in 2005 andnil in 2004. For the three months and six months ended June 30, 2006 and2005, our share of costs were nil and nil (unaudited), respectively.

**Critical Accounting Policies**

*Revenue recognition policy*

We are engaged primarily in the business of providing realestate and financial education to individual investors through courses of studyas 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 contract. Weallow students to attend courses subsequent to expiration upon request. Thetuition is generally nonrefundable. A student may receive a refund withinthree days of the purchase by exercising a right of rescission. In suchcases, the corresponding amount of deferred revenue is relieved with no impacton the Consolidated Statement of Operations.

We recognize revenue based on:

·                  when the courseis attended by the student; or

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

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

·                  highest numberof days in which 95% of those students who attended our courses subsequentto 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, we calculate verifiable andobjective supporting data as of each balance sheet date.

To the extent our financial markets education division(EduTrades, Inc. a wholly owned subsidiary) and United Kingdom businessesdo not have three full years of data (subsequent to course expiration), werecognize revenue based on course attendance. Only at such time that we havedeveloped verifiable and objective data over a three year period subsequent tocourse expiration will we apply course breakage based on the methodologydescribed above.

With respect to our EduTrades division and the UnitedKingdom, we expect to have sufficient data to apply course breakage by the endof 2006. Accordingly, we anticipate reflecting course breakage as contemplatedabove in the quarter ending 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 remain expired and unattended. We expect to recognizebetween approximately $18 million and $22 million of deferred revenuein the fourth quarter of 2006 from initial application of the course breakagerelated to the period prior to January 1, 2006 to our EduTrades divisionand United Kingdom businesses.

*Teleconferencing and subscription services*

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:

·                  The delivereditem(s) has value to the customer on a standalone basis. That item(s) has valueon a standalone basis if it is sold separately by any vendor or the customercould resell the delivered item(s) on a standalone basis. In the context of acustomer’s ability to resell the delivered item(s), the Task Force observedthat this criterion does not require the existence of an observable market forthat deliverable(s).

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·                  There isobjective and reliable evidence of the fair value of the undelivered item(s).

·                  If thearrangement includes a general right of return relative to the delivered item,delivery or performance of the undelivered item(s) is considered probable andsubstantially in the control of the vendor.

We determined the criteria detailed above have been met:

·                  The product andthe service have value to the student on a standalone basis.

·                  The product canbe and is sold separately.

·                  As discussedbelow, we feel there is objective and reliable evidence to determine the valueof the product.

·                  Lastly, thereare 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.

*Advertising and sales expense and prepaid 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 expenses are deferred until suchtime the course is conducted and the related revenue is earned.

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.

**2005 compared to 2004**

**Revenue**

Our revenue for the year ended December 31, 2005amounted to $163.1 million, an increase of 19.7% over revenue of$136.3 million in 2004. The increase was driven by expanded advance courseofferings and attendees per event, offset by a decrease in the revenuegenerated from introductory courses, as reflected in the following chart (inthousands):
| ** **                                         | ** ** | **Years ended December 31,** | ** ** | ** **     | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|----------------|------------|
| ** **                                         | ** ** | **2005**                                    | ** ** | **2004**       | ** ** | **% change** | ** ** |
| ** **                                         | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | ** ** | ** ** |
| *Cash  received from course and product sales:*    |       |                                        |       |           |       |   |   |
| Three day  sessions                                |       | $                                           | 25,017     |           | 34,202     |   | (26.9 | )% |
| Advanced courses                                   |       | 112,008                                     |       | 91,855         |       | 21.9 |   |
| Outreach  programs                                 |       | 40,415                                      |       | 23,723         |       | 70.4 |   |
| 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 | % |
|                                                    |            |                                             |            |                |            |  |  |  |  |

 

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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 | % |
| Three day  sessions                 |       | 992                                     |       | 915      |       | 8.4 |   |
| Advanced live  courses              |       | 582                                     |       | 537      |       | 8.4 |   |
| Advanced  electronic courses        |       | 162                                     |       | 25       |       | 548.0 |   |
|                                |       | 6,480                                   |       | 6,303    |       | 2.8 | % |
| *Number of students*                | * *   | * *                                | * *   | * * | * *   | * * | * * |
| Three day  sessions                 |       | 53,742                                  |       | 30,280   |       | 77.5 |   |
| Advanced live  courses              |       | 21,662                                  |       | 19,978   |       | 8.4 |   |
| Advanced  electronic courses        |       | 9,832                                   |       | 741      |       | 1,226.9 |   |
|                                |       | 85,236                                  |       | 50,999   |       | 67.1 | % |
| *Average students per paid  course* | * *   | * *                                | * *   | * * | * *   | * * | * * |
| Three day  sessions                 |       | 54.2                                    |       | 33.1     |       | 63.7 | % |
| Advanced live  courses              |       | 37.2                                    |       | 37.2     |       | — |   |
|                                |       | 47.9                                    |       | 34.6     |       | 38.4 | % |

 

We decided to reduce the tuition prices at ourintroductory courses to provide the opportunity for more students to benefitfrom our offerings and provide the opportunity for our students to be exposedto our advanced courses. Our blended average tuition level per student for anintroductory course declined 63.9%, while the number of students taking theintroductory courses 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 division’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 saw a 32.1% decline 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 andproduct sales over 2004, followed by *TeachMe To Trade*® with a 38.8% increase, while our most mature brands, *Building Wealth*TM grew at 15.5% and *Cash Flow Generator*® at 10.8%, roundingout 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.

We expanded our options for course delivery towards ourgoal of providing our students with multiple channels of accessing our coursecontent and minimizing the number of expired contracts. We increased the numberof courses offered on DVD, the opportunities to take courses via the Internet,and have expanded our live presentations within the United States. We have alsoimplemented outreach notifications by email and the U.S. mail as courses nearexpiration.

*Expenses*

Certain expenses were misclassified in 2004 and 2003.Similar expense items are now classified within the same Statement ofOperations statement line item for all periods presented. Reclassificationswere required in prior period line item expense categories and the timing ofaccruals necessary for comparability to the current period’s presentation. Theneed for reclassifications is a result of the lack of sufficient and qualifiedpersonnel over the accounting and reporting function. As qualified people werebrought into the organization, consideration was given to the presentation ofthe particular line items. It was determined the reclassification would betterdemonstrate the activities of our business.

35

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“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.

*Direct course expenses*

Direct course expenses relate to our free, introductoryand advanced courses and consist of instructor fees, commissions, facilitycosts, salaries associated with our field travel team coordinators and relatedtravel expenses.

In 2005, direct course expenses increased$3.0 million to $94.8 million, or 3.3% from $91.8 million in2004. As a percentage of revenue, direct course expenses decreased from 67.3%of revenue in 2004 to 58.1% in 2005. The components of this 9.2 percentagepoint (pp) reduction include:

|                                           | ** ** | **Margin change  2005 vs. 2004** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|
| 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. The improvement in course delivery and eventmanagement is the result of cost control measures implemented in the fourthquarter of 2004 that were realized throughout 2005 along with our ability toleverage revenue increases without corresponding increases in costs.

Direct course expense efficiencies in 2006, are notexpected at the same level as achieved in 2005, due to the nonrecurring natureof the benefit of the cost control measures realized in 2005.

*Advertising and sales expense*

Advertising expense consists of purchased media and salesexpenses consist of sales commissions to our sales force supporting our studentrecruitment.

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** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| 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 through televisioncommercials and infomercials, with the balance consisting of direct mail andnewspaper advertisement.

36

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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 expected into the future,efficiency gains are not expected to be realized at the same levels realized in2005, due in part to the nonrecurring nature of both cost control benefits andchanges to our media purchasing and scheduling practices that were realized in2005.

*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 point (pp)reduction in general and administrative costs include:

|                                                         | ** ** | **Margin change  2005 vs. 2004** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|
| 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.

*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.

37

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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 million in 2005 as interest incomeresulting from the increase in cash and cash equivalents balance offsetinterest expense from the reduction in long term debt.

Equity loss for our related parties investment 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$11.3 million which resulted in a net tax benefit of $6.8 millionbeing recorded in our Consolidated Statement of Operations.

In arriving at the conclusion that it is more likely thannot that we would realize our deferred tax assets, we reversed our valuationallowance resulting in a tax benefit for 2005. We prepared a ten year earningsmodel with key operating assumptions, along with a detailed economic model bybusiness unit and by brand for 2006. We compared these models to historicaltrends by business unit and by brand, along with detailed operating assumptionsby brand to arrive at this conclusion.

Overall key operating growth assumptions wereconservatively determined—at a discount when compared to current trends.Operating margin assumptions were based on historical trends. No additionalincome from gain on sales was assumed.

Our current trend further supports the reversal of aportion of the valuation allowance. The Company recorded approximately$8 million in taxable income for the year ended 2005 and made a payment ofapproximately $0.2 million representing our Alternative Minimum Tax for2005. Moreover, results in the first quarter of 2006 show cash received oncourse and products sales increased approximately 20.4% over the same period in2005, further supporting our projections.

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. The Company believes, based on the assumptions contained in itseconomic plan and the current trends of the business, that it is more likelythan not that the deferred tax asset will be realized in the future.

Management does not feel an additional tax asset has beencreated as a result of the restatement. As discussed in Note 11—*Income taxes* in Notes to ConsolidatedFinancial Statements. Additionally, the restatement does not affect anypreviously 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.

**Liquidity and capital resources at December 31,2005**

In December 2005, we closed a private placement of3,000,000 units of our securities, each unit consisting of one share of commonstock at $4.50 per share and one-half common stock purchase warrant to purchasean additional share at $6.00 per share. The securities are being registered forsale pursuant to this prospectus. Russell A. Whitney, our Chief ExecutiveOfficer, sold 1,250,000 of the units and we sold the remaining 1,750,000 units.The private placement generated net proceeds to us of approximately$7.2 million after offering costs.

Our capital requirements consist primarily of workingcapital, capital expenditures and acquisitions. Historically, we have fundedour working capital and capital expenditures using cash and cash equivalents onhand. Cash increased by $28.6 million in 2005 to $33.2 million,compared to a decrease of $8.6 million in 2004. Cash generation fromtuition, proceeds 

38

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from the sale of noncore investments and the sale of common stock werethe primary reasons for the $37.2 million year over year improvement, withrespect to cash generation.

Cash provided by operations was $17.0 million versus$0.6 million provided by operations in 2004. The increase is primarilyattributable to better operating margins as previously discussed as well ascash collections on courses and products, evidenced by the increase in deferredrevenue of $33.3 million, offset by an increase in deferred courseexpenses of $2.6 million.

Cash provided by investing activities was$8.6 million in 2005, as compared to a usage of $10.6 million for thesame period last year. The increase is primarily due to the sale of real estateinvestments resulting in cash proceeds of $9.8 million in 2005. In 2004,we purchased $9.7 million in property and equipment and invested$1.5 million in noncore investments, as compared to $0.7 million inproperty and equipment purchases in 2005. We will deploy excess capital toinvest in property and equipment in future periods for expansion, computer andsoftware upgrades and geographic expansion. We will continue to pursue otheropportunistic, strategic acquisitions.

Cash provided by financing activities amounted to$3.0 million in 2005. Nearly $12.3 million in cash was received fromthe sale of stock in December 2005, comprised of approximately$7.2 million net proceeds to the Company and $5.1 million from sharessold by our Chairman and Chief Executive Officer that was subsequently paid inJanuary 2006. Offsetting this was $9.0 million in payments of long term debt,principally from the proceeds of the SCB Building sale. As we continue togenerate cash flow from operations, we may consider some additional reductionof long term debt as a financing option.

Merchant account reserves which represent funds ondeposit with credit card processors, was $5.4 million on December 31,2005 as compared with $2.2 million on December 31, 2004. AtDecember 31, 2005, we had used letters of credit to secure merchantaccounts and certain state bonding requirements aggregating $1.8 million,which are supported by certificates of deposit which carry an interest rate of2.9% and 3.7%, respectively

Historically, we have been able to fund all of ouroperations primarily through existing working capital.

As a result of significant and growing deferred revenuebalance, our working capital deficit will continue to grow. We intend tocontinue to use working capital for operating purposes. We intend to establisha credit facility to support our growth strategy. At the current time, we havestarted very preliminary discussions with a few financial institutions. Fromtime to time, we evaluate potential acquisitions of business products ortechnologies that complement our business. To the extent that resources areinsufficient to fund 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, we may beunable to expand our business, develop or enhance our products and services,take advantage of future opportunities or respond to competitive pressures, anyof which could have a material adverse effect on our business, operatingresults and financial condition.

As of December 31, 2005 we have long term debt of$3.4 million, consisting of notes payable secured by certain assets thatinclude real estate in the United Kingdom and our corporate airplane. Thefuture loan payments, along with commitments under noncancelable operatingleases, are set forth in the table below (in thousands):

|            | ** ** | **Debt** | ** ** | **Operating  Lease  Commitments** | ** ** | **Total** | ** ** |
|------------|------------|----------|------------|-----------------------------------|------------|-----------|------------|
| 2006       |       | $        | 462        |                              | $          | 748       |       | $ | 1,210 |   |
| 2007       |       | 444      |       | 446                               |       | 890       |       |
| 2008       |       | 377      |       | 186                               |       | 563       |       |
| 2009       |       | 307      |       | 192                               |       | 499       |       |
| 2010       |       | 310      |       | 137                               |       | 447       |       |
| Thereafter |       | 1,474    |       | —                            |       | 1,474     |       |
|       |       | $        | 3,374      |                              | $          | 1,709     |       | $ | 5,083 |   |

 

Additionally, in December 2005 we entered into a commitmentfor a new computer software package. The total commitment of approximately$2.5 million includes installation, training and support services.

We believe our cash resources are sufficient to fund ouroperations and growth plans in 2006.

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**Impact of Inflation**

Inflationary factors such as increases in the cost oflabor directly affect our operations. Most of our leases provide forcost-of-living adjustments and require us to pay taxes, insurance andmaintenance expenses, all of which are subject to inflation. Additionally, ourfuture lease costs for new facilities may include potentially escalating costsof real estate and construction. There is no assurance that we will be able topass on increased costs to our customers.

Depreciation expense is based on historical cost of fixedassets, and is therefore potentially less than it would be if it were based oncurrent replacement cost. While property and equipment acquired in prior yearswill ultimately have to be replaced at higher prices, it is expected thatreplacement will be a gradual process over many years.

**2004 compared to 2003**

*Revenue*

Revenue for the year ended December 31, 2004 was$136.3 million, an increase of $46.5 million or 51.7%, compared torevenue of $89.8 million in 2003. There was significant growth in allsegments of the business. Within the real estate segment, the *Cash Flow Generator®* brand, which wasintroduced in 2003, had revenue of $22.5 million in 2004. Revenue in thefinancial markets in 2004 was $32.1 million, an increase of 120.6% versus2003 revenue of $14.5 million. Financial markets segment revenue has grownfrom 16.2% of total revenue in 2003 to 23.5% of total revenue in 2004.

Revenue recognized from course breakage was$19.0 million in 2003, compared to $18.1 million in 2004, a decreaseof $0.9 million. Revenue from course breakage was 13.3% and 21.1% of totalrevenue for the 2004 and 2003, respectively.

In addition to an increase in the number of courses held,in November 2004, we raised the price of our courses an average of 10.2%. Itwas the first price increase in our courses for over two years.

*Expenses*

Certain expenses were misclassified in 2004 and 2003.Similar expense items are now classified within the same Statements ofOperations line item for all periods presented. Reclassifications were requiredin prior period line item expense categories and the timing of accrualsnecessary for comparability to the current period’s presentation. The need forreclassifications is a result of the lack of sufficient and qualified personnelover the accounting and reporting function. As qualified people were broughtinto the organization, consideration was given to the presentation of theparticular line items. It was determined the reclassification would betterdemonstrate 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, leveraging of revenueincreases without corresponding increases in costs, an increase in the averagenumber of students per course, our ability to deliver more courseselectronically and general economies of scale resulting from substantial salesgrowth.

*Direct course expenses*

Direct course expenses were $91.8 million for theyear ended December 31, 2004, an increase of $39.9 million or 76.9%compared to $51.9 million in 2003. Direct course expenses as a percent ofrevenue were 67.3% for 2004 versus 57.8% for 2003. The overall increase indirect course expenses is primarily attributable to the increase in number ofcourses held which were 2,468 in 2004 compared to 2,132 in 2003.

The primary components of the 9.5 percentage point (pp)increase in direct course expenses are:

|                               | ** ** | **Margin change  2004 vs. 2003** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|
| Speaker fees and  commissions |       | 4.4                                             | pp         |
| Introductory  course delivery |       | 5.2                                             |       |
| Coaching and  mentoring       |       | 1.9                                             |       |
| Event production  and travel  |       | 2.7                                             |       |
| Product cost                  |       | (3.5                                            | )          |
| Other direct  course expenses |       | (1.2                                            | )          |
|                          |       | 9.5                                             | pp         |

 

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*Advertising and sales expenses*

Advertising and sales expense, of which advertisingrepresents approximately 86% of the expense for the year endedDecember 31, 2004, were $49.7 million, an increase of$19.6 million or 65.0%, compared to $30.1 million in 2003. As a percentageof revenue, advertising and sales expenses were 36.4% and 33.5%, respectively,in 2004 and 2003. The growth of the advertising and sales expense over 2003 isprimarily due to the increase in free introductory workshops held. Advertisingand sales expense has a direct correlation to the number of free introductoryworkshops we conduct. The addition of more brands, the continued expansion ofthe brands internationally, and the expansion in the number of selling teamsfor each brand contribute to increase.

The increase in advertising and sales expense from 2003,as a percentage of revenue by component, is illustrated below:

|                | ** ** | **Margin change  2004 vs. 2003** | ** ** |
|----------------|------------|-------------------------------------------------|------------|
| Television     |       | 0.9                                             | pp         |
| Direct mail    |       | 0.8                                             |       |
| Newspaper      |       | 0.9                                             |       |
| Other media    |       | 0.8                                             |       |
| Sales expenses |       | (0.5                                            | )          |
|           |       | 2.9                                             | pp         |

 

*General and administrative expenses*

General and administrative expenses were$27.7 million in 2004, an increase of $12.4 million or 80.6%,compared to $15.3 million in 2003. This increase was due primarily toincreased personnel hired to handle the increase in our volume of business.Payroll and payroll benefits account for approximately 57% of general andadministrative expenses. It includes bonuses to executive officers of$1.5 million. This makes general and administrative expenses highlyvariable and thus controllable as our volume grows or contracts. General andadministrative expenses as a percent of sales were 20.3% and 17.1% in 2004 and2003, respectively.

The 3.2 percentage point (pp) increase in general andadministrative expenses is illustrated in the chart below:

|                            | ** ** | **Margin change  2004 vs. 2003** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|
| Payroll and  benefit costs |       | 2.2                                             | pp         |
| Professional  fees         |       | 1.0                                             |       |
|                       |       | 3.2                                             | pp         |

 

*Loss from operations*

Loss from operations for 2004 was $32.8 million, ascompared to a loss from operations of $7.5 million for 2003. The increased lossfrom operations is directly attributable to increased expenses in allcategories in 2004 over the prior period, and to the fact that new sales ofadvanced training courses continue to outpace the rate at which courses areoffered and delivered to students. This is reflected in the fact that deferredrevenue increased by $27.9 million in 2004, as compared to$19.5 million in 2003.

*Other income*

Other income increased by $0.7 million from 2003.This was primarily due to gain on sale of assets, recovery of merchant depositsand equity in earnings from affiliates, offset by an increase in interestexpense (net of interest income) $0.5 million from additional borrowingsin 2004 used to finance improvements to a real estate investment.

*Net loss*

Net loss for 2004 was $32.0 million or $3.72 pershare compared to $7.9 million or $0.89 per share, in 2003. The increasein net loss is attributable to the aforementioned increase in loss fromoperations.

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

Market risk generally represents the risk that losses may occur in thevalues of financial instruments as a result of movements in interest rates,foreign currency exchange rates and commodity prices. We do not have commodityprice market risk. We are exposed to market risk from changes in foreigncurrency exchange rates and interest rates which could impact our results ofoperations and financial condition. We manage our exposure to these marketrisks through our regular operating and financing activities.

Foreign Currency Exchange Rate Risk- We may faceforeign currency exchange risk because of the growth of our United Kingdom andCanadian subsidiaries 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 temporarilyinvest our excess cash and restricted cash in interest-bearing securitiesissued by high-quality issuers. Our management monitors risk exposure to moniesinvested in securities of these financial institutions. Due to the sort timethe investments are outstanding and their general liquidity, these instrumentsare classified as cash equivalents in the consolidated balance sheet and do notrepresent a material interest rate risk to us. Our primary market risk exposurefor changes in interest rates relates to our long-term debt obligations. Wemanage our exposure to changing interest rates principally through the use of acombination of fixed and floating rate debt. In addition, certain of our debtinstruments have interest rate floors and ceilings.

We evaluated the potential effect that near termchanges in interest rates would have had on the fair value of its interest raterisk sensitive financial instruments at December 31, 2005. Assuming a 100basis point increase in the prime interest rate at December 31, 2005 thepotential increase in the fair value of our debt obligations would have beenapproximately $36,000 at December 31, 2005.

42

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTAL DATA**

 

**Index to Consolidated Financial Statements**

 
| **Whitney Information Network,  Inc.**                                                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheet as  of December 31, 2005 and 2004                                                                       | F-2    |
| Consolidated Statement of  Operations and Comprehensive Earnings (Loss) for the years ended  December 31, 2005, 2004 and 2003 | F-3    |
| Consolidated Statement of Cash  Flows for the years ended December 31, 2005, 2004 and 2003                                    | F-4    |
| Consolidated Statement of  Changes in Stockholders’ Deficit for the years ended December 31, 2005,  2004 and 2003             | F-6    |
| Notes to Consolidated Financial  Statements                                                                                             | F-7    |
| Report of Independent  Registered Public Accounting Firm                                                                                | F-35   |

 

F-1

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

**ConsolidatedBalance Sheets**

**(in thousands,except share data)**
| ** **                                                                                                                                                              | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **(restated)**              | ** ** | **(restated)**              | ** ** |
| **Assets**                                                                                                                                                              |       |                        |       |                        |       |
| Current assets:                                                                                                                                                         |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                              |       | $                           | 33,244     |                        | $          | 4,667 |   |
| Restricted cash                                                                                                                                                         |       | 5,406                       |       | 2,181                       |       |
| Accounts  receivable, net                                                                                                                                               |       | 3,789                       |       | 448                         |       |
| Accounts receivable,  related parties                                                                                                                                   |       |                        |       | 1,168                       |       |
| Notes  receivable, current portion                                                                                                                                      |       | 1,785                       |       |                        |       |
| Deferred course  expenses, current portion                                                                                                                              |       | 14,401                      |       | 11,898                      |       |
| Prepaid  advertising and other                                                                                                                                          |       | 2,841                       |       | 1,977                       |       |
| Inventory                                                                                                                                                               |       | 1,087                       |       | 1,390                       |       |
| Deferred  registration costs                                                                                                                                            |       | 315                         |       |                        |       |
| Total current assets                                                                                                                                                    |       | 62,868                      |       | 23,729                      |       |
| Notes  receivable, net of current portion                                                                                                                               |       | 9,158                       |       |                        |       |
| Property and  equipment, net                                                                                                                                            |       | 10,082                      |       | 24,548                      |       |
| Investment in  related parties                                                                                                                                          |       | 2,103                       |       | 847                         |       |
| Investment in  real estate joint venture                                                                                                                                |       | 2,716                       |       | 2,701                       |       |
| Intangible  assets, net                                                                                                                                                 |       | 5,754                       |       | 6,576                       |       |
| Goodwill                                                                                                                                                                |       | 2,000                       |       | 1,500                       |       |
| Deferred income  tax asset                                                                                                                                              |       | 7,287                       |       |                        |       |
| Deferred course  expenses, net of current portion                                                                                                                       |       | 99                          |       |                        |       |
| Other assets                                                                                                                                                            |       | 136                         |       | 127                         |       |
|                                                                                                                                                                    |       | $                           | 102,203    |                        | $          | 60,028 |   |
| **Liabilities  and Stockholders’ Deficit**                                                                                                                         |       |                        |       |                        |       |
| Current liabilities:                                                                                                                                                    |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                        |       | $                           | 3,691      |                        | $          | 7,413 |   |
| Income taxes  payable                                                                                                                                                   |       | 356                         |       |                        |       |
| Accrued course  expenses                                                                                                                                                |       | 1,841                       |       | 2,174                       |       |
| Other accrued  expenses                                                                                                                                                 |       | 7,377                       |       | 3,999                       |       |
| Due to  stockholders from sale of common stock                                                                                                                          |       | 5,110                       |       |                        |       |
| Long term debt,  current portion                                                                                                                                        |       | 462                         |       | 504                         |       |
| Deferred revenue                                                                                                                                                        |       | 116,777                     |       | 83,713                      |       |
| Total current  liabilities                                                                                                                                              |       | 135,614                     |       | 97,803                      |       |
| Long term debt, net of  current portion                                                                                                                                 |       | 2,912                       |       | 11,808                      |       |
| Deferred revenue, net  of current portion                                                                                                                               |       | 224                         |       |                        |       |
| Total liabilities                                                                                                                                                       |       | 138,750                     |       | 109,611                     |       |
| Minority interest                                                                                                                                                       |       | 3,939                       |       | 1,977                       |       |
| 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, 10,455,910 and 8,618,186 shares  issued and outstanding, as of December 31, 2005 and 2004, respectively |       | 10,593                      |       | 3,269                       |       |
| Paid-in  capital                                                                                                                                                        |       | 449                         |       | 449                         |       |
| Foreign currency  translation adjustment                                                                                                                                |       | (650                        | )          | (550                        | )          |
| Accumulated  deficit                                                                                                                                                    |       | (50,878                     | )          | (54,728                     | )          |
| Total stockholders’  deficit                                                                                                                                       |       | (40,486                     | )          | (51,560                     | )          |
|                                                                                                                                                                    |       | $                           | 102,203    |                        | $          | 60,028 |   |

 

See notes to Consolidated Financial Statements.

F-2

----

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

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

**(in thousands,except per share data)**
| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                   | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Revenue                                      |       | $                                           | 163,107    |   | $ | 136,259 |   | $ | 89,805 |   |
| Operating expenses:                          |       |                                        |       |   |   |   |   |
| Direct course  expenses                      |       | 94,765                                      |       | 91,763 |   | 51,868 |   |
| Advertising and  sales expense               |       | 49,839                                      |       | 49,664 |   | 30,092 |   |
| General and administrative  expenses         |       | 27,664                                      |       | 27,676 |   | 15,321 |   |
|                                         |       | 172,268                                     |       | 169,103 |   | 97,281 |   |
| Loss from operations                         |       | (9,161                                      | )          | (32,844 | ) | (7,476 | ) |
| Other income (expense):                      |       |                                        |       |   |   |   |   |
| Other income                                 |       | 1,800                                       |       | 893 |   | 154 |   |
| Interest  expense, net                       |       | (28                                         | )          | (499 | ) | (3 | ) |
| Equity earnings  (loss) from related parties |       | (176                                        | )          | 159 |   |   |   |
| Gain on sale of  assets                      |       | 6,579                                       |       | 305 |   |   |   |
|                                         |       | 8,175                                       |       | 858 |   | 151 |   |
| Loss before income  taxes                    |       | (986                                        | )          | (31,986 | ) | (7,325 | ) |
| Minority  interest                           |       | (1,962                                      | )          | 23 |   |   |   |
| Income tax  benefit                          |       | 6,798                                       |       |   |   |   |   |
| Net earnings (loss)                          |       | $                                           | 3,850      |   | $ | (31,963 | ) | $ | (7,325 | ) |
| Effect of  foreign exchange rates            |       | (100                                        | )          | 55 |   | (591 | ) |
| Comprehensive earnings  (loss)               |       | 3,750                                       |       | $ | (31,908 | ) | $ | (7,916 | ) |
| Earnings (loss) per  share:                  |       |                                        |       |   |   |   |   |
| Diluted                                      |       | $                                           | 0.41       |   | $ | (3.72 | ) | $ | (0.89 | ) |
| Basic                                        |       | $                                           | 0.43       |   | $ | (3.72 | ) | $ | (0.89 | ) |
| Weighted average common  shares outstanding: |       |                                        |       |   |   |   |   |
| Diluted                                      |       | 9,360                                       |       | 8,589 |   | 8,188 |   |
| Basic                                        |       | 8,859                                       |       | 8,589 |   | 8,188 |   |

 

See notes to Consolidated Financial Statements.

F-3

----

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

**ConsolidatedStatements of Cash Flows**

**(in thousands)**
| ** **                                                                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Operating activities:                                                                       |       |                                        |       |   |   |   |   |
| Net earnings (loss)                                                                         |       | $                                           | 3,850      |   | $ | (31,963 | ) | $ | (7,325 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                              |       | 1,856                                       |       | 1,610 |   | 950 |   |
| Gain on sale of  assets                                                                     |       | (6,579                                      | )          | (305 | ) |   |   |
| Minority  interest                                                                          |       | 1,962                                       |       | (23 | ) |   |   |
| Changes in operating  assets and liabilities:                                               |       |                                        |       |   |   |   |   |
| Restricted cash                                                                             |       | (3,225                                      | )          | (389 | ) | 67 |   |
| Accounts  receivable, net                                                                   |       | (3,341                                      | )          | 867 |   | (807 | ) |
| Prepaid  advertising and other                                                              |       | (864                                        | )          | 353 |   | (1,633 | ) |
| Inventory                                                                                   |       | 303                                         |       | (677 | ) | (349 | ) |
| Deferred tax  asset, net of deferred tax liability                                          |       | (7,287                                      | )          |   |   |   |   |
| Deferred course  expenses                                                                   |       | (2,602                                      | )          | (3,546 | ) | (3,339 | ) |
| Other assets                                                                                |       | (19                                         | )          | (96 | ) | 7 |   |
| Accounts payable                                                                            |       | (3,722                                      | )          | 4,195 |   | 1,456 |   |
| Accrued course  expenses                                                                    |       | (333                                        | )          | 528 |   | 1,582 |   |
| Deferred revenue                                                                            |       | 33,288                                      |       | 27,828 |   | 19,468 |   |
| Other accrued  expenses                                                                     |       | 3,379                                       |       | 2,218 |   | 655 |   |
| Income taxes  payable                                                                       |       | 356                                         |       |   |   |   |   |
| Net change in  operating working capital                                                    |       | 15,933                                      |       | 31,281 |   | 17,107 |   |
| Cash provided by  operations                                                                |       | 17,022                                      |       | 600 |   | 10,732 |   |
| Investing  activities:                                                                      |       |                                        |       |   |   |   |   |
| Purchase of  property and equipment                                                         |       | (701                                        | )          | (9,682 | ) | (2,884 | ) |
| Proceeds from  sale of investment properties                                                |       | 9,777                                       |       | 827 |   |   |   |
| Purchase of  goodwill and intangible assets                                                 |       | (333                                        | )          | (250 | ) | (470 | ) |
| Purchase of  equity interest in investment properties                                       |       |                                        |       | (2,701 | ) | (2,000 | ) |
| Investments in  and advances to related parties, net                                        |       | (103                                        | )          | 1,202 |   | (2,378 | ) |
| Cash provided by (used  in) investing activities                                            |       | 8,640                                       |       | (10,604 | ) | (7,732 | ) |
| Financing activities:                                                                       |       |                                        |       |   |   |   |   |
| Proceeds from  sale of common stock                                                         |       | 7,155                                       |       |   |   |   |   |
| Due to  stockholders from sale of common stock                                              |       | 5,110                                       |       |   |   |   |   |
| Proceeds of long  term debt                                                                 |       | 103                                         |       | 6,363 |   | 2,500 |   |
| Principal  payments on long term debt                                                       |       | (9,041                                      | )          | (291 | ) | (560 | ) |
| Proceeds of note  payable to officer                                                        |       |                                        |       |   |   | 62 |   |
| Principal  payments on note payable to officer                                              |       |                                        |       | (4,713 | ) | (1,119 | ) |
| Proceeds from  exercise of stock options                                                    |       | 3                                           |       | 28 |   | 16 |   |
| Distribution to  officer                                                                    |       |                                        |       |   |   | (300 | ) |
| Stock  registration costs                                                                   |       | (315                                        | )          |   |   |   |   |
| Cash provided by financing  activities                                                      |       | 3,015                                       |       | 1,387 |   | 599 |   |
| Effect of foreign  currency translation                                                     |       | (100                                        | )          | 55 |   | (591 | ) |
| Increase (decrease) in  cash and cash equivalents                                           |       | 28,577                                      |       | (8,562 | ) | 3,008 |   |
| Cash and cash  equivalents, beginning of year                                               |       | 4,667                                       |       | 13,229 |   | 10,221 |   |
| Cash and cash equivalents, end of year                                                      |       | $                                           | 33,244     |   | $ | 4,667 |   | $ | 13,229 |   |

 

See notes to Consolidated Financial Statements.

F-4

----

Supplemental cash flow information:

Cash paid for interest was $0.2 million,$0.5 million and $0.1 million for the years ended December 31,2005, 2004 and 2003, respectively.

Capital expenditures of $2.7 million and$2.5 million in 2004 and 2003, respectively that were financed throughborrowings have been included as purchases of property and equipment andproceeds of long term debt on the Statement of Cash Flows. These transactionshad been presented as a supplemental disclosure of noncash activity in prioryears.

The net change in accounts receivable, related partiesfor all years has been restated and included in the Investing Activities of theConsolidated Statement of Cash Flows section under the caption “Investment inand advances to related parties, net” for comparative purposes (see Note 1-*Restatement*). In 2004 and 2003, the netchange of $1.3 million and ($2.5 million), respectively had beenpresented in the operating activities section.

Supplemental disclosure of noncash activity:

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.

A portion of the consideration received on the sale ofthe SCB Building, as discussed in Note 4—*Mergers,acquisitions and capital accounts*, includes $11.0 million in notesreceivable out of $20.3 million in total proceeds.

F-5

----

**WHITNEY INFORMATION 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, 2002 (restated)                                                              |       | 8,097                 |       | $           | 940        |            | $          | 449             |       | (14                    | )          | $           | (14,240    | ) | $ | (12,865 | ) |
| Issuance  of stock for the stock purchased of MRS Equity Corp.                                             |       | 63                    |       | 125         |       |            |       |            |       |                   |       | 125         |       |
| Issuance  of stock for assets purchased of Success Development, Inc.                                  |       | 180                   |       | 900         |       |            |       |            |       |                   |       | 900         |       |
| Issuance  of stock for the stock purchased of SpeakTek, Inc.                                               |       | 200                   |       | 1,000       |       |            |       |            |       |                   |       | 1,000       |       |
| Issuance  of stock for assets purchased                                                                    |       | 2                     |       | 10          |       |            |       |            |       |                   |       | 10          |       |
| Issuance  of stock for stock options exercised                                                             |       | 6                     |       | 16          |       |            |       |            |       |                   |       | 16          |       |
| Issuance  of cash and note payable to majority stockholder for interest in Whitney  Leadership Group, Inc. |       |                  |       |        |       |            |       |            |       | (1,200                 | )          | (1,200      | )          |
| Foreign  currency translation adjustment                                                                   |       |                  |       |        |       |            |       | (591            | )          |                   |       | (591        | )          |
| Net  loss                                                                                                  |       |                  |       |        |       |            |       |            |       | (7,325                 | )          | (7,325      | )          |
| Balance at  December 31, 2003 (restated)                                                              |       | 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 (restated)                                                              |       | 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 (restated)                                                               |       | 10,456                |       | $           | 10,593     |            | $          | 449             |       | $                      | (650       | )           | $          | (50,878 | ) | $ | (40,486 | ) |

 

See notes to Consolidated Financial Statements.

F-6

----

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

**Notes toConsolidated Financial Statements**

***Note 1—Restatement***

*Overview*

Whitney Information Network, Inc. and Subsidiaries’Consolidated Financial Statements and other financial information have beenrestated for the years ended December 31, 2005, 2004, 2003, 2002 and 2001and for each of the quarters in the years 2005 and 2004. Certain of ourmaterial control weaknesses resulted in inaccurate financial reporting andrestatements to our previously filed Consolidated Financial Statements from2001 through 2005. The effect of the restatement on our statement of financialposition at the end of the reported periods is summarized in the table below.The financial restatements reflect:

·                  a modificationassociated with a change in revenue recognition policy and restatement ofrevenue from expired courses;

·                  reclassificationsin prior period line item expense categories and the timing of accrualsnecessary for comparability to the current period’s presentation; and

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

The following discussion details the reasons for therestatement and reclassifications in our Consolidated Financial Statements.

*Restatement—Revenue Recognition*

We are engaged primarily in the business of providingreal estate and financial education to individual investors 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.

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 theConsolidated Statement of Operations.

We recognize revenue based on:

·                  when the courseis attended by the student; or

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

—           percentage of students who never attended a courseand those students who never attended a course subsequent to expiration; and

—           highest number of days in which 95% of thosestudents who attended our courses subsequent 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, we calculate verifiable andobjective supporting data as of each balance sheet date.

F-7

----

*Reclassification*

Certain expense items were misclassified in 2004 and2003. Reclassifications were required in prior period line item expensecategories and the timing of accruals necessary for comparability to thecurrent period’s presentation. Similar expense items are now classified withinthe same Statement of Operations line item for all periods presented. The needfor reclassifications is a result of the lack of sufficient and qualifiedpersonnel over the accounting and reporting function. As qualified people werebrought into the organization, consideration was given to the presentation ofthe particular line items. It was determined the reclassification would betterdemonstrate the activities of our business.

*Restatement—Teleconference and subscription service*

Upon review of our revenue recognition policies for allservice and product offerings, we concluded the previous revenue recognitionpolicy with respect to our teleconferencing and subscription based offeringsneeded to be modified in order to comply with the Financial Accounting StandardBoard’s Emerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*and Staff Accounting Bulletin 104 (SAB 104). These restatements have nocumulative effect on our Consolidated Statement of Cash Flows.

*Effects of Restatement*

The following tables set forth the effects of therestatement on affected line items within our previously reported financialstatements for the years ended December 31, 2005, 2004 and 2003 and foreach of the quarters in the years 2005 and 2004.

F-8

----

All financial information expressed in thousands.
| ** **                             | ** ** | **Revenue** | ** ** | **Direct  course  expenses** | ** ** | **Advertising  & sales  expense** | ** ** | **General &  administrative  expenses** | ** ** | **Total  operating  expenses** | ** ** | **Earnings  (loss)  from  operations** | ** ** | **Other  income  (expense)** | ** ** | **Interest  (expense)  income, net** | ** ** | **Equity  earnings** | ** ** | **Gain  on  sale of  assets** | ** ** | **Earnings  before  taxes  and  minority  interest** | ** ** | **Minority  Interests** | ** ** | **Income  tax** | ** ** | **Net  earnings  (loss)** | ** ** |
|----------------------------------------|------------|-------------|------------|------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|----------------------|------------|------------------------------------|------------|------------------------------------------------------|------------|-------------------------|------------|-----------------|------------|---------------------------|------------|
| **Year ended December 31,  2005** | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **                                 | ** ** | ** **                                       | ** ** | ** **                     | ** ** | ** **                             | ** ** | ** **                   | ** ** | ** **                                | ** ** | ** **           | ** ** | ** **                         | ** ** | ** **                                           | ** ** | ** **              | ** ** | ** **      | ** ** | ** **                | ** ** |
| **As previously reported**         |       | $          | 178,564    |       | $          | 96,520     |       | $          | 50,003     |       | $          | 27,664     |       | $          | 174,187    |       | $          | 4,377      |       | $          | 1,800      |       | $          | (28        | )          | $          | (176       | )          | $          | 6,579  |   | $      | 12,552  |   | $      | (1,962 | )      | $      | 6,798  |   | $       | 17,388 |   |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|
| ***Restatements:***                |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Revenue recognition  policy change |       | (14,173    | )          | (1,382     | )          |       |       |       |       | (1,382     | )          | (12,791    | )          |       |       |       |       |       |       |       |       | (12,791    | )          |       |       |       |       | (12,791    | )          |
| Revenue deferral policy            |       | (1,283     | )          | (373       | )          | (164       | )          |       |       | (537       | )          | (746       | )          |       |       |       |       |       |       |       |       | (746       | )          |       |       |       |       | (746       | )          |
| **2005 as restated**               |       | $          | 163,107    |       | $          | 94,765     |       | $          | 49,839     |       | $          | 27,664     |       | $          | 172,269    |       | $          | (9,161     | )          | $          | 1,800      |       | $          | (28        | )          | $          | (176       | )          | 6,579      |   | $      | (986   | )       | $      | (1,962 | )      | $      | 6,798  |   | $      | 3,850   |   |
| **2004**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **As previously reported**         |       | $          | 139,859    |       | $          | 57,952     |       | $          | 79,533     |       | $          | 33,150     |       | $          | 170,635    |       | $          | (30,776    | )          | $          | 894        |       | $          | (499       | )          | $          | 159        |       | $          | 305    |   | $      | (29,917 | )      | $      | 23     |   |   |   | $      | (29,894 | )      |
| ***Reclassifications:***           |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Payroll & related  costs       |       |       |       | 5,694      |       | (864       | )          | (4,830     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Commissions                        |       |       |       | 13,462     |       | (13,462    | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Product cost                       |       |       |       | 3,655      |       | (3,655     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Event staging                      |       |       |       | 7,505      |       | (7,505     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Shipping                           |       |       |       | 4,521      |       | (4,521     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Advertising                        |       |       |       | 117        |       |       |       | (117       | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Merchant fees                      |       |       |       | (3         | )          | 3          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Administrative costs               |       |       |       | 359        |       |       |       | (359       | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Other                              |       |       |       | 33         |       | 135        |       | (168       | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| **2004 as reclassified**           |       | $          | 139,859    |       | $          | 93,295     |       | $          | 49,664     |       | $          | 27,676     |       | $          | 170,635    |       | $          | (30,776    | )          | $          | 894        |       | $          | (499       | )          | $          | 159        |       | $          | 305    |   | $      | (29,917 | )      | $      | 23     |   |   |   | $      | (29,894 | )      |
| ***Restatements:***                |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Revenue recognition  policy change |       | $          | (3,005     | )          | $          | (1,307     | )          |       |       |       |       | (1,307     | )          | (1,698     | )          |       |       |       |       |       |       |       |       | (1,698     | )          |       |       |       |       | (1,698 | )      |
| Revenue deferral policy            |       | (595       | )          | (224       | )          |       |       |       |       | (224       | )          | (371       | )          |       |       |       |       |       |       |       |       | (371       | )          |       |       |       |       | (371       | )          |
| **2004 as restated**               |       | $          | 136,259    |       | $          | 91,763     |       | $          | 49,664     |       | $          | 27,676     |       | $          | 169,103    |       | $          | (32,845    | )          | $          | 894        |       | $          | (499       | )          | $          | 159        |       | $          | 305    |   | $      | (31,986 | )      | $      | 23     |   |   |   | $      | (31,963 | )      |
| **2003**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **As previously reported**         |       | $          | 94,958     |       | $          | 46,804     |       | $          | 27,508     |       | $          | 22,355     |       | $          | 96,667     |       | $          | (1,709     | )          | $          | 154        |       | $          | (3         | )          |       |       |       |       | $      | (1,558 | )      |    |   |   |   | $      | (1,558 | )      |
| ***Reclassifications:***           |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Payroll & related  costs       |       |       |       | 2,971      |       | (511       | )          | (2,460     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Commissions                        |       |       |       | (11        | )          | 11         |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Shipping                           |       |       |       | 267        |       |       |       | (267       | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Advertising                        |       |       |       | (851       | )          | 2,668      |       | (1,817     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Merchant fees                      |       |       |       | 1,956      |       |       |       | (1,956     | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Administrative costs               |       |       |       | 103        |       | 127        |       | (230       | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Other                              |       |       |       | 15         |       | 289        |       | (304       | )          |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| **2003 as reclassified**           |       | $          | 94,958     |       | $          | 51,254     |       | $          | 30,092     |       | $          | 15,321     |       | $          | 96,667     |       | $          | (1,709     | )          | $          | 154        |       | (3         | )          |       |       |       |       | $          | (1,558 | )      |   |    |   |   | $      | (1,558 | )      |
| ***Restatements:***                |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |
| Revenue  recognition policy change |       | (5,153     | )          | 614        |       |       |       |       |       | 614        |       | (5,767     | )          |       |       |       |       |       |       |       |       | (5,767     | )          |       |       |       |       | (5,767     | )          |
| **2003 as restated**               |       | $          | 89,805     |       | $          | 51,868     |       | $          | 30,092     |       | $          | 15,321     |       | $          | 97,281     |       | $          | (7,476     | )          | $          | 154        |       | $          | (3         | )          |       |       |       |       | $      | (7,325 | )      |    |   |   |   | $      | (7,325 | )      |

 

F-9

----

 
| ** **                     | ** ** | **2005**                     | ** ** | **2004**         | ** ** | **2003**                     | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| **Earnings (loss) per share:** |       |                         |       |             |       |                         |       |   |   |   |   |   |   |
| Diluted                        |       | $                            | 1.86       |             | $          | 0.41                         |       | $ | (3.48 | ) | $ | (3.72 | ) | $ | (0.19 | ) | $ | (0.89 | ) |
| Basic                          |       | 1.96                         |       | 0.43             |       | (3.48                        | )          | (3.72 | ) | (0.19 | ) | (0.89 | ) |
|                                |            |                              |            |                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                           | ** ** | **2005**                     | ** ** | **2004**         | ** ** | **2003**                     | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|------------------|------------|------------------------------|------------|
| ** **                                                           | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**      | ** ** |
| **Consolidated Statement of  Changes in Stockholders’ Deficit** |       |                         |       |             |       |                         |       |   |   |   |   |   |   |
| Balance at  January 1                                           |       | $                            | (33,609    | )                | $          | (51,560                      | )          | $ | (4,157 | ) | $ | (19,930 | ) | $ | (3,102 | ) | $ | (12,865 | ) |
| Increase (decrease)  attributable to net earnings (loss)             |       | 17,388                       |       | 3,850            |       | (29,896                      | )          | (31,963 | ) | (1,558 | ) | (7,325 | ) |
| Currency translation  adjustments—net (a)                       |       | (155                         | )          | (100             | )          | 166                          |       | 55 |   | (348 | ) | (591 | ) |
| Balance at December 31                                          |       | $                            | (9,052     | )                | $          | (40,486                      | )          | $ | (33,609 | ) | $ | (51,560 | ) | $ | (4,157 | ) | $ | (19,930 | ) |

----

(a)          The change in foreign currency translation isattributable to the restatements arising from the change in revenue recognitionpolicies.
| ** **                                        | ** ** | **2005**                     | ** ** | **2004**         | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|------------------|------------|
| **At December 31**                      | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                        | ** ** | **(in thousands)**      | ** ** |
| **Consolidated  Balance Sheets**                  |       |                         |       |             |       |   |   |   |   |
| Deferred course  expenses                         |       | $                            | 9,513      |             | $          | 14,401 |   | $ | 8,825 |   | $ | 11,898 |   |
| Deferred course  expenses, noncurrent             |       |                         |       | 99               |       |   |   |   |   |
| Total assets                                      |       | 97,216                       |       | 102,203          |       | 56,955 |   | 60,028 |   |
| Deferred revenue                                  |       | 80,580                       |       | 116,777          |       | 62,689 |   | 83,713 |   |
| Deferred  revenue, noncurrent                     |       |                         |       | 224              |       |   |   |   |   |
| Total  liabilities                                |       | 102,329                      |       | 138,750          |       | 88,587 |   | 109,611 |   |
| Foreign currency  translation adjustment          |       | (337                         | )          | (650             | )          | (182 | ) | (550 | ) |
| Accumulated  deficit                              |       | (19,757                      | )          | (50,878          | )          | (37,145 | ) | (54,728 | ) |
| Total  stockholders’ deficit                 |       | (9,052                       | )          | (40,486          | )          | (33,609 | ) | (51,560 | ) |
| Total liabilities and  stockholders’ deficit |       | $                            | 97,216     |             | $          | 102,203 |   | $ | 56,955 |   | $ | 60,028 |   |

 

F-10

----

 
| ** **                                | ** ** | **2005**                                                             | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **First quarter**                                               | ** ** | **Second quarter** | ** ** | **Third quarter** | ** ** | **Fourth quarter** | ** ** |
| **Unaudited  quarterly information** | ** ** | **As  previously  reported**                                         | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                | ** ** | **(in thousands except per share amounts)** | ** ** |
| **Consolidated Statement of  Operations** |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                   |       | $                                                                    | 40,170     |   | $ | 38,434 |   | $ | 46,520 |   | $ | 40,898 |   | $ | 46,820 |   | $ | 44,050 |   | $ | 45,054 |   | $ | 39,725 |   |
| Operating expenses                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct course  expenses                   |       | 18,835                                                               |       | 20,611 |   | 25,234 |   | 25,307 |   | 27,248 |   | 26,419 |   | 25,203 |   | 22,428 |   |
| Advertising and  sales expense            |       | 11,898                                                               |       | 11,119 |   | 12,917 |   | 12,376 |   | 13,549 |   | 14,010 |   | 11,639 |   | 12,334 |   |
| General and  administrative               |       | 5,329                                                                |       | 6,290 |   | 5,902 |   | 5,697 |   | 4,610 |   | 6,025 |   | 11,823 |   | 9,653 |   |
|                                      |       | 36,062                                                               |       | 38,020 |   | 44,053 |   | 43,380 |   | 45,407 |   | 46,454 |   | 48,665 |   | 44,415 |   |
| Earnings (loss) from  operations          |       | 4,108                                                                |       | 414 |   | 2,467 |   | (2,482 | ) | 1,413 |   | (2,404 | ) | (3,611 | ) | (4,690 | ) |
| Other income  (expense), net              |       | (21                                                                  | )          | 322 |   | (60 | ) | (377 | ) | 669 |   | 669 |   | 1,008 |   | 982 |   |
| Gain on sale of  assets                   |       |                                                                 |       | 13 |   | 524 |   | 511 |   | 253 |   | 253 |   | 5,802 |   | 5,802 |   |
| Minority interest                         |       | 62                                                                   |       | 62 |   | 228 |   | 228 |   | 55 |   | 55 |   | (2,307 | ) | (2,307 | ) |
| Income tax  benefit                       |       |                                                                 |       |   |   |   |   |   |   | 6,679 |   | 6,679 |   | 119 |   | 119 |   |
| Net earnings (loss)                       |       | $                                                                    | 4,149      |   | $ | 811 |   | $ | 3,159 |   | $ | (2,120 | ) | $ | 9,069 |   | $ | 5,252 |   | $ | 1,011 |   | $ | (94 | ) |
| Per share amounts:                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share        |       | $                                                                    | 0.48       |   | $ | 0.08 |   | $ | 0.35 |   | $ | (0.24 | ) | $ | 0.97 |   | $ | 0.56 |   | $ | 0.10 |   | $ | (0.01 | ) |
| Basic earnings  (loss) per share          |       | 0.48                                                                 |       | 0.09 |   | 0.36 |   | (0.24 | ) | 1.04 |   | 0.60 |   | 0.11 |   | (0.01 | ) |

 
| ** **                                | ** ** | **2004**                                                             | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **First quarter**                                               | ** ** | **Second quarter** | ** ** | **Third quarter** | ** ** | **Fourth quarter** | ** ** |
| **Unaudited  quarterly information** | ** ** | **As  previously  reported**                                         | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                | ** ** | **(in thousands except per share amounts)** | ** ** |
| **Consolidated Statement of Operations**  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                   |       | $                                                                    | 38,509     |   | $ | 32,164 |   | $ | 38,607 |   | $ | 32,572 |   | $ | 32,154 |   | $ | 38,858 |   | $ | 30,589 |   | $ | 32,665 |   |
| Operating expenses                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct course  expenses                   |       | 15,418                                                               |       | 19,386 |   | 13,947 |   | 22,262 |   | 16,032 |   | 26,303 |   | 12,555 |   | 23,812 |   |
| Advertising and  sales expense            |       | 12,838                                                               |       | 12,265 |   | 22,301 |   | 14,774 |   | 19,665 |   | 11,606 |   | 24,729 |   | 11,019 |   |
| General and  administrative               |       | 10,206                                                               |       | 5,717 |   | 7,330 |   | 5,726 |   | 8,651 |   | 7,376 |   | 6,963 |   | 8,857 |   |
|                                      |       | 38,462                                                               |       | 37,368 |   | 43,578 |   | 42,762 |   | 44,348 |   | 45,285 |   | 44,247 |   | 43,688 |   |
| Earnings (loss) from operations           |       | 47                                                                   |       | (5,204 | ) | (4,971 | ) | (10,190 | ) | (12,194 | ) | (6,427 | ) | (13,658 | ) | (11,023 | ) |
| Other income  (expense), net              |       | 161                                                                  |       | (144 | ) | 652 |   | 708 |   | 173 |   | 68 |   | (106 | ) | (79 | ) |
| Gain on sale of  assets                   |       |                                                                 |       | 305 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minority interest                         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   | 23 |   |
| Net earnings (loss)                       |       | $                                                                    | 208        |   | $ | (5,043 | ) | $ | (4,319 | ) | $ | (9,482 | ) | $ | (12,021 | ) | $ | (6,359 | ) | $ | (13,764 | ) | $ | (11,079 | ) |
| Per share amounts:                        |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share        |       | $                                                                    | 0.02       |   | $ | (0.59 | ) | $ | (0.51 | ) | $ | (1.11 | ) | $ | (1.40 | ) | $ | (0.74 | ) | $ | (1.61 | ) | $ | (1.29 | ) |
| Basic earnings  (loss) per share          |       | 0.02                                                                 |       | (0.59 | ) | (0.51 | ) | (1.11 | ) | (1.40 | ) | (0.74 | ) | (1.61 | ) | (1.29 | ) |

 

F-11

----

 
| ** **                                       | ** ** | **2005**                                                             | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **March 31**                                                    | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **Unaudited  quarterly information**        | ** ** | **As  previously  reported**                                         | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                       | ** ** | **(in thousands except per share amounts)** | ** ** |
| **Consolidated Balance Sheets**                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                                                                    | 13,312     |   | $ | 10,360 |   | $ | 16,012 |   | $ | 13,969 |   | $ | 20,898 |   | $ | 20,170 |   | $ | 33,244 |   | $ | 33,244 |   |
| Restricted cash                                  |       |                                                                 |       | 2,952 |   | 5,392 |   | 7,435 |   | 7,285 |   | 8,013 |   | 5,406 |   | 5,406 |   |
| Deferred course expenses                         |       | 9,258                                                                |       | 12,637 |   | 9,593 |   | 13,723 |   | 9,726 |   | 14,218 |   | 9,513 |   | 14,401 |   |
| Other current assets                             |       | 5,273                                                                |       | 5,240 |   | 3,985 |   | 3,980 |   | 10,463 |   | 8,120 |   | 9,817 |   | 9,817 |   |
| Total current assets                             |       | 27,843                                                               |       | 31,189 |   | 34,982 |   | 39,107 |   | 48,372 |   | 50,521 |   | 57,980 |   | 62,868 |   |
| Note receivable                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   | 9,158 |   | 9,158 |   |
| Property and equipment,  net                     |       | 25,450                                                               |       | 24,426 |   | 24,420 |   | 23,421 |   | 22,933 |   | 21,788 |   | 10,082 |   | 10,082 |   |
| Intangible assets, net                           |       | 6,156                                                                |       | 6,361 |   | 5,866 |   | 6,005 |   | 5,751 |   | 6,031 |   | 5,754 |   | 5,754 |   |
| Deferred tax asset                               |       |                                                                 |       |   |   |   |   |   |   | 4,887 |   | 6,679 |   | 7,287 |   | 7,287 |   |
| Other noncurrent assets                          |       | 4,833                                                                |       | 5,708 |   | 4,831 |   | 5,750 |   | 5,082 |   | 5,897 |   | 6,955 |   | 7,054 |   |
| Total assets                                     |       | $                                                                    | 64,282     |   | $ | 67,684 |   | $ | 70,099 |   | $ | 74,284 |   | $ | 87,025 |   | $ | 90,916 |   | $ | 97,216 |   | $ | 102,203 |   |
| Deferred revenue                                 |       | $                                                                    | 70,136     |   | $ | 92,800 |   | $ | 74,552 |   | $ | 102,770 |   | $ | 80,463 |   | $ | 112,233 |   | $ | 80,580 |   | $ | 116,777 |   |
| Accounts payable                                 |       | 5,470                                                                |       | 6,839 |   | 3,054 |   | 4,448 |   | 5,544 |   | 5,851 |   | 3,691 |   | 3,691 |   |
| Due to stockholder                               |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   | 5,110 |   | 5,110 |   |
| Other current  liabilities                       |       | 4,778                                                                |       | 5,373 |   | 5,650 |   | 6,628 |   | 5,980 |   | 7,915 |   | 10,036 |   | 10,036 |   |
| Total current liabilities                        |       | 80,384                                                               |       | 105,012 |   | 83,256 |   | 113,847 |   | 91,987 |   | 125,999 |   | 99,417 |   | 135,614 |   |
| Long term debt, noncurrent                       |       | 11,654                                                               |       | 11,654 |   | 11,501 |   | 11,501 |   | 10,553 |   | 10,553 |   | 2,912 |   | 2,912 |   |
| Deferred revenue, noncurrent                     |       |                                                                 |       | 52 |   |   |   | 125 |   |   |   | 206 |   |   |   | 224 |   |
| Total liabilities                                |       | 92,038                                                               |       | 116,718 |   | 94,757 |   | 125,472 |   | 102,540 |   | 136,758 |   | 102,329 |   | 138,750 |   |
| Minority interest                                |       | 1,915                                                                |       | 1,915 |   | 1,687 |   | 1,687 |   | 1,632 |   | 1,632 |   | 3,939 |   | 3,939 |   |
| Commitments and contingencies                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock                                     |       | 3,436                                                                |       | 3,436 |   | 3,436 |   | 3,436 |   | 3,435 |   | 3,435 |   | 10,593 |   | 10,593 |   |
| Paid in capital                                  |       | 449                                                                  |       | 449 |   | 449 |   | 449 |   | 449 |   | 449 |   | 449 |   | 449 |   |
| Foreign currency  translation adjustment         |       | (560                                                                 | )          | (917 | ) | (393 | ) | (723 | ) | (263 | ) | (574 | ) | (337 | ) | (650 | ) |
| Accumulated deficit                              |       | (32,996                                                              | )          | (53,917 | ) | (29,837 | ) | (56,037 | ) | (20,768 | ) | (50,784 | ) | (19,757 | ) | (50,878 | ) |
| Total stockholders’ deficit                 |       | (29,671                                                              | )          | (50,949 | ) | (26,345 | ) | (52,875 | ) | (17,147 | ) | (47,474 | ) | (9,052 | ) | (40,486 | ) |
| Total liabilities and stockholders’ deficit |       | $                                                                    | 64,282     |   | $ | 67,684 |   | $ | 70,099 |   | $ | 74,284 |   | $ | 87,025 |   | $ | 90,916 |   | $ | 97,216 |   | $ | 102,203 |   |

 

F-12

----

 
| ** **                                       | ** ** | **2004**                                                             | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **March 31**                                                    | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **Unaudited  quarterly information**        | ** ** | **As  previously  reported**                                         | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** | **As  previously  reported** | ** ** | **As  restated** | ** ** |
| ** **                                       | ** ** | **(in thousands except per share amounts)** | ** ** |
| **Consolidated Balance Sheets**                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                                                                    | 22,608     |   | $ | 20,536 |   | $ | 14,916 |   | $ | 12,844 |   | $ | 8,893 |   | $ | 6,734 |   | $ | 4,667 |   | $ | 4,667 |   |
| Restricted cash                                  |       |                                                                 |       | 2,072 |   |   |   | 2,072 |   |   |   | 2,159 |   | 2,181 |   | 2,181 |   |
| Deferred course expenses                         |       | 7,798                                                                |       | 10,339 |   | 8,403 |   | 11,718 |   | 9,397 |   | 11,710 |   | 8,825 |   | 11,898 |   |
| Other current assets                             |       | 6,986                                                                |       | 6,986 |   | 6,792 |   | 6,792 |   | 5,661 |   | 5,661 |   | 4,983 |   | 4,983 |   |
| Total current assets                             |       | 37,392                                                               |       | 39,933 |   | 30,111 |   | 33,426 |   | 23,951 |   | 26,264 |   | 20,656 |   | 23,729 |   |
| Property and equipment,  net                     |       | 17,789                                                               |       | 17,184 |   | 21,874 |   | 21,409 |   | 27,996 |   | 27,736 |   | 24,781 |   | 24,548 |   |
| Intangible assets, net                           |       | 6,930                                                                |       | 7,524 |   | 6,802 |   | 7,256 |   | 6,952 |   | 7,201 |   | 6,352 |   | 6,576 |   |
| Other non current assets                         |       | 1,736                                                                |       | 1,746 |   | 1,878 |   | 1,889 |   | 1,770 |   | 1,781 |   | 5,166 |   | 5,175 |   |
| Total assets                                     |       | $                                                                    | 63,847     |   | $ | 66,387 |   | $ | 60,665 |   | $ | 63,980 |   | $ | 60,669 |   | $ | 62,982 |   | $ | 56,955 |   | $ | 60,028 |   |
| Deferred revenue                                 |       | $                                                                    | 46,549     |   | $ | 70,279 |   | $ | 49,857 |   | $ | 79,589 |   | $ | 55,583 |   | $ | 78,568 |   | $ | 62,689 |   | $ | 83,713 |   |
| Accounts payable                                 |       | 1,377                                                                |       | 1,377 |   | 2,917 |   | 2,917 |   | 5,612 |   | 5,612 |   | 7,413 |   | 7,417 |   |
| Other current  liabilities                       |       | 7,020                                                                |       | 7,020 |   | 5,657 |   | 5,657 |   | 5,453 |   | 5,453 |   | 6,678 |   | 6,677 |   |
| Total current liabilities                        |       | 54,946                                                               |       | 78,676 |   | 58,431 |   | 88,163 |   | 66,648 |   | 89,633 |   | 76,780 |   | 97,803 |   |
| Long term debt, noncurrent                       |       | 10,771                                                               |       | 10,771 |   | 8,421 |   | 8,421 |   | 11,922 |   | 11,922 |   | 11,807 |   | 11,808 |   |
| Total liabilities                                |       | 65,717                                                               |       | 89,447 |   | 66,852 |   | 96,584 |   | 78,570 |   | 101,556 |   | 88,587 |   | 109,611 |   |
| Minority interest                                |       | 2,000                                                                |       | 2,000 |   | 2,000 |   | 2,000 |   | 2,000 |   | 2,000 |   | 1,977 |   | 1,977 |   |
| Commitments and contingencies                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock                                     |       | 3,015                                                                |       | 3,015 |   | 3,017 |   | 3,017 |   | 3,267 |   | 3,267 |   | 3,269 |   | 3,269 |   |
| Paid in capital                                  |       | 449                                                                  |       | 449 |   | 449 |   | 449 |   | 449 |   | 449 |   | 449 |   | 449 |   |
| Foreign currency  translation adjustment         |       | (293                                                                 | )          | (669 | ) | (244 | ) | (629 | ) | (187 | ) | (530 | ) | (182 | ) | (550 | ) |
| Accumulated deficit                              |       | (7,041                                                               | )          | (27,855 | ) | (11,409 | ) | (37,441 | ) | (23,430 | ) | (43,759 | ) | (37,145 | ) | (54,728 | ) |
| Total stockholders’ deficit                 |       | (3,870                                                               | )          | (25,060 | ) | (8,187 | ) | (34,604 | ) | (19,901 | ) | (40,573 | ) | (33,609 | ) | (51,560 | ) |
| Total liabilities and stockholders’ deficit |       | $                                                                    | 63,847     |   | $ | 66,387 |   | $ | 60,665 |   | $ | 63,980 |   | $ | 60,669 |   | $ | 62,982 |   | $ | 56,955 |   | $ | 60,028 |   |

 

In addition to the aforementioned restatementadjustments, the Consolidated Balance Sheets include certain otherreclassifications identified during the restatement process. These changes hadno effect on the Consolidated Statements of Operations.

*Restatement—Statement of Cash Flows*

As a result of displaying restricted cash on theConsolidated Balance Sheets, we have revised the changes in operating assetsand liabilities section and the cash and cash equivalents to reflect thischange.

The net change in accounts receivable, related parties isincluded in the Investing Activities section of the statement under the caption“Investments in and advances to related parties”. The reason this is classifiedin “Investing activities” is due to Management’s conclusion that the repaymentof this receivable will come from sales of the land underlying the investment.Accordingly we have revised 2004 and 2003 to include the net changes foraccounts receivable, related parties in the Investing Activities portion of theConsolidated Statement of Cash Flows for comparability to the 2005presentation.

Originally provided as a supplemental disclosure ofnoncash activity, we reflected the gross payments of capital expenditures andthe proceeds of long term debt in 2004 and 2003 that were financed through bankborrowings. We believe this is a more appropriate presentation of the Statementof Cash Flows in accordance with Statement of Financial Accounting StandardsNo. 95, Statement of Cash Flows. The summary effect on the ConsolidatedStatement of Cash Flows is as follows (in thousands):

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| ** **                                       | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **As previously  reported**            | ** ** | **As restated** | ** ** | **As previously  reported** | ** ** | **As restated** | ** ** | **As previously  reported** | ** ** | **As restated** | ** ** |
| Change in restricted  cash                       |       | $                                           | (3,216     | ) | $ | (3,225 | ) | $ | (2,190 | ) | $ | (389 | ) | $ | — |   | $ | 67 |   |
| Cash provided by (used  in) operations           |       | $                                           | 17,086     |   | $ | 17,022 |   | $ | (1,478 | ) | $ | 600 |   | $ | 10,769 |   | $ | 10,732 |   |
| Cash provided by (used  in) investing activities |       | 8,640                                       |       | 8,640 |   | (10,438 | ) | (10,604 | ) | (8,018 | ) | (7,732 | ) |
| Cash provided by  financing activities           |       | 3,015                                       |       | 3,015 |   | 1,387 |   | 1,387 |   | 537 |   | 599 |   |
| Foreign currency  translation (a)                |       | (155                                        | )          | (100 | ) | 166 |   | 55 |   | (348 | ) | (591 | ) |
| Increase (decrease) in cash and cash equivalents |       | $                                           | 28,586     |   | $ | 28,577 |   | $ | (10,363 | ) | $ | (8,562 | ) | $ | 2,940 |   | $ | 3,008 |   |

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(a)          The change in foreign currency translation isattributable to the restatements arising from the change in revenue recognitionpolicies.

***Background***

In May 2005, we changed the United Kingdom revenuerecognition policy to conform to our North American operations’ practice ofrecognizing revenue upon the expiration of the student’s contract. Ourworldwide business practice was to allow our students to attend coursessubsequent to the expiration of the contract. Our current business practiceshave not changed significantly.

The original revenue recognition policy was establishedat the inception of our European operations and was initially driven bycustomer service and capacity considerations. As the United Kingdom operationsmatured, we sought to establish conformity with our North American operationsrevenue recognition policy; therefore, the revenue recognition policy changedin May 2005 to recognize revenue upon the earlier of attendance or thestudent contract’s expiry. In the second quarter of 2005, we changed the UnitedKingdom revenue recognition policy and recorded approximately $1.3 millionin revenue in connection with expired contracts.

In connection with the review of our RegistrationStatement on Form S-1, we had discussions with Staff members of theSecurities and Exchange Commission (“SEC”) regarding the May 2005 changein policy with respect to revenue recognition in the United Kingdom. Throughthese discussions, we identified errors in the application of our revenuerecognition policy in compliance with generally accepted accounting principlesin the United Kingdom and in North America because our business practice ofallowing students to complete courses after the expiration of their contractswas not consistent with our revenue recognition policy in the United Kingdomand in North America between 2001 and 2005. 

Accordingly, we elected to restate our ConsolidatedFinancial Statements to correct these errors. Upon implementation of the newrevenue recognition policy, we restated our Consolidated Financial Statementsfrom 2001 through and including 2005. These restatements resulted inrecognition of revenue based upon when the course is attended or once thelikelihood of attendance by the student becomes remote, as described further inour Revenue Recognition Policy below.

Our revenue recognition policy is consistently appliedworldwide. Moreover, our worldwide business practice to allow our students toattend courses subsequent to the expiration of the contract remains ourbusiness practice today and for the foreseeable future.

While these restatements have no cumulative effect on ourConsolidated Statement of Cash Flows, our reported net earnings (loss) changedsignificantly in any given period.

***Note 2—Description of Business andSummary of Significant Accounting Policies***

*Organization and history*

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

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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. (“WEG”), a Florida company organized in1992, and changed our name to WIN Systems International, Inc. In 1999, wechanged our name to Whitney Information Network, Inc.

In July 2005, EduTrades, Inc. was formed as a whollyowned subsidiary for holding the rights and brands of the financial marketseducation division of the Company. In November 2005, we filed a RegistrationStatement on Form S-1, with the Securities and Exchange Commission for thepurpose of an initial public offering. The Registration Statement has not beendeclared effective by the Securities and Exchange Commission.

*Principles of consolidation*

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

*Quarterly data*

The information included in these Consolidated FinancialStatements as of and for the three and six months ended June 30, 2006 and2005, respectively, is unaudited, and includes all adjustments in the opinionof management considered necessary for a fair presentation.

*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 areexpensed when incurred. However, the tuition paid at registration is deferreduntil the course is attended by the student, (in all available learningformats), 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 the form of cashflows and in the form of our operating results in that we recognize the bulk ofour expenses before we recognize revenue in the form of fees and tuition fromattendees at our courses. In addition, we recognize a significant portion ofour expenses associated with our courses at the time they occur and any moneythat is collected as a result of those programs is deferred until the studentactually takes the course or receives the product offered. As a result of thesefactors, our cash flows are significantly different than our reported resultsof operations.

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 investors 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 when it is received.Revenue is earned when the student attends the course.

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 theConsolidated Statement of Operations.

We recognize revenue based on:

·                  when the courseis attended by the student; or

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

—           percentage of students who never attended a courseand those students who never attended a course subsequent to expiration; and

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—           highest number of days in which 95% of thosestudents who attended our courses subsequent 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, we calculate verifiable andobjective supporting data as of each balance sheet date.

To the extent our financial markets education division(EduTrades, Inc. a wholly owned subsidiary) and United Kingdom businessesdo not have three full years of data (subsequent to course expiration), werecognize revenue based on course attendance. Only at such time that we havedeveloped verifiable and objective data over a three year period subsequent tocourse expiration will we apply course breakage based on the methodologydescribed above.

With respect to our EduTrades division and the UnitedKingdom, we expect to have sufficient data to apply course breakage by the endof 2006. Accordingly, we anticipate reflecting course breakage as contemplatedabove for the quarter ending 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 remains expired and unattended. We expect to recognize asignificant amount of deferred revenue in the fourth quarter of 2006 frominitial application of the course breakage to our EduTrades division and UnitedKingdom businesses.

As a result of applying this policy, during the yearsended December 31, 2005, 2004 and 2003 we recognized $16.6 million,$18.1 million and $19.0 million, respectively, in revenue related tocourse breakage.

*Teleconferencing and subscription services*

As required by Financial Accounting Standard Board’sEmerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables and the SEC’s StaffAccounting Bulletin No. 104 (SAB No. 104)*, ourteleconferencing product and service offering is an arrangement with multipledeliverables. The delivered items should be considered a separate unit ofaccounting if all of the following criteria are met:

·                  The delivereditem(s) has value to the customer on a standalone basis. That item(s) has valueon a standalone basis if it is sold separately by any vendor or the customercould resell the delivered item(s) on a standalone basis. In the context of acustomer’s ability to resell the delivered item(s), the Task Force observedthat this criterion does not require the existence of an observable market forthat deliverable(s).

·                  There isobjective and reliable evidence of the fair value of the undelivered item(s).

·                  If thearrangement includes a general right of return relative to the delivered item,delivery or performance of the undelivered item(s) is considered probable andsubstantially in the control of the vendor.

We determined the criteria detailed above have been met:

·                  The product andthe service have value to the student on a standalone basis.

·                  The product can be and is soldseparately.

·                  We feel there isobjective and reliable evidence to determine the fair value of the undelivereditem(s).

·                  Lastly, thereare 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.

*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:

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

·                  Wehave discretion in the course development and its delivery

·                  We collect cashor 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 30 days after the educational event.Thus, the only costs resulting from the successful acquisition of a payingcustomer are capitalized. The deferred course expenses are tracked individuallyby student and are recognized in the statement of operations as the studentattends 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 a rescissionof FASB Statement No. 17*, Technical Bulletin No. 90-1 *Accounting for Separately Priced Extended Warrantyand Product Maintenance Contracts* and the SEC’s Staff AccountingBulletin No. 104.

*Cash, cash equivalents and restricted cash*

We consider all highly liquid instruments purchased withan original maturity of three months or less to be cash equivalents. TheCompany continually monitors its positions with, and the credit quality of, thefinancial institutions it invests with. Restricted cash reflects amounts retainedby credit card merchants as a reserve for returns on credit card transactionsand deposit balances required under letters of credit. We consider restrictedcash as a current asset as credit card merchants can typically hold suchreserve funds only up to one year, and our letters of credit are for annualterms.

*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.

*Accounts receivable*

Accounts receivable consists of trade receivables fromthe sale of educational products and services for which a contract has beenentered into, 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 method (FIFO).

*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.

F-17

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*Prepaid advertising and sales expense*

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

*Deferred registration costs*

We are in the process of a registration of our EduTradessubsidiary. Expenses related to this offering have been accounted for asdeferred registration costs, and will be charged against the gross proceedsreceived. The registration statement has not been declared effective by theSecurities and Exchange Commission.

*Property and equipment*

Property and equipment is stated at cost. Depreciation isprovided utilizing the straight-line method over the estimated useful lives forowned 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, 2005, 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 and determined that impairment was notconsidered necessary.

*Investments in related parties*

We acquired a 20% ownership interest in Rancho Monterey,S.A., a Panama corporation, in 2001. This corporation was formed with thepurpose of acquiring, developing, and selling land on the Pacific coast ofCosta Rica. We are an investor in phase one of this project which includesapproximately 350 acres. Prior to January 2004, this venture has incurredsolely capitalized development costs and had not had any sales activity. Weaccount for our investment using the equity method of accounting and record itsproportionate share of the corporation’s profit or loss.

In 2003, we acquired an additional 10% equity interest inthe investment for $0.7 million through the issuance of debt. As part ofthis transaction, we also received an 8% interest in Monterey del Este, S.A. aPanama corporation organized to develop unimproved real estate in Costa Rica;and a 20% interest in Monterey del Mar, S.A. a Panama corporation organized todevelop an ocean front hotel on the Pacific coast of Costa Rica. Our share ofthe corporation’s losses and profits for the years ended December 31, 2005and 2004 were a loss of $(0.2) million and a profit of $0.2 millionrespectively.

Our Chief Executive Officer individually indirectly ownsapproximately 11% of Rancho Monterey, S.A. and approximately 6% of Monterey delEste. Our Company’s Executive Vice President, Secretary, individually indirectlyowns approximately 1% of Rancho Monterey, S.A.

We have, at times, advanced funds to this entity forworking capital purposes to secure and protect its investment. Our agreementwith the management of this venture is that we will be repaid for these fundsfrom future land sales. At December 31, 2005, $1.4 million in suchadvances is included in investment in related parties. At December 31,2004 $1.2 million of such advances is shown on the Consolidated BalanceSheets as accounts receivable, related parties.

*Investment in real estate joint venture*

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 

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interest of the other 50% owner. In March 2006 we acquired theremaining 50% of SCB Building LLC through the issuance of $3.6 million oflong term debt.

In November 2005 we sold the office building, which wasthe primary asset of SCB, for a pretax gain of $5.6 million, beforeminority interest, or a pretax $3.5 million after minority interest. Thedebt on the building was paid in full and SCB issued a note receivable, securedby the building, totaling $11.0 million as part of the $20.3 millionselling 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.Under the equity method of accounting we record our share of these costs whichfor 2005 and 2004 were insignificant.

*Long-lived assets*

We review property and equipment, intangible assets andgoodwill for impairment whenever events or changes in circumstances indicatethat the carrying amount of the asset may not be recoverable. Recoverability ismeasured by the comparison of its carrying amount with the future net cashflows the assets are 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. As of December 31, 2005, accordingour most recent assessments, there are no impairments in the carrying values ofour 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, 2005 and 2004, respectively.

*Earnings (Loss) per share*

We apply the provisions of SFAS No. 128*, Earnings Per Share*. All dilutivepotential common shares in 2005 were included in the diluted earnings per sharecalculation. All dilutive potential common shares in 2004 had an anti-dilutiveeffect on diluted per share amounts and therefore were excluded in determiningnet loss per share. At December 31, 2005 we had 1,985,000 stockoptions, 1,225,000 warrants and 300,000 warrants to purchase unitsoffered in our offering *(seeNote 3—Offering)*for 300,000 shares of stock and150,000 warrants which were excluded from earnings per share as theireffect was anti-dilutive. The total 3,660,000 potential dilutive securitiesexcluded could be dilutive to future earnings.

*Stock options and stock-based compensation*

SFAS No. 123, *Accountingfor Stock-Based Compensation* encourages, but does not requirecompanies to record compensation cost for stock-based employeecompensation plans at fair value. Through December 31, 2005, the Companyhas chosen to account for stock-based compensation using the intrinsicvalue method prescribed in Accounting Principles Board Opinion No. 25 (APBNo. 25), *Accounting for Stock Issued toEmployees* and provides the required pro forma disclosures 

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prescribed by SFAS No. 123 and SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure—An Amendment of SFAS No. 123*. We have adoptedthe disclosure-only provisions of SFAS No. 123. Accordingly, nocompensation cost has been recognized for the stock option plans.

We have adopted the disclosure-only provisions of SFASNo. 123, *Accounting for Stock-BasedCompensation*. Accordingly, no compensation cost has been recognizedfor the stock option plans. Had compensation cost for our option plan and theoption plan of our wholly owned subsidiary EduTrades, Inc. been determinedbased on the fair value at the grant date for awards consistent with theprovisions of SFAS No. 123, our net earnings (loss) and basic earnings(loss) per common share would have been changed to the pro forma amountsindicated below (in thousands, except for per share data):

|                                                                                                     | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                          | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Net earnings  (loss)—as reported                                                               |       | $                                           | 3,850      |   | $ | (31,963 | ) | $ | (7,325 | ) |
| Add: stock-based  compensation included in net profit (loss) as reported                            |       |                                        |       |   |   |   |   |
| Deduct: Total  stock-based compensation using the fair market value method under SFAS  No. 123 |       | 1,535                                       |       | 1,374 |   | 398 |   |
| Net earnings  (loss)—pro forma                                                                 |       | $                                           | 2,315      |   | $ | (33,337 | ) | $ | (7,723 | ) |
| Basic loss per  common share—as reported                                                       |       | $                                           | 0.43       |   | $ | (3.72 | ) | $ | (0.89 | ) |
| Basic loss per common  share—pro forma                                                         |       | $                                           | 0.26       |   | $ | (3.88 | ) | $ | (0.94 | ) |

 

The fair value of each option is estimated on the date ofgrant using the Black Scholes option pricing model with the followingassumptions (average weight):

|                          | ** ** | **Years ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life in  years  |       | 7                                       |       | 10 |   | 10 |   |
| Expected  volatility     |       | 77.9                                    | %          | 57.0 | % | 33.8 | % |
| Risk free  interest rate |       | 4.39                                    | %          | 4.24 | % | 4.25 | % |
| Expected dividend        |       |                                    |       |   |   |   |   |

 

The pro forma disclosure includes approximately$0.8 million of compensation expense for stock options granted by ourwholly owned subsidiary EduTrades, Inc. for the year ended December 31,2005.

Effective January 1, 2006, we adopted SFASNo. 123R using the modified prospective application method of adoptionwhich requires us to record compensation cost related to unvested stock awardsas of December 31, 2005 by recognizing the unamortized grant date fairvalue of these awards over the remaining service periods of those awards withno change in historical reported earnings. Awards granted afterDecember 31, 2005 will be valued at fair value in accordance with theprovisions of SFAS No. 123R and recognized on a straight line basis overthe service periods of each award. We will estimate forfeiture rates based onits historical experience.

Prior to 2006, we accounted for stock-basedcompensation in accordance with APB No. 25 using the intrinsic valuemethod, which did not require that compensation cost be recognized for theCompany’s stock options provided the option exercise price was established at100% of the common stock fair market value on the date of grant. Under APBNo. 25, we were required to record expense over the vesting period for thevalue of options granted. Prior to 2006, we provided pro forma disclosureamounts in accordance with SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure (SFASNo. 148)*, as if the fair value method defined by SFASNo. 123 had been applied to its stock-based compensation.

Theimpact of adoption of SFAS No. 123(R) 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. 123(R) in prior periods, the impact of that standardwould have approximated the impact of SFAS No. 123 as described in thedisclosure of pro forma net earnings (loss) per share above

*Reclassifications*

Certain reclassifications have been made in the 2004 and2003 Consolidated Financial Statements to conform to the 2005 presentation.

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*Recently Issued Accounting Standards*

In July 2006, the FASB issued Financial InterpretationNo. 48, *Accounting for Uncertainty inIncome Taxes* (“FIN No. 48”). FIN No. 48 clarifies theaccounting for uncertainty in income taxes recognized in accordance with SFASNo. 109, *Accounting for Income Taxes*.This Interpretation requires that we recognize in our financial statements, theimpact of a tax position, if that position is more likely than not of beingsustained on audit, based on the technical merits of the position.  FIN No. 48 provides guidance onrecognizing, measuring, presenting and disclosing uncertain tax positions thata company has taken or expects to take on a tax return. Our effective date foradopting FIN No. 48 is as of January 1, 2007, with the cumulativeeffect of the change in accounting principle recorded as an adjustment toopening accumulated deficit.  We arecurrently evaluating the impact of FIN No. 48 on our Consolidated FinancialStatements.

The EITF reached a consensus on EITF Issue No. 06-03,*How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross versus Net Presentation)* (“EITFNo. 06-03”) in June 2006. EITF No. 06-03 provides thatthe presentation of taxes assessed by a governmental authority that is directlyimposed on a revenue-producing transaction between a seller and acustomer on either a gross basis (included in revenues and costs) or on a netbasis (excluded from revenues) is an accounting policy decision that should bedisclosed. . The Task Force observed that because the tentative conclusion inthis Issue requires only the presentation of additional disclosures, we wouldnot be required to reevaluate its existing policies related to taxes assessedby a governmental authority that are directly imposed on a revenue-producingtransaction between a seller and a customer. The provisions of EITF No. 06-03become effective as of January 1, 2007. We are currently examining theimpact of adopting EITF No. 06-03 on our Consolidated FinancialStatements.

Effective January 1, 2006, we adopted the FinancialAccounting Standard Board’s Statement of Financial Accounting StandardsNo. 123 (revised 2004), *Share-BasedPayment* (“SFAS No. 123R”), which requires us to measure thecost of employee services received in exchange for all equity awards grantedincluding stock options based on the fair market value of the award as of thegrant date. SFAS No. 123R supersedes Statement of Financial AccountingStandards No. 123, *Accounting for Stock-BasedCompensation* and Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APBNo. 25”). We adopted SFAS No. 123R using the modified prospectiveapplication method of adoption which requires us to record compensation costrelated to unvested stock awards as of December 31, 2005 by recognizingthe unamortized grant date fair value of these awards over the remainingservice periods of those awards with no change in historical reported earnings.Awards granted after December 31, 2005 are valued at fair value inaccordance with the provisions of SFAS No. 123R and recognized on astraight line basis over the service periods of each award. We estimateforfeiture rates based on its historical experience.

***Note 3—Offering***

In December 2005, 3,000,000 shares of common stock andcommon stock purchase warrants representing 1,950,000 shares of common stockwere sold. The Company sold 1,750,000 shares of common stock and issuedwarrants for 875,000 shares. Our Chairman and Chief Executive Officer sold1,250,000 shares and warrants for 625,000 shares. In both cases, eachwarrant allows one share to be purchased for $6.00. We received$7.9 million in proceeds and netted approximately $7.2 million afterexpenses for its 1,750,000 shares.

The common stock and warrants were issued as a$13.5 million private placement in which 3,000,000 units of oursecurities, each unit consisting of one share of common stock at $4.50 pershare and one-half common stock purchase warrant exercisable at $6.00 per unit,were issued to a group of 17 nonaffiliated accredited investors. In addition, aunit warrant was issued to our placement agent exercisable to purchase300,000 shares of common stock at $4.50 per unit and one-half common stockpurchase warrants at $6.00 per share. Including the units to our placementagent, the Company is 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 Chief ExecutiveOfficer, who was a selling shareholder in the offering. At December 31,2005, we have recorded a liability to our Chief Executive Officer of$5.1 million, net of $0.5 million in offering costs, on theaccompanying Consolidated Balance Sheets, which was paid in the first quarterof 2006.

In connection with this transaction, we entered into aregistration rights agreement which provides for us to use its “best efforts”to file a Registration Statement for the resale of the3,000,000 common shares and the shares underlying the common stockpurchase warrant to be declared effective by April 11, 2006 as well asrequire us to maintain the effectiveness of the Registration Statement for oneyear subsequent to the effective date. If we fail to have the registrationstatement declared effective by April 11, 2006 (or if effectiveness is notmaintained), the registration rights agreement requires the payment ofliquidated damages to the investors on a daily basis of $4,500 (whichrepresents 1% per month of the proceeds in cash) until the 

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Registration Statement is declared effective or effectiveness ismaintained. We have a maximum liability of one year under the registrationrights agreement.

The Financial Accounting Standard Board’s Emerging IssuesTask Force (EITF) has exposed for deliberation the Financial AccountingStandards Board Emerging Issues Task Force Issue No. 05-04, *The Effect of a Liquidated Damages Clause on aFreestanding Financial Instrument Subject to EITF Issue No. 00-19, “Accountingfor a Derivative Financial Instrument Indexed to, and Potentially Settled in, aCompany’s Own Stock*.” (See Note 16—*Commitments and Contingencies*).

Accordingly, we estimate a probable liability ofapproximately $0.2 million in connection with the liquidated damagesprovision of the registration rights agreement which is reflected as a currentliability in other accrued expenses in our Consolidated Balance Sheets as ofDecember 31, 2005. An additional $0.5 million was accrued during thesix months ended June 30, 2006 due to delays resulting from theaforementioned restatement of prior period financial statements. The total of$0.7 million is reflected as a current liability in other accrued expensesin our Consolidated Balance Sheets, as of June 30, 2006.

***Note 4—Mergers, acquisitions andcapital accounts***

On March 8, 2006, we issued 98,156 shares of commonstock to the estate of Richard Brevoort, our former President and ChiefOperating Officer who passed away in 2002. We recorded a $1.4 million inexpense in the first quarter of 2006 representing the fair value of thesecurities issued and our obligation for related income taxes.

On March 29, 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.

On February 1, 2005, we issued 85,470 shares ofcommon stock valued at $0.2 million plus cash of $0.3 million forassets recorded as goodwill for the final payment of the *Star Trader®*brand purchase agreement.

In September 2004, we entered into a six-month agreementwith Discount Buyers Association of America (“DBAA”) to assume operationalcontrol over it 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 haveallowed the option to expire and charged $0.5 million to expense for theyear ended 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 will expire in June 2008, and are exercisable atthe following prices: 100,000 shares at $5.25 per share; and 100,000 shares at$8.00 per share

In October 2003, we acquired the stock ofSpeakTek, Inc. for $1.6 million, which resulted in $1.0 millionin goodwill, $0.5 million in customer lists and other intangibles and$0.1 million in current assets. SpeakTek, Inc. is the holding companyfor Quantum Vision, Inc., which is the operating entity and providesfinancial markets education. Of this amount $0.6 million is payable incash, and $1.0 million is payable through 200,000 shares of our newlyissued, restricted common stock.

In July 2003, we purchased two related companies, EquityCorp. Holdings, Inc. (“Equity Corp.”) and Whitney LeadershipGroup, Inc. The purchase price of Whitney Leadership, Inc. was$1.2 million paid to our Chairman and Chief Executive Officer and hiswife, payable $0.3 million in cash at closing and a $0.9 millionpromissory note payable in semiannual installments beginning inFebruary 2004 bearing an interest rate of 7% per annum. The payments anddebt issued were recorded as a distribution as Whitney LeadershipGroup, Inc. and we were under common control. The acquisition of EquityCorp. from our Executive Vice President, Real Estate Education Divisionresulted in $4.9 million of intellectual property. The purchase price of$0.3 million, comprised of $0.1 million in cash, 62,500 shares of ourcommon stock valued at $0.1 million at closing, and $0.1 millionpayable one year from the closing date evidenced by a promissory note bearinginterest at 7% per annum. We also agreed to assume and pay a promissory noteissued to our chairman by Equity Corp. in June, 2002 in the amount of$4.8 million payable $1.0 million in July 2003 and July 2004 and teninstallments of $0.3 million payable in January and July beginning in 2005through 2009. The unpaid balance bears interest at 7% per annum. Equity Corp.incurred this $4.8 million obligation when it elected to redeem all of ourChairman’s and Chief Executive Officer’s stock ownership in Equity Corp., whichamounted to 90% of the outstanding stock of Equity Corp., as of June 1,2002. This note was paid in full during 2004.

In May 2003, we paid $0.5 million under a six-monthmanagement agreement with Success Development, Inc. (“SDI”). Under theagreement, we acquired SDI’s customer database and operated is *Cash Flow Generator®* brand. Under thisagreement, we received 30% of SDI’s profits. During this time period, we alsomade advances to SDI for working capital purposes. We believe that this balanceis collateralized by a bank account maintained by SDI. In November 2003, weexercised 

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the option to purchase SDI for 180,000 shares of common stock, valued at$0.9 million. This resulted in a $0.6 million trademark,$0.3 million customer list and $0.1 million non-compete agreement.

***Note 5—Related partytransactions***

MRS Equity Corp. was wholly owned by Equity Corp.Holdings, Inc., which manages the processing of payments through customers’accounts to the mortgage holder. Equity Corp. Holdings, Inc. was acquiredby us in 2003 and was previously owned by our Executive Vice President, RealEstate Division (See Note 4—*Mergers,acquisitions and capital accounts*).

In 2003, the Company provided payroll services in theamount of $0.1 million to MRS Equity Corp., and purchased goods andservices in the aggregate amount of $0.1 million from MRS Equity Corp.,and Whitney Leadership Group, Inc. prior to its acquisition.

Whitney Leadership Group, Inc. is a company thatformerly held all the copyright and intellectual property rights associatedwith the education materials and licenses. It was acquired in July, 2003 andwas previously owned by our Chairman and Chief Executive Officer and his wife(who is also employed by us) (See Note 4—*Mergers,acquisitions and capital accounts*).

We have rented a training facility located in Cape Coral,Florida, since 1992 from the Chairman of the Board and Chief Executive Officer.Rentals under the related party leases were $0.2 million,$0.2 million, and $0.1 million during 2005, 2004 and 2003,respectively. We lease 2,200 square feet of training facilities at 1611 EastCape Coral Parkway, 9,000 square feet of space at 1625 East Cape Coral Parkwaywhich is used for shipping, and 4,802 square feet at 1630 SE 47th Terracewhich we use as a training center and for storage, all in Cape Coral Florida,from Cape Promenade Trust which is for the benefit of Russell A. Whitney,our Chairman and Chief Executive Officer and his wife. The leases are for threeyears and began in March 2003, March 2003 and June 2004, respectively. We arecurrently paying rent on a month-to-month basis with respect to the1611 East Cape Coral Parkway lease that expired March 2006. We extendedthe lease with respect to 1625 East Cape Coral Parkway through June 30,2009.

Included in revenue for 2005 and 2004 is$0.3 million and $0.3 million, respectively, received under anarrangement with Gulfstream Development Corp., a company owned 25% by ourChairman and Chief Executive Officer. Under this arrangement we receive $1,000for each home constructed by Gulfstream for one of our students, who arepresented an opportunity to purchase lots at one of our advanced real estatecourses by realtors representing Gulfstream. We have no interest in the lotsnor any involvement in dealings between students and the realtors orGulfstream.

Those items above that are reasonably expected to becollected within one year are shown as current.

***Note 6—Property and equipment***

Property and equipment consist of the following (inthousands):

F-23

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|                                 | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(restated)**        | ** ** | **(restated)** | ** ** |
| Land                            |       | $                     | 1,728      |   | $ | 2,807 |   |
| Building                        |       | 4,778                 |       | 17,437 |   |
| Airplane                        |       | 2,114                 |       | 2,114 |   |
| Software                        |       | 1,114                 |       | 1,114 |   |
| Equipment                       |       | 1,253                 |       | 1,049 |   |
| Furniture and fixtures          |       | 772                   |       | 819 |   |
| Leasehold improvements          |       | 1,474                 |       | 1,428 |   |
|                            |       | 13,233                |       | 26,768 |   |
| Less: accumulated  depreciation |       | (3,151                | )          | (2,220 | ) |
|                            |       | $                     | 10,082     |   | $ | 24,548 |   |

 

|                      | ** ** | **Years ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------|------------|
| ** **           | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **           | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation expense |       | $                                           | 1,034      |   | $ | 964 |   | $ | 692 |   |
|                      |            |                                             |            |  |  |  |  |  |  |  |

 

***Note 7—Intangible assets***

Intangible assets consist of the following (inthousands):

|                                 | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Customer lists                  |       | $                     | 5,943      |   | $ | 5,943 |   |
| Trademarks                      |       | 1,050                 |       | 1,050 |   |
| Other intangibles               |       | 795                   |       | 795 |   |
|                            |       | 7,788                 |       | 7,788 |   |
| Less: accumulated  amortization |       | (2,034                | )          | (1,212 | ) |
|                            |       | $                     | 5,754      |   | $ | 6,576 |   |

 

|                      | ** ** | **Years ended  December 31,** | ** ** |
|----------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortization expense |       | $                                       | 822        |   | $ | 646 |   | $ | 258 |   |
|                      |            |                                         |            |  |  |  |  |  |  |  |

 

Future amortization expense of intangibles is as follows(unaudited, in thousands):

| Years ending December 31, | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2006                                     |       | $          | 790        |   |
| 2007                                     |       | 629        |       |
| 2008                                     |       | 629        |       |
| 2009                                     |       | 629        |       |
| 2010                                     |       | 629        |       |
| Thereafter                               |       | 2,448      |       |
|                                     |       | $          | 5,754      |   |

 

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***Note 8—Long term debt***

Long term debt consists of (in thousands):

|                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                                       | ** ** | ** **            | ** ** | ** ** | ** ** |
| 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.                                                               |       |                  |       |   |   |
| 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.                                                                                                                  |       | $                     | 1,962      |   | $ | 2,442 |   |
| 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 the Chairman  and Chief Executive Officer. |       | 1,035                 |       | 1,090 |   |
| Note payable to an  individual for purchase of equity interest in Rancho Monterey. Principal and  interest payments beginning in July 2003 at an interest rate of 5%. The note  matures in June 2008 and is collateralized by the Company’s stock.                          |       | 345                   |       | 472 |   |
| Note payable to a bank.  Interest only payments beginning in July 2003 due monthly until June 2005.  Principal and interest payments due beginning July 2005 and amortized over 20  years. Interest at a fixed rate of 7.5%. The note was paid in full in 2005.                  |       |                  |       | 7,289 |   |
| Mortgage payable to a  bank. Monthly principal and interest payments through June 2007 with a  balloon payment of $1.0 million due on July 28, 2007 and is collateralized by  the building on North Frontage Road, Orlando, Florida. This was paid in full  in June 2005.        |       |                  |       | 1,019 |   |
| Other installment notes  payable                                                                                                                                                                                                                                                 |       | 32                    |       |   |   |
|                                                                                                                                                                                                                                                                             |       | 3,374                 |       | 12,312 |   |
| Less: current portion                                                                                                                                                                                                                                                            |       | (462                  | )          | (504 | ) |
|                                                                                                                                                                                                                                                                             |       | $                     | 2,912      |   | $ | 11,808 |   |

 

Maturities of long term obligations over each of the nextfive years and thereafter as of December 31, 2005 are as follows (inthousands):

| Years ending | ** ** | **December 31,  2005** | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | ** **                  | ** ** |
| Year 1            |       | $                           | 462        |   |
| Year 2            |       | 444                         |       |
| Year 3            |       | 377                         |       |
| Year 4            |       | 307                         |       |
| Year 5            |       | 310                         |       |
| Thereafter        |       | 1,474                       |       |
|              |       | $                           | 3,374      |   |

 

***Note 9—Stock options andwarrants***

*Stock-based compensation plans*

Our 1998 Stock Option Plan provides for the granting ofstock options to key employees. Under the terms and conditions of this plan,any time between the grant date and two years of service, the employee maypurchase up to 25% of the option shares. Between two and three years ofcontinuous service, the employee may purchase up to 50% of the option share, 

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and after three years of continuous service, the employee may purchaseall remaining option shares. All options expire ten years from the date of thegrant.

The following table presents the activity for optionsoutstanding (in thousands, except per share data):

|                                           | ** ** | **Number  of options** | ** ** | **Weighted  average  exercise  price** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|
| Outstanding as of  December 31, 2002 |       | 1,394                       |       | $                                      | 1.93       |   |
| Granted                                   |       | 201                         |       | 3.79                                   |       |
| Forfeited/canceled                        |       | (180                        | )          | (2.16                                  | )          |
| Exercised                                 |       | (6                          | )          | (3.00                                  | )          |
| Outstanding as of  December 31, 2003 |       | 1,409                       |       | $                                      | 2.17       |   |
| Granted                                   |       | 435                         |       | 4.47                                   |       |
| Forfeited/canceled                        |       | (15                         | )          | (3.94                                  | )          |
| Exercised                                 |       | (15                         | )          | (1.87                                  | )          |
| Outstanding as of  December 31, 2004 |       | 1,814                       |       | $                                      | 2.72       |   |
| Granted                                   |       | 590                         |       | 5.43                                   |       |
| Forfeited/canceled                        |       | (417                        | )          | (3.05                                  | )          |
| Exercised                                 |       | (2                          | )          | (1.50                                  | )          |
| Outstanding as of December 31, 2005  |       | 1,985                       |       | $                                      | 3.56       |   |

 

During 2005, stock options for 475,000 shares weregranted to our executives, and stock options for 40,000 shares were granted tomembers of the Board of Directors.

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)** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|--------------|------------|--------------------------|------------|--------------|------------|-------------|------------|
| $1.75                                   |       | 20                       |       | $            | 1.75       |                     | 20         |         | $          | 1.75        |       | 4.33 |   |
| $1.81                                   |       | 222                      |       | $            | 1.81       |                     | 222        |         | $          | 1.81        |       | 6.25 |   |
| $1.88                                   |       | 167                      |       | $            | 1.88       |                     | 167        |         | $          | 1.88        |       | 3.75 |   |
| $2.00                                   |       | 464                      |       | $            | 2.00       |                     | 464        |         | $          | 2.00        |       | 4.58 |   |
| $2.55                                   |       | 30                       |       | $            | 2.55       |                     | 8          |         | $          | 2.55        |       | 9.50 |   |
| $3.10                                   |       | 15                       |       | $            | 3.10       |                     | 15         |         | $          | 3.10        |       | 6.67 |   |
| $3.70                                   |       | 142                      |       | $            | 3.70       |                     | 107        |         | $          | 3.70        |       | 7.16 |   |
| $3.90                                   |       | 40                       |       | $            | 3.90       |                     | 30         |         | $          | 3.90        |       | 8.00 |   |
| $4.10                                   |       | 10                       |       | $            | 4.10       |                     | 7          |         | $          | 4.10        |       | 7.25 |   |
| $4.50                                   |       | 315                      |       | $            | 4.50       |                     | 235        |         | $          | 4.50        |       | 7.25 |   |
| $5.60                                   |       | 560                      |       | $            | 5.60       |                     | 140        |         | $          | 5.60        |       | 9.80 |   |
| $1.75 to $5.60                          |       | 1,985                    |       | $            | 3.56       |                     | 1,415      |         | $          | 2.67        |       | 5.61 |   |

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

Prior to 2006, the Company accounted for stock-basedcompensation in accordance with APB No. 25 using the intrinsic valuemethod, which did not require that compensation cost be recognized for theCompany’s stock options provided the option exercise price was established at100% of the common stock fair market value on the date of grant. Under APBNo. 25, we were required to record expense over the vesting period for thevalue of options granted. Prior to 2006, we provided pro forma disclosureamounts in accordance with SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure (SFASNo. 148)*, as if the fair value method defined by SFASNo. 123 had been applied to its stock-based compensation. Our netearnings and net earnings per share for the three months ended March 31,2005 would have been reduced if compensation cost related to stock options hadbeen recorded in the financial statements based on fair value at the grantdates.

*Warrants*

The following table presents the composition of warrantsoutstanding at December 31, 2005 (in thousands except per share data):

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| Exercise prices | ** ** | **Warrants  granted** | ** ** | **Warrants  exercisable** | ** ** | **Remaining  life in years** | ** ** |
|----------------------|------------|-----------------------|------------|---------------------------|------------|----------------------------------------|------------|
| $5.25                |       | 100                   |       | 100                       |       | 2.9                                    |       |
| $6.00                |       | 1,025                 |       | 875                       |       | 3.5                                    |       |
| $8.00                |       | 100                   |       | 100                       |       | 2.9                                    |       |
| $4.60 - $8.00        |       | 1,225                 |       | 1,075                     |       | 3.4                                    |       |

 

The following table illustrates the activity for warrantsoutstanding (in thousands except per share data);

|                                           | ** ** | **Number of  warrants** | ** ** | **Weighted  average  exercise price** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| Outstanding as of  December 31, 2003 |       | —                       |       | —                                     |       |
| Granted                                   |       | 200                          |       | $                                          | 6.63       |   |
| Forfeited/canceled                        |       |                         |       |                                       |       |
| Exercised                                 |       |                         |       |                                       |       |
| Outstanding as of  December 31, 2004 |       | 200                          |       | 6.63                                       |       |
| Granted                                   |       | 1,025                        |       | $                                          | 6.00       |   |
| Forfeited/canceled                        |       |                         |       |                                       |       |
| Exercised                                 |       |                         |       |                                       |       |
| Outstanding as of December 31, 2005  |       | 1,225                        |       | $                                          | 6.12       |   |

 

In 2005, we sold 1,750,000 shares of common stockand issued warrants for 875,000 shares. Our Chairman and Chief ExecutiveOfficer sold 1,250,000 shares of common stock and warrants for 625,000shares. In addition we issued a unit warrant to our placement agent exercisableto purchase 300,000 units at $4.50 per share (a unit is comprised of one shareof stock plus a warrant for one-half share). See Note 3—*Offering*.

***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, 2005, 2004, and 2003, were $0.2 million,$0.1 million, and $0.0 million, respectively.

***Note 11—Income taxes***

We had net operating losses of approximately$27.4 million at December 31, 2005 to offset future federal taxableincome for U.S. domestic operations. The net operating losses expire in theyears 2020 through 2024. The Company also has $19.5 million representingnet operating losses for state income taxes that expire in years 2010 through2024. Generally accepted accounting principles requires the future utilizationto be recorded as a deferred tax asset if management believes if it is morelikely than not that we will generate future taxable income.

As of the end of 2004, we established a valuationallowance to offset all future tax benefits from the operating losses thatwould have been recorded as deferred tax assets. In assessing therecoverability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income and projections forfuture taxable income over the periods in which the deferred tax assets aredeductible. During 2005, Management concluded that it is more likely than notthat we will realize the benefits of some of our net operating losscarryforwards creating future tax deductible amounts for the current year andfuture periods beyond 2005.

In arriving at the conclusion that it is more likely thannot that we would realize our deferred tax assets we reversed our valuationallowance resulting in a tax benefit for 2005. We prepared a ten year earningsmodel with key operating assumptions, along with a detailed economic model bybusiness unit and by brand for 2006. We compared these models to historicaltrends by business unit and by brand, along with detailed operating assumptionsby brand to arrive at this conclusion.

Our current trend further supports the reversal of aportion of the valuation allowance. We recorded approximately $8 millionin taxable income for the year ended 2005 and made a payment of approximately$0.2 million representing our 

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Alternative Minimum Tax for 2005. Moreover, results in the first quarterof 2006 show cash received on course and product sales increased approximately20.4% over the same period in 2005, further supporting our projections.

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 believes, based on the assumptions contained in its economic planand the current trends of the business, that it is more likely than not thatthe deferred tax asset will be realized in the future.

Management does not feel an additional tax asset has beencreated as a result of the restatement discussed in Note 1—*Restatement*. Management has determinedthat even though the Company restated its results for financial reportingpurposes, no economic factors have occurred that would change the originalassessment. Accordingly, it does not feel it was appropriate to revise orchange the deferred tax asset that was established at December 31, 2005.Additionally, the restatement does not affect any previously filed tax returns.

We estimate that we will be liable for approximately $0.2 millionin Alternative Minimum Taxes for 2005, which will be carried forward intofuture periods to offset future taxes. The net operating loss carryforwardsfrom prior years can only be applied to 90% of the current year profits. Thedeferred tax assets recorded in 2005 represent Management’s estimate of alldeferred tax benefits to be utilized in the current fiscal year and futureperiods beyond 2005.

Our income tax provision is as follows (in thousands):
| ** **                          | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Earnings before taxes:              |       |                                        |       |   |   |   |   |
| U.S.                                |       | $                                           | 35         |   | $ | (23,922 | ) | $ | (5,687 | ) |
| Non-U.S.                            |       | (1,021                                      | )          | (8,064 | ) | (1,638 | ) |
| Total earnings before  income taxes |       | $                                           | (986       | ) | $ | (31,986 | ) | $ | (7,325 | ) |
| Provision for taxes:                |       |                                        |       |   |   |   |   |
| Current:                            |       |                                        |       |   |   |   |   |
| Federal                             |       | $                                           | 160        |   |   |   |   |   |
| State                               |       | 101                                         |       |   |   |   |   |
| Non-U.S.                            |       | 228                                         |       |   |   |   |   |
|                                |       | 489                                         |       | — |   | — |   |
| Deferred:                           |       |                                        |       |   |   |   |   |
| Federal                             |       | (1,046                                      | )          | (8,526 | ) | (2,093 | ) |
| State                               |       | (122                                        | )          | (999 | ) | (245 | ) |
| Non-U.S.                            |       | (406                                        | )          | (1,388 | ) | (808 | ) |
|                                |       | (1,574                                      | )          | (10,913 | ) | (3,146 | ) |
| Valuation allowance                 |       | (5,713                                      | )          | 10,913 |   | 3,146 |   |
| Total income tax  provision         |       | $                                           | (6,798     | ) | $ |   |   | $ |   |   |
| Effective income tax rate           |       | (689.2                                      | )%         | 0.0 | % | 0.0 | % |

 

The difference between the tax provision at the statutoryfederal income tax rate and the tax provision attributable to income beforeincome taxes was as follows:

|                                           | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **(in percentages)**                   | ** ** |
| ** **                                | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Statutory federal  income tax rate        |       | 35.0                                        | %          | 35.0 | % | 35.0 | % |
| State income net of  federal benefit      |       | 4.0                                         |       | 3.1 |   | 3.3 |   |
| Non-U.S. income  taxed at different rates |       | 0.4                                         |       | 4.4 |   | 11.1 |   |
| Valuation allowance                       |       | (728.6                                      | )          | (42.5 | ) | (49.4 | ) |
| Other                                     |       |                                        |       |   |   |   |   |
| Effective income tax rate                 |       | (689.2                                      | )%         | 0.0 | % | 0.0 | % |

 

F-28

----

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 the Company’s deferred tax assets and liabilitieswere as follows:

|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(restated)**        | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| **Deferred tax assets:**           |       |                  |       |   |   |   |   |
| Net operating losses,  federal     |       | $                     | 9,595      |   | $ | 12,120 |   | $ | 906 |   |
| Net operating losses,  state       |       | 790                   |       | 1,104 |   | 49 |   |
| Net operating losses,  non-U.S.    |       | 31                    |       | 764 |   |   |   |
| Depreciation                       |       | 44                    |       |   |   |   |   |
| Intangible amortization            |       | 421                   |       | 537 |   |   |   |
| Deferred revenue                   |       | 14,241                |       | 8,220 |   | 6,761 |   |
| Valuation allowance                |       | (12,322               | )          | (18,035 | ) | (7,122 | ) |
| **Total deferred tax assets**      |       | $                     | 12,800     |   | $ | 4,710 |   | $ | 594 |   |
| **Deferred tax liabilities:**      |       |                  |       |   |   |   |   |
| Deferred course expenses           |       | $                     | 5,513      |   | $ | 4,236 |   | $ | 594 |   |
| Depreciation                       |       |                  |       | 474 |   |   |   |
| **Total deferred tax liabilities** |       | $                     | 5,513      |   | $ | 4,710 |   | $ | 594 |   |
| Reported as:                       |       |                  |       |   |   |   |   |
| Current deferred  tax assets       |       |                  |       |   |   |   |   |
| Noncurrent  deferred tax assets    |       | $                     | 12,800     |   | $ | 4,710 |   | 594 |   |
| Current deferred  tax liabilities  |       | (5,513                | )          | (4,710 | ) | (594 | ) |
| **Net deferred taxes**             |       | $                     | 7,287      |   | $ | — |   | $ | — |   |

 

***Note 12—Earnings (Loss) pershare***

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, 2005,2004 and 2003 respectively. There are a total of 1,985,350 stock options,1,225,000 warrants to purchase common stock outstanding as of December 31,2005 and a combined 450,000 unit placement warrants issued to our placementagent. The following table sets forth the computation for basic and dilutedearnings per share (unaudited, in thousands, except for per share data):

All financial information, except per share amounts, isexpressed in thousands:

|                                                                                   | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                        | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Numerator for diluted  earnings (loss) per common share                           |       | $                                           | 3,850      |   | $ | (31,963 | ) | $ | (7,325 | ) |
| Denominator for basic  earnings per share—weighted average shares            |       | 8,859                                       |       | 8,589 |   | 8,188 |   |
| Effect of dilutive  securities—options and warrants                          |       | 501                                         |       |   |   |   |   |
| Denominator for diluted  earnings per share—adjusted weighted average shares |       | 9,360                                       |       | 8,589 |   | 8,188 |   |
| Diluted earnings (loss) per common share                                          |       | $                                           | 0.41       |   | $ | (3.72 | ) | $ | (0.89 | ) |

 

Where the inclusion of potential common shares isanti-dilutive, 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, 2005, 2004 and 2003 (in thousands):

F-29

----

 
| ** **                                         | ** ** | **Years ended December 31,** | ** ** | **% change over** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **2005**                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | **(restated)**                              | ** ** | **(restated)**              | ** ** | **(restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Cash received from course and  product sales:*    |       |                                        |       |                        |       |   |   |   |   |   |   |
| Free  introductory courses                         |       | $                                           | 25,017     |                        | $          | 34,202 |   | $ | 29,970 |   | (26.9 | )% | 14.1 | % |
| Advanced courses                                   |       | 112,008                                     |       | 91,855                      |       | 58,818 |   | 21.9 |   | 56.1 |   |
| Outreach  programs                                 |       | 40,415                                      |       | 23,723                      |       | 10,699 |   | 70.4 |   | 121.7 |   |
| Products sales                                     |       | 12,317                                      |       | 8,828                       |       | 6,816 |   | 39.5 |   | 29.5 |   |
| Other                                              |       | 6,638                                       |       | 5,479                       |       | 1,555 |   | 21.2 |   | 252.3 |   |
| Total cash received  from course and product sales |       | 196,395                                     |       | 164,087                     |       | 107,858 |   | 19.7 |   | 52.1 |   |
| Less: Net change in  deferred revenue              |       | (33,288                                     | )          | (27,828                     | )          | (19,468 | ) | (19.6 | ) | (42.9 | ) |
| Revenue for financial  reporting purposes          |       | $                                           | 163,107    |                        | $          | 136,259 |   | $ | 88,390 |   | 19.7 | % | 54.1 | % |

 

***Note 14—Business segmentinformation***

We operate primarily in two business segments: real estateeducation and financial markets education. Our revenues are generated throughthe sale of real estate and financial market educations courses, programs andproducts. The operating segments reported below are for which segmentsfinancial information is available and for which operating results areevaluated regularly by executive management in deciding how to allocateresources and in assessing performance.

Segment operating results evaluates earnings beforecorporate and unallocated shared expenses, gain on sale of assets, net interestincome, equity earnings from related parties, income tax benefits and minorityinterest.

The following segment results include allocations ofcertain costs, including shared administrative costs-based metricsdesigned to correlate with the consumption of such services. These allocationsare agreed-upon amounts between the businesses and may differ from amounts thatwould be negotiated in arm’s length transactions (in thousands):

 
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|---------------------------------------------|------------|
| **Segment revenues**    | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Real estate education        |       | $                                           | 115,924    |   | $ | 103,605 |   | $ | 74,459 |   |
| Financial markets  education |       | 47,183                                      |       | 32,644 |   | 13,346 |   |
|                         |       | $                                           | 163,107    |   | $ | 136,259 |   | $ | 89,805 |   |

 

F-30

----

 
| ** **                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| **Segment operating earnings** | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(restated)**                              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Real estate education                    |       | $                                           | 6,639      |   | $ | (12,762 | ) | $ | 2,890 |   |
| Financial markets  education             |       | (15,800                                     | )          | (20,082 | ) | (10,366 | ) |
|                                     |       | $                                           | (9,161     | ) | $ | (32,844 | ) | $ | (7,476 | ) |

 
| ** **                                | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|
| **Depreciation and amortization expense** | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                | ** ** | **(restated)**                    | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Real estate education                     |       | $                                 | 1,414      |   | $ | 1,206 |   | $ | 647 |   |
| Financial markets  education              |       | 442                               |       | 404 |   | 303 |   |
|                                      |       | $                                 | 1,856      |   | $ | 1,610 |   | $ | 950 |   |

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| **Segment identifiable assets** | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(restated)**        | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| Real estate education           |       | $                     | 16,006     |   | $ | 16,478 |   | $ | 14,101 |   |
| Financial markets  education    |       | 11,674                |       | 6,748 |   | 5,544 |   |
|                            |       | $                     | 27,680     |   | $ | 23,226 |   | $ | 19,645 |   |

 
| **Geographic revenues** | ** ** | **2005**       | ** ** | **2004**       | ** ** | **2003**       | ** ** |
|-------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **              | ** ** | **(restated)** | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| United States           |       | $              | 151,320    |           | $          | 121,508        |       | $ | 79,479 |   |
| International           |       | 11,787         |       | 14,751         |       | 10,326         |       |
|                    |       | $              | 163,107    |           | $          | 136,259        |       | $ | 89,805 |   |

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| **Geographic identifiable assets** | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(restated)**        | ** ** | **(restated)** | ** ** | **(restated)** | ** ** |
| United States                      |       | $                     | 22,895     |   | $ | 17,297 |   | $ | 18,189 |   |
| International                      |       | 4,785                 |       | 5,929 |   | 1,456 |   |
|                               |       | $                     | 27,680     |   | $ | 23,226 |   | $ | 19,645 |   |

 

***Note 15—Summarized quarterlyresults (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)

F-31

----

 
| ** **                            | ** ** | **First  quarter(a)** | ** ** | **Second  quarter(a)** | ** ** | **Third  quarter(b)** | ** ** | **Fourth  quarter(c)** | ** ** | **Full Year** | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|--------------------|------------|
| ** **                            | ** ** | **(restated)**        | ** ** | **(restated)**         | ** ** | **(restated)**        | ** ** | **(restated)**         | ** ** | **(restated)**     | ** ** |
| **2005**                              |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Revenues                              |       | $                     | 38,434     |                   | $          | 40,898                |       | $                      | 44,050     |               | $          | 39,725 |   | $ | 163,107 |   |
| Operating expenses                    |       | 38,020                |       | 43,380                 |       | 46,454                |       | 44,415                 |       | 172,268            |       |
|                                  |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Earnings (loss) from operations       |       | 414                   |       | (2,482                 | )          | (2,404                | )          | (4,690                 | )          | (9,161             | )          |
| Net earnings (loss)                   |       | 811                   |       | (2,120                 | )          | 5,252                 |       | (94                    | )          | 3,850              |       |
|                                  |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Per share amounts:                    |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Diluted earnings  (loss) per share(1) |       | $                     | 0.08       |                   | $          | (0.24                 | )          | $                      | 0.56       |               | $          | (0.01 | ) | $ | 0.41 |   |
| Basic earnings  (loss) per share(1)   |       | 0.09                  |       | (0.24                  | )          | 0.60                  |       | (0.01                  | )          | 0.43               |       |
|                                  |       |                  |       |                   |       |                  |       |                   |       |               |       |
| **2004**                              |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Revenues                              |       | $                     | 32,164     |                   | $          | 32,572                |       | $                      | 38,858     |               | $          | 32,665 |   | $ | 136,259 |   |
| Operating expenses                    |       | 37,368                |       | 42,762                 |       | 45,285                |       | 43,688                 |       | 169,103            |       |
|                                  |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Loss from operations                  |       | (5,204                | )          | (10,190                | )          | (6,427                | )          | (11,023                | )          | (32,844            | )          |
| Net loss                              |       | (5,043                | )          | (9,482                 | )          | (6,359                | )          | (11,079                | )          | (31,963            | )          |
|                                  |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Per share amounts:                    |       |                  |       |                   |       |                  |       |                   |       |               |       |
| Diluted loss per  share(1)            |       | $                     | (0.59      | )                      | $          | (1.11                 | )          | $                      | (0.74      | )                  | $          | (1.29 | ) | $ | (3.72 | ) |
| Basic loss per share(1)               |       | (0.59                 | )          | (1.11                  | )          | (0.74                 | )          | (1.29                  | )          | (3.72              | )          |

----

(1)                                  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.

(a)                                  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. This amount is recorded in Other income.

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

(c)                                  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 andcontingencies***

*Liquidated damages provision in registration rightsagreement*

In December 2005, 3,000,000 shares of common stockand 1,950,000 shares of common stock underlying common stock purchase warrantswere sold. We sold 1,750,000 shares of common stock and issued a warrant for50% of those shares. The Company’s Chairman and Chief Executive Officerconcurrently sold 1,250,000 and issued common stock purchase warrants for 50%of those shares.

We issued the common stock and warrants in aDecember 2005, $13.5 million in private placement in which we sold3,000,000 units of our securities, each unit consisting of one share of commonstock and one-half common stock purchase warrant, at $4.50 per unit, to a groupof 17 nonaffiliated accredited investors and issued a unit warrant to ourplacement agent exercisable to purchase 300,000 units at $4.50 per unitand one-half common stock purchase warrant at $6.00 per share. We received$7.9 million in proceeds and netted approximately $7.2 million afterexpenses.

In connection with the transaction, we entered into aregistration rights agreement which provides, for the Company to use its “bestefforts” to file a registration statement for the resale of the 3,000,000common shares and the 1,950,000 shares underlying the common stock purchasewarrant to be declared effective by April 11, 2006 as well as require usto maintain the effectiveness of the registration statement for a one yearperiod subsequent to the effective date. If the issuer fails to have theregistration statement declared effective by April 11, 2006 (or ifeffectiveness is not maintained), the registration rights agreement requiresthe payment of liquidated damages to the investors on a daily basis of $4,500(which represents 1% (per month) of the proceeds in cash) until theregistration statement is declared effective or effectiveness is maintained. Wehave a maximum liability of six months under the registration rightsagreement.

F-32

----

The Financial Accounting Standard Board’s Emerging IssuesTask Force (EITF) has exposed for deliberation the Financial AccountingStandards Board Emerging Issues Task Force Issue No. 05-04, *the Effect of a Liquidated Damages Clause on a FreestandingFinancial Instrument Subject to EITF Issue No. 00-19, “Accounting for aDerivative Financial Instrument Indexed to and Potentially Settled in, aCompany’s Own Stock.”* As articulated under View C in IssueNo. 05-04, the Company views the registration rights agreement and thecommon stock purchase warrant agreement as separate freestanding agreementswhich should be accounted for separately. The common stock purchase warrant isclassified as equity under the provisions of Issue 00-19, and the registrationrights agreement is accounted for under SFAS No. 133 *Accounting for Derivative Instruments and HedgingActivities.*

Accordingly, we estimate a probable liability ofapproximately $0.2 million in connection with the liquidated damagesprovision of the registration rights agreement which is reflected as a currentliability in Other Accrued Expenses in our Consolidated Balance Sheet as ofDecember 31, 2005. An additional $0.5 million was accrued during thesix months ended June 30, 2006 due to delays resulting from theaforementioned restatement of prior period financial statements. The total of$0.7 million is reflected as a current liability in other accrued expensesin our Consolidated Balance Sheets, as of June 30, 2006.

*Software commitment*

In December 2005, we entered into a commitment forapproximately $2.5 million for new software which includes licensing,training and maintenance.

*Operating leases*

We lease office space for administrative and trainingrequirements. These leases expire from March 2006 to December 2012(in thousands).

|                                     | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental expense for operating leases |       | $                                           | 823        |   | $ | 425 |   | $ | 384 |   |
|                                     |            |                                             |            |  |  |  |  |  |  |  |

 

Future minimum rental payments under these noncancelableleases are as follows (in thousands):

| Years ending December 31, | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2006                                     |       | $          | 748        |   |
| 2007                                     |       | 446        |       |
| 2008                                     |       | 186        |       |
| 2009                                     |       | 192        |       |
| 2010                                     |       | 137        |       |
|                                     |       | $          | 1,709      |   |

 

*Litigation*

The Company is not involved in any material asserted orunasserted claims and action arising out of the normal course of its businessthat in our opinion, based upon knowledge of facts and advice of counsel, willresult in a material adverse effect on our financial position.

*Other*

In the ordinary course of conducting our business, we aresubject to various state and federal requirements. In the opinion ofManagement, we are in compliance with these requirements.

***Note 17—Subsequent Events***

 

OnMarch 8, 2006, the Company issued 98,156 shares of common stock as agift to the estate of Richard Brevoort, the Company’s former President andChief Operating Officer who passed away in 2002. The Company has recorded anexpense in the first quarter of $0.9 million representing the fair valueof the securities issued, and the gross up of related income taxes of$0.3 million.

F-33

----

InAugust of 2006, we our Board of Directors declared a special dividend of $1.00per share for those shareholders of record on September 15, 2006.  There is a separate current liability on ourbalance sheet in amount of $11.7 million. The dividend was paid in October 2006. This dividend has been treated as a return of capital for bothaccounting and tax purposes.

We have negotiated the purchase of a corporate jet to replace thecurrent corporate aircraft.  The jet is aCitation VII with a purchase price of $6.4 million.  We anticipate approximately $0.3 million inrenovations for a total investment of $6.7 million.  We are in negotiations to obtain $6.1 million(95.3% of the purchase price) in financing for the purchase.  The note will contain a 16 year amortizationperiod with $0.6 million in annual debt service at an interest rate ofapproximately 6.1%.  Whitney InformationNetwork, Inc. will provide a corporate guarantee.  The existing aircraft has been offered forsale.  It is expected that it will besold for the approximate net book value of $1.7million.

F-34

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersWhitney Information Network, Inc. andSubsidiariesCape Coral, Florida

We have audited the accompanying Consolidated BalanceSheets of Whitney Information Network, Inc. and Subsidiaries as ofDecember 31, 2005 and 2004, and the related Consolidated Statements ofOperations and Comprehensive Earnings (Loss), Stockholders’ Deficit and CashFlows for each of the three years in the period ended December 31, 2005.These Consolidated Financial Statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these ConsolidatedFinancial Statements 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, 2005 and 2004, and the results of their operations and theircash flows for each of the three years in the period ended December 31,2005 in conformity with accounting principles generally accepted in the UnitedStates of America.

As described in Note 1 to the Consolidated FinancialStatements, the December 31, 2005, 2004 and 2003 Consolidated FinancialStatements have been restated.
|                      | /s/ EHRHARDT KEEFE STEINER & HOTTMAN PC |
|----------------------|---------------------------------------------|
|                 | Ehrhardt Keefe Steiner &  Hottman PC    |
| August 14, 2006 |                                        |
| Denver, Colorado     |                                        |

 

F-35

----

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

None

F-36

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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 Securities and Exchange Act of 1934,as amended, is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow timely decisionsregarding required disclosure. Our management, with the participation andoversight of our chief executive officer and chief financial officer, evaluatedthe design and effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this report. In conducting this evaluation,several material weaknesses were identified in our internal control overfinancial reporting relating to timely account reconciliations, preparation andreview of financial statements and disclosures, accounting for foreigncurrency, deferred revenue, inventory valuation, and recordkeeping for equityincentive awards and agreements. Specifically, our personnel lacked sufficientknowledge and experience and did not have appropriate oversight. The Company’saccounting department has experienced significant turnover at various levels.This turnover and abilities of these personnel have contributed to the internalcontrol issues described above.

On thebasis of these findings, our Chief Executive Officer and our Chief FinancialOfficer have concluded that our disclosure controls and procedures were noteffective, as of the end of the period covered by this report. In connectionwith the 2005 audit of our Consolidated Financial Statements, our independentregistered public accounting firm issued a management letter which noted thatwe had the material weaknesses described above in our internal control overfinancial reporting. These deficiencies included:

·                  Errors in deferred revenue andrevenue recognition were noted. The Company places excessive reliance on itssystems in certain circumstances without adequate review over systems andprocesses.

·                  A general lack of review over theaccounting and reporting functions and inadequate reconciliation proceduresexist in many areas of the accounting function.

·                  Inadequate EDP controls includinggeneral access controls.

·                  The Company does not currentlymaintain complete records and adequate supporting documentation over stockoptions and warrants.

·                  The Company’s calculation of foreigncurrency translation adjustments contained errors.

·                  The Company does not have adequateprocedures to provide for inventory obsolescence.

Thesematerial weaknesses are a result of a lack of sufficient and qualifiedpersonnel over the accounting and reporting function, a lack of formalizedprocesses and procedures over key areas in the accounting and reportingfunctions, and inadequate supervision and review over the financial reportingfunction.

(b)           Subsequent to identifying thematerial weaknesses in our internal control over financial reporting, weinitiated several corrective actions to address these internal controldeficiencies. We will continue to evaluate the effectiveness of our disclosurecontrols and internal controls and procedures on an ongoing basis, taking correctiveaction as appropriate. Thus far in 2006, we hired an experienced ChiefFinancial Officer. In addition, we hired or appointed a Chief Financial Officerfor our EduTrades division, a Director, Corporate Accounting, a Director,Accounting Operations, a Director, Financial Systems, a Director,Sarbanes-Oxley Compliance and Implementation, a Director, Planning and Analysisand a Vice President, Strategy and Business Development. We are also activelyrecruiting for several new positions that have been approved by the Board ofDirectors in the areas of financial reporting, financial planning and analysis,financial systems and continued upgrades in the Controller’s department. In theinterim, we have retained the services of two certified public accountants andother accounting professionals to assist in the preparation of our ConsolidatedFinancial Statements until the positions are filled.

Toaddress the formerly disclosed material weaknesses in the bank reconciliationprocess we have implemented several controls to ensure accuracy andcompleteness in the reconciliations to properly support the recorded balance inthe general ledger. These new controls have been designed and are operatingadequately. We also upgraded our current accounting and financial reportingsystems.

Althoughthe above mentioned steps are beginning to correct the noted deficiencies, wecannot be certain that our 

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efforts to improveour internal controls will be successful or that we will be able to maintainadequate controls over our financial processes and reporting in the future. Wemay be hampered in this regard by our current level of staffing or our currentaccounting system. Any failure to develop or maintain effective controls, ordifficulties encountered in the effective improvement of our internal controls,could harm our operating results, cause us to fail to meet our reportingobligations, result in misstatements in our Consolidated Financial Statementsor cause investors to lose confidence in our reported financial information, whichwould likely have a negative effect on the trading price of our common stock.

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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.

Based on currentSEC guidance related to the Sarbanes-Oxley Act for non-accelerated filers, wewill comply with the management assessment of internal controls over financialreporting as required by Section 404(a) of Sarbanes-Oxley for our fiscal yearbeginning on or after December 16, 2006. We anticipate that we will become an accelerated filer in 2007 andtherefore we will be required to comply with these requirements for the yearending December 31, 2007.

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**PART III**

**ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS**

Information concerning each of our executives anddirectors is set forth below:
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                    |
|---------------------|------------|---------|------------|-----------------------------------------------------------------|
| Russell A. Whitney  |       | 50      |       | Chairman of the Board of Directors and Chief  Executive Officer |
| Nicholas S. Maturo  |       | 59      |       | President and Chief Operating Officer                           |
| Alfred R. Novas     |       | 43      |       | Chief Financial Officer                                         |
| Ronald S. Simon     |       | 63      |       | Executive Vice President, Secretary and Director                |
| John F. Kane        |       | 53      |       | Executive Vice President, Real Estate Education  Division       |
| Anil K. Singh       |       | 50      |       | Vice President, Marketing                                       |
| Frederick A. Cardin |       | 60      |       | Director                                                        |
| Chester P. Schwartz |       | 61      |       | Director                                                        |
| Stephen L. Cootey   |       | 37      |       | Director                                                        |
| Anthony B. Petrelli |       | 54      |       | Director                                                        |

 

Directors hold office for a period of one year from theirelection at the annual meeting of stockholders or until their successors isduly elected and qualified. Officers are elected by, and serve at thediscretion of, the Board of Directors.

                *Russell A. Whitney, Chairman of the Board ofDirectors and Chief Executive Officer.*  Mr. Whitney is our founder and has beenChief Executive Officer of our Company and its predecessors since 1987.Mr. Whitney is also an active real estate investor for his own account andhas written and published several books on wealth building topics.

*Nicholas S. Maturo, President and ChiefOperating Officer.*  Mr. Maturo joined us in 2002, became ourChief Operating Officer in 2003 and President in 2004. He was the ChiefOperating Officer of Food Trader, Inc. from 2000 to 2001. From 1981 to2000, he held a number of executive positions with Kraft Foods and was ChiefInformation Officer when he left Kraft. Mr. Maturo earned a Bachelor ofCommerce degree in finance and economics from McGill University and alsocompleted the Executive General Management Program at McGill University.

*Alfred R. Novas, Chief FinancialOfficer.*  Mr. Novas joined us in 2006 from Novasand Associates where he led a strategic and financial planning consultingpractice since 2002. From 2001 to 2002, Mr. Novas was President and ChiefExecutive Officer of Childtime Learning Centers, Inc. Prior to this, Mr. Novasheld senior financial and executive positions with Burger King Corporation, ThePillsbury Company and Pizza Hut, Inc., a former division ofPepsiCo, Inc. Mr. Novas started his career with ToucheRoss & Co. (now Deloitte & Touche LLP), has a Bachelor ofBusiness Administration degree from the University of Notre Dame and a Mastersof Accounting from St. Thomas University.

*Ronald S. Simon, Executive VicePresident, Secretary and Director.*  Mr. Simon is a CertifiedPublic Accountant and has been our Acting Chief Financial Officer from 2004through 2006 and a member of our Board of Directors since 1998. Mr. Simonwas a self-employed certified public accountant from 1987 until he joined us asour Chief 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, Real EstateEducation Division.* Mr. Kane was appointed to his current position in 2003. Hepreviously was the President of Precision Software Services, Inc., one ofour wholly owned subsidiaries, since 1993.

*Anil K. Singh, Vice President,Marketing.*  Mr. Singh was appointed in 2004. Priorto joining us, he was Vice President, Marketing for The Markets, LLC from 2002to 2004. Mr. Singh was Chief Marketing Officer at Paytrust, Inc. from2000 to 2001. He also held senior marketing positions at American BusinessFinancial Services, Inc., Advanta Corporation and Time Warner, Inc.

*Frederick A. Cardin, Director.*  Dr. Cardinhas been a director since 2003. Since 1996, he has been managing director ofHarvard Growth 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 

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Doctorate in Finance from the Harvard Graduate School of BusinessAdministration. He earned a Bachelor’s degree in economics summa cum laude fromTufts University.

*Chester P. Schwartz, Director.*  Mr. Schwartzhas been a director since 2003. Since 1970 he has been engaged in the privatepractice of law in Denver, Colorado, specializing in real estate and commerciallaw. He earned a Bachelor of Science degree in business administration andaccounting and a Juris Doctor degree from the University of Colorado.

*Stephen L. Cootey, Director.* Mr. Cootey joined us as a director in 2006. Since 2004 he has beena Principal at Prides Capital LLC, an affiliate of Prides Capital Fund I, L.P.and an investment firm specializing that actively invests in small- andmicro-cap public and private companies. Prides Capital Fund I LP is a 14.1%stockholder of us, and Mr. Cootey was appointed as one of our directors atthe request of Prides Capital Fund I, LP. From 2001 to 2004, Mr. Cooteywas a Vice President with Credit Suisse First Boston. Prior to that time,Mr. Cootey maintained over six years of management consulting andoperational experience at the Goldman Sachs Group, Inc. and AndersenConsulting. He is a director of eDiets.com, Inc., a NASDAQ traded publiccompany. Mr. Cootey holds a B.A. in physics and government from BowdoinCollege in Brunswick, Maine and a Masters of Business Administration from theColumbia Business School in New York, New York.

*Anthony B. Petrelli, Director.* Mr. Petrelli joined us as a director in 2006. Since 1987 he hasbeen the Senior Vice President and a director of Neidiger, Tucker,Bruner, Inc. a Denver, Colorado based securities brokerage firm. His responsibilitiesat Neidiger include managing its Corporate Finance and Investment BankingDepartment. He is also a member of the firm’s Management Committee andadministers the distribution and syndication of its public underwritings andprivate placements. Since 2003 he has been Chairman, President and a directorof the National Investment Banking Association (NIBA). Since 1991 he has servedon a number of committees of the National Association of SecuritiesDealers, Inc. (NASD), most recently as a member of the NASD’s StatutoryDisqualifications Committee, Vice Chairman of the NASD’s National AdjudicatoryCouncil and member of the NASD’s Corporate Finance Committee and its Small FirmAdvisory Board. He earned a Bachelor of Science degree and Masters of BusinessAdministration degree from the University of Colorado.

**Committees of the Board of Directors**

*Audit Committee*

Our Board of Directors has established a standing AuditCommittee that consists of three directors. The current members of the AuditCommittee are Messrs. Schwartz, Cardin and Petrelli. Mr. Schwartz isthe Audit Committee Chairman. The Board of Directors has determined that eachof these directors is “independent” as defined and as required by theSecurities and Exchange Commission. The Board of Directors has also determinedthat each of these directors is financially literate and that Mr. Schwartzfurther qualifies as an “audit committee financial expert” as such term isdefined in the applicable rules of the Securities and Exchange Commission.

The Audit Committee assists the Board in fulfilling itsresponsibility to provide oversight with respect to our Consolidated FinancialStatements, reports and other disclosures provided to stockholders, the systemof internal controls and the audit process. Its duties include reviewing the adequacyof our internal accounting and financial controls, reviewing the scope andresults of the audit plans of our independent and internal auditors, reviewingthe objectivity, effectiveness and resources of the internal audit function,and assessing our financial reporting activities and accounting standards andprinciples. The Audit Committee also selects and engages our independentauditors and approves their fees. In 2005, the Committee met four times. In2006, through October 30, 2006, the Audit Committee met five times.

The Audit Committee has considered whether the provisionof non-audit services performed by our independent auditors is compatible withmaintaining that firm’s independence.

*Compensation Committee*

Our Compensation Committee is comprised ofMessrs. Schwartz, Cardin and Cootey, all of whom are independentdirectors. Mr. Cardin is our Compensation Committee Chairman. TheCompensation Committee recommends approval by the Board of the compensation ofour executive officers, the annual compensation budget for all other employees,together with bonuses, grants of stock options and any changes to our benefitplans.

Although bound by the negotiated annual salaryrequirements of employment agreements we have with our executives, theCompensation Committee is charged with determining bonus compensation for ourexecutive officers. The Compensation Committee is charged with determiningbonus compensation for our executive officers. Under our bonus plan, executiveofficers are limited to 50% of their salaries. Bonuses for our Chief ExecutiveOfficer may range from 50% to 150% of his salary. Within 

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these parameters, we consider year over year net earnings, cash flowsand revenue growth, as well as whether we met business plans and forecasts setfor the year. We do not have a specific formula to apply these factors whichare weighed on an individual basis by our Compensation Committee.

*Governance and Nominating Committee*

Our Governance and Nominating Committee consists ofMessrs. Schwartz, Cardin and Petrelli. Mr. Schwartz is our Governanceand Nominating Committee Chairman. The Governance and Nominating Committeemonitor the implementation of the Company’s corporate Governance Guidelines, toprepare and supervise the Board’s Annual Reviews and Director Independence andto identify review and evaluate candidates for election as director.

*Code of Ethics*

Our Board of Directors has adopted a Code of Ethics thatapplies to our executive officers, senior financial officers and directors ofour company. We have filed a copy of our Code of Ethics with the Securities andExchange Commission and have also posted the Code of Ethics on our Web site.

In accordance with the *Sarbanes-OxleyAct of 2002*, we have adopted procedures to facilitate thesubmission, on a confidential and anonymous basis, of complaints, reports andconcerns by any person regarding (1) accounting, internal accountingcontrols or auditing matters, (2) actual or potential violations of laws,rules or regulations, and (3) other suspected wrongdoing, including inconnection with our Code of Ethics.

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**ITEM 11. EXECUTIVE COMPENSATION**

The following table sets forth certain summaryinformation concerning compensation paid to our executive officers for thecalendar years indicated.
|                                            | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **      | ** ** | ** **          | ** ** | **Long Term Compensation Awards** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------|------------|-----------------|------------|---------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **      | ** ** | ** **          | ** ** | **Restricted**                                   | ** ** | **Shares** | ** ** | ** ** | ** ** |
| **Name and Principal**           | ** ** | **Annual Compensation** | ** ** | **Other Annual** | ** ** | **Stock ** | ** ** | **Underlying**      | ** ** | **All Other**                               | ** ** |
| **Position in 2005**             | ** ** | **Year**                     | ** ** | **Salary**            | ** ** | **Bonus**       | ** ** | **Compensation(1)** | ** ** | **Award(s)**                                     | ** ** | **Options** | ** ** | **Compensation** | ** ** |
| Russell A. Whitney, Chairman               |       | 2005                         |       | $                     | 659,189    |            | $          | 850,000             |       | $                                                | 78,170     | (2) | — |   | 125,000 |   | — |   |
| of the  Board and Chief                    |       | 2004                         |       | 553,846               |       | 600,000         |       | —              |       | —                                           |       | — |   | — |   |
| Executive  Officer                         |       | 2003                         |       | 400,000               |       | 275,000         |       | —              |       | —                                           |       | 75,000 |   | — |   |
|                                       |       |                         |       |                  |       |            |       |                |       |                                             |       |   |   |   |   |
| Nicholas S. Maturo, President              |       | 2005                         |       | $                     | 275,000    |            | $          | 250,000             |       |                                             |       |   |   | 100,000 |   |   |   |
| and Chief  Operating Officer               |       | 2004                         |       | 230,769               |       | 125,000         |       | —              |       | —                                           |       | 100,000 |   | — |   |
|                                            |       | 2003                         |       | 180,000               |       | 20,000          |       | —              |       | —                                           |       | 45,000 |   | — |   |
|                                       |       |                         |       |                  |       |            |       |                |       |                                             |       |   |   |   |   |
| Ronald S. Simon, Exec. Vice                |       | 2005                         |       | $                     | 275,000    |            | $          | 300,000             |       |                                             |       |   |   | 100,000 |   |   |   |
| President,  Acting Chief                   |       | 2004                         |       | 230,769               |       | 125,000         |       | —              |       | —                                           |       | 100,000 |   | — |   |
| Financial Officer, Secretary and  Director |       | 2003                         |       | 180,000               |       | 75,000          |       | —              |       | —                                           |       | 50,000 |   | — |   |
|                                       |       |                         |       |                  |       |            |       |                |       |                                             |       |   |   |   |   |
| John F. Kane, Executive Vice               |       | 2005                         |       | $                     | 215,385    |            | $          | 200,000             |       |                                             |       |   |   | 100,000 |   |   |   |
| President,  Real Estate                    |       | 2004                         |       | 190,785               |       | 75,000          |       | —              |       | —                                           |       | 25,000 |   | — |   |
| Education  Division                        |       | 2003                         |       | 120,000               |       | 15,000          |       | —              |       | —                                           |       | 25,000 |   | — |   |
|                                       |       |                         |       |                  |       |            |       |                |       |                                             |       |   |   |   |   |
| Anil K. Singh, Vice President,             |       | 2005                         |       | $                     | 184,423    |            | $          | 100,000             |       | —                                           |       | — |   | 50,000 |   |   |   |
| Marketing                                  |       | 2004                         |       | 131,924               |       | 15,000          |       | $                   | 22,904     | (3)                                              | —     |   | 20,000 |   | — |   |

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|   |   |                                                                                                                                                           |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (1)    |   | In  accordance with SEC rules, disclosure is omitted where total Other Annual  Compensation is less than $50,000 or 10% of the total annual salary and  bonus. |   |
|   |   |                                                                                                                                                           |   |
| (2)    |   | Represents  speaker fees at conferences of $65,135 and non-business use of corporate  airplane in the amount of $13,035.                                       |   |
|   |   |                                                                                                                                                           |   |
| (3)    |   | Represents relocation  expense reimbursement.                                                                                                                  |   |

 

*Employment Agreements*

In 2003, we entered into an employment agreement withMr. Whitney which expires in 2007. The agreement provided an initialsalary of $400,000 per year, together with bonuses to be granted by theCompensation Committee of our Board of Directors, and customary employeebenefits, including health insurance. The Compensation Committee establishedMr. Whitney’s salary at $600,000 for 2006. Bonuses granted by the Board ofDirectors to Mr. Whitney are determined by the Compensation Committee andhave historically been between 50% and 150% of his salary, depending upon ourlevel of net earnings, cash flows and revenue growth.

Also in 2003, we also entered into employment agreementswith Messrs. Maturo, Simon and Kane, providing for initial annual salariesof $180,000, $180,000, and $172,000, respectively. The employment agreementsexpire in 2007. The Compensation Committee established annual salaries of$300,000, $300,000 and $250,000 for Messrs. Maturo, Simon and Kane,respectively in 2006. We have instituted a cash bonus plan which will beadministered by the Compensation Committee of our Board of Directors. Under thebonus plan, employees, including all of our executive officers, except ourChief Executive Officer, may receive cash bonuses in accordance with ourIncentive Plan based upon a number of factors, including the meeting orexceeding of internally prepared budgets and forecasts, along with othersubjective criteria.

The following table sets forth certain informationregarding grants of stock options to Russell A. Whitney, Nicholas S. Maturo,Ronald S. Simon, John F. Kane and Anil K. Singh, the executive officerswho received stock options during the years 2003 through 2005. The fair valueof the grants has been estimated utilizing the Black Scholes option pricing.

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| **Name**           | ** ** | **Number of  underlying  securities  options granted  during last  12 months** | ** ** | **% of total  options granted  during last  12 months** | ** ** | **Exercise or base  price per share** | ** ** | **Expiration  date** | ** ** | **Grant date  present value** | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|
| Russell A. Whitney |       | 125,000                                                                                            |       | 21.2                                                                             | %          | $                                                         | 5.60       |                 | 11/1/2015  |                                    | $          | 1,057,500 |   |
| Nicholas S. Maturo |       | 100,000                                                                                            |       | 16.9                                                                             | %          | $                                                         | 5.60       |                 | 11/1/2015  |                                    | $          | 846,000 |   |
| Ronald S. Simon    |       | 100,000                                                                                            |       | 16.9                                                                             | %          | $                                                         | 5.60       |                 | 11/1/2015  |                                    | $          | 846,000 |   |
| John F. Kane       |       | 100,000                                                                                            |       | 16.9                                                                             | %          | $                                                         | 5.60       |                 | 11/1/2015  |                                    | $          | 846,000 |   |
| Anil K. Singh      |       | 50,000                                                                                             |       | 8.5                                                                              | %          | $                                                         | 5.60       |                 | 11/1/2015  |                                    | $          | 423,000 |   |

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(1)                                  Our present value computations were based upon thefollowing assumptions: 77.9% volatility, ten year life, risk free rate ofreturn of 4.35% and a 0% dividend yield.

The following table sets forth, on an aggregated basis,each exercise of stock options during the last completed fiscal year by each ofthe named executive officers and the fiscal year-end value of unexercisedoptions.
| **Name**           | ** ** | **Shares  acquired  on exercise** | ** ** | **Value  realized** | ** ** | **# of  securities  underlying  unexercised  options at  December 31,  2005** | ** ** | **Value of unexercised  in-the-money  options at  December 31, 2005** | ** ** |
|--------------------|------------|----------------------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| Russell A. Whitney |       | 0                                      |       | 0                   |       | 192,200                                                                                      |       | $                                                                                              | 989,028    |   |
| Nicholas S. Maturo |       | 0                                      |       | 0                   |       | 245,000                                                                                      |       | $                                                                                              | 1,206,250  |   |
| Ronald S. Simon    |       | 0                                      |       | 0                   |       | 543,000                                                                                      |       | $                                                                                              | 3,543,125  |   |
| John F. Kane       |       | 0                                      |       | 0                   |       | 165,000                                                                                      |       | $                                                                                              | 816,600    |   |
| Anil K. Singh      |       | 0                                      |       | 0                   |       | 70,500                                                                                       |       | $                                                                                              | 324,500    |   |

 

We have not adopted any retirement, pension or profitsharing plans for the benefit of our officers or directors although we adoptedour 1998 Stock Option Plan for the benefit of our officers, directors,employees and consultants. We also offer our employees a 401(k) plan. Ourcontributions to the plan, charged to operations, for the years endedDecember 31, 2005, 2004, and 2003, were $0.2 million,$0.1 million, and $0.0 million, respectively.

**Compensation of Directors**

Independent directors receive $10,000 per year forserving as members of the Board of Directors. Members of the Audit Committeereceive an additional $2,500 per year. Expenses incurred by our directors inattending Board meetings are reimbursed, and independent directors each receive5,000 stock options under our 1998 Stock Option Plan upon joining our Board.Additional stock options have been and will be granted to our Board membersfrom time to time in the future.

**Stock Option Plan**

In 1998 we adopted a stock option plan which provides forthe grant of options intended to qualify as “incentive stock options” or “nonqualifiedstock options” within the meaning of Section 422 of the United StatesInternal Revenue Code of 1986 (the “Code”). Incentive stock options areissuable only to employees.

The purposes of the plan are to attract and retain thebest available personnel, to provide additional incentives to our employees andto promote the success of our business.

We have reserved 2,187,500 shares of common stock forissuance under the plan, which is administered by the Compensation Committee ofour Board of Directors. Under the plan, the Compensation Committee determineswhich individuals will receive options, the time period during which theoptions may be partially or fully exercised, the number of shares of commonstock that may be purchased under each option and the option price. As ofSeptember 5, 2006, options to purchase 1,480,350 shares of commonstock at exercise prices ranging from $1.81 per share to $10.80 per share wereoutstanding under the plan. Of these options, 1,205,200 have been issued to executivesand directors at exercise prices ranging from $1.81 per share to $10.80 pershare.

The per share exercise price of the common stock subjectto options must not be less than the fair market value of the common stock onthe date the option is granted. In the case of incentive stock options, theaggregate fair market value, determined as of the date the option is granted,of the common stock that any person may purchase in any calendar year pursuantto the exercise of incentive stock options must not exceed $100,000. No personwho owns, directly or indirectly, at the time of the granting of an incentivestock option, more than 10% of the total combined voting power of all classesof our stock is eligible to receive incentive stock options under the planunless the option price is at least 110% of the fair market value of the common

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stock subject to the option on the date of grant. The stock options aresubject to anti-dilution provisions in the event of stock splits, stockdividends and the like.

No incentive stock options are transferable by anoptionee other than by will or the laws of descent and distribution, and duringthe lifetime of an optionee, the option is only exercisable by the optionee.The exercise date of an option granted under the plan must not be later thanten years from the date of grant. Any options that expire unexercised or thatterminate upon an optionee’s ceasing to be employed by us will become availableonce again for issuance. Shares issued upon exercise of an option rank equallywith other shares then outstanding.

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**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATEDSTOCKHOLDER MATTERS**

The following table sets forth the common stock ownership of each personknown by us to be the beneficial owner of five percent or more of our commonstock, by each of our officers and directors and by all officers and directorsas a group. Each person holds record and beneficial ownership and has solevoting and investment power with respect to the shares of common stock shown.The address of all of these individuals is in our care at 1612 East Cape CoralParkway, Cape Coral, Florida 33904.
| **Name of Owner**                          | ** ** | **Number of Shares** | ** ** | **Percent of Class(1)** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Russell A. Whitney(2)                                |       | 5,531,819                      |       | 40.6                              | %          |
| Nicholas S. Maturo(3)                                |       | 250,000                        |       | 1.8                               |       |
| Alfred R. Novas(4)                                   |       | 25,000                         |       | *                                 |       |
| Ronald S. Simon(2)(5)                                |       | 478,175                        |       | 3.5                               |       |
| John F. Kane(6)                                      |       | 350,833                        |       | 2.6                               |       |
| Anil K. Singh(7)                                     |       | 60,500                         |       | *                                 |       |
| Frederick A. Cardin(8)                               |       | 25,000                         |       | *                                 |       |
| Chester P. Schwartz(9)                               |       | 25,269                         |       | *                                 |       |
| Stephen L. Cootey(10)                                |       | 5,000                          |       | *                                 |       |
| Anthony B. Petrelli(11)                              |       | 5,000                          |       | *                                 |       |
| All officers and  directors as a group (ten persons) |       | 6,756,596                      |       | 49.6                              |       |
| Prides Capital Fund I,  LP(12)                       |       | 1,650,000                      |       | 12.1                              |       |
| Heartland Value  Fund(13)                            |       | 900,000                        |       | 6.6                               |       |
| QVT Fund LP(14)                                      |       | 600,000                        |       | 4.4                               |       |

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| *    |   | Less than 1%                                                                                                                                                                                                                                                                                                                      |   |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (1)  |   | Includes stock  options and common stock purchase warrants exercisable within 60 days  from the date of the prospectus.                                                                                                                                                                                                      |   |
| (2)  |   | Includes 9,619  shares of common stock and 297,200 stock options held by Mr. Whitney and  members of his family. All of Mr. Whitney’s shares of common stock are  held in International Securities 3, LLC, a limited liability company  owned by Mr. Whitney and his wife and managed by Mr. Simon. |   |
| (3)  |   | Includes 245,000  stock options.                                                                                                                                                                                                                                                                                                  |   |
| (4)  |   | Comprised of  25,000 stock options.                                                                                                                                                                                                                                                                                               |   |
| (5)  |   | Includes 443,000  stock options.                                                                                                                                                                                                                                                                                                  |   |
| (6)  |   | Includes of  125,000 stock options.                                                                                                                                                                                                                                                                                               |   |
| (7)  |   | Includes 60,000  stock options.                                                                                                                                                                                                                                                                                                   |   |
| (8)  |   | Comprised of  25,000 stock options.                                                                                                                                                                                                                                                                                               |   |
| (9)  |   | Includes 25,000  stock options.                                                                                                                                                                                                                                                                                                   |   |
| (10) |   | Mr. Cootey,  an employee of Prides Capital LLC, does not vote the shares owned by Prides  Capital Fund I, LP and disclaims beneficial ownership of the securities,  except to the extent of his pecuniary interest in Prides Capital LLC.                                                                                    |   |
| (11) |   | Comprised of  5,000 stock options.                                                                                                                                                                                                                                                                                                |   |
| (12) |   | Includes 550,000  common stock purchase warrants.                                                                                                                                                                                                                                                                                 |   |
| (13) |   | Includes 300,000  common stock purchase warrants.                                                                                                                                                                                                                                                                                 |   |
| (14) |   | Includes 200,000 common  stock purchase warrants.                                                                                                                                                                                                                                                                                 |   |

 

F-46

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**ITEM 13 CERTAIN RELATIONSHOPS AND RELATED TRANSACTIONS**

We lease 2,200 square feet of training facilities at 1611East Cape Coral Parkway, 9,000 square feet of space at 1625 East Cape CoralParkway which is used for shipping, and 4,802 square feet at 1630 SE 47th Terracewhich we use as a Training Center and for storage, all in Cape Coral, Floridafrom Cape Promenade Trust which is for the benefit of Russell A. Whitney, ourChairman of the Board and Chief Executive Officer, and his wife, IngridWhitney. The leases are for three years and began on March 1, 2003,March 1, 2003 and June 1, 2004, respectively. We are on a month-to-monthbasis with respect to 1611 East Cape Coral Parkway that expired inMarch 2006. We extended the lease with respect to 1625 East Cape CoralParkway through June 30, 2009.

Between 2002 and 2005, Mr. Whitney benefited fromour students’ purchase of residential lots and the construction of homes onlots they acquire in the Cape Coral, Florida area because the studentspurchased these lots from Mr. Whitney or from other lot owners. Thestudents were presented this opportunity at one of our advanced real estate coursesby realtors representing Gulfstream Development Corp. (“Gulfstream”), a companyowned 25% by Mr. Whitney. We had no involvement in the students’ decisionto purchase lots or in their dealings with the realtor or Gulfstream. Thepurchase price of lots sold by Mr. Whitney was consistent with lot pricessold by others in the Cape Coral area. Gulfstream often constructs homes onlots owned by our students. Through an informal arrangement with Gulfstream, wereceive $1,000 for every Gulfstream home built for our students, amounting to$0.3 million and $0.3 million for the years ended December 31,2005 and 2004, respectively.

We also have investments in three entities in which ourChairman and Chief Executive Officer and Executive Vice President, Secretary haveminority ownership interests. The entities are Rancho Monterey, S.A., Montereydel Este, S.A. and Monterey del Mar, S.A., which is described in more detailunder Noncore Investments in Management’s Discussion and Analysis of FinancialCondition and Results of Operation. Our Chief Executive Officer owns 11% ofRancho Monterey, S.A. and 8% of Monterey del Este, S.A. Our Executive VicePresident, Secretary owns 1% of Rancho Monterey, S.A.

In our view, the terms of the transactions describedabove are no less favorable than could have been obtained from independentthird parties. All affiliated transactions must be approved by a majority ofthe independent and disinterested members of our Board of Directors.

F-47

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**ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES**

Ehrhardt Keefe Steiner & Hottman, P.C., Denver, Colorado (“EKS&H”),conducted the audit of our financial statements for the year endedDecember 31, 2005. It is our understanding that this firm is obligated tomaintain audit independence as prescribed by the accounting profession andcertain requirements of the Securities and Exchange Commission. As a result,our directors do specifically approve, in advance, non-audit services providedby EKS&H, and it considers the effect, if any, of such services on audit independence.

        EKS&H’saudit fees billed to us during 2005 were $339,520 Audit related fees billed tous during 2005 were approximately $29,196 for the audit of the Company’s 401(k)plan, tax fees billed to us during 2005 for tax services were approximately$74,815 and other fees billed to us during 2005 were $233,783 which wasprimarily to work related to Form S-1 registration statements filed withthe Securities and Exchange Commission. We have concluded that the provision ofservices by EKS&H is compatible with maintaining its independence.

F-48

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**ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K**

 
| Exhibit No. | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 3.01             |       | Articles  of Incorporation of the Registrant, as amended(1)                                                                                                                                                                                                                                                                                                                                                                               |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 3.02             |       | Bylaws  of the Registrant(2)                                                                                                                                                                                                                                                                                                                                                                                                              |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 5.01             |       | Opinion  of Law Office of Gary A. Agron regarding legality of the common stock  (includes consent)(5)                                                                                                                                                                                                                                                                                                                                     |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 5.02             |       | Opinion  of Law Office of Gary A. Agron regarding legality of the common stock  (revised)(5)                                                                                                                                                                                                                                                                                                                                              |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.01            |       | Securities  Purchase Agreement—Private Placement(5)                                                                                                                                                                                                                                                                                                                                                                                  |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.02            |       | Stockholders  Agreement—Private Placement(5)                                                                                                                                                                                                                                                                                                                                                                                         |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.03            |       | Registration  Rights Agreement—Private Placement(5)                                                                                                                                                                                                                                                                                                                                                                                  |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.04            |       | Warrant  Agreement—Private Placement(5)                                                                                                                                                                                                                                                                                                                                                                                              |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.05            |       | 1998  Stock Option Plan(3)                                                                                                                                                                                                                                                                                                                                                                                                                |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.06            |       | Employment  Agreement with Mr. Whitney(4)                                                                                                                                                                                                                                                                                                                                                                                                 |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.07            |       | Employment  Agreement with Mr. Simon(4)                                                                                                                                                                                                                                                                                                                                                                                                   |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.08            |       | Employment  Agreement with Mr. Maturo(4)                                                                                                                                                                                                                                                                                                                                                                                                  |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 10.10            |       | Employment  Agreement with Mr. Kane(4)                                                                                                                                                                                                                                                                                                                                                                                                    |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 21.01            |       | The  Registrant has ten active subsidiaries as follows: Precision Software  Services, Inc.; Intelligence Network, Inc.; Whitney Canada, Inc.; Whitney  Consulting Services, Inc.; Whitney Education Group, Inc.; Whitney Internet  Services, Inc.; Whitney Mortgage.com, Inc.; Whitney U.K., Limited; Coral  Aviation, Inc.; American Home Buyers Alliance, Inc., and EduTrades, Inc. The  Registrant also has two inactive subsidiaries. |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 23.02            |       | Consent  of Ehrhardt Keefe Steiner & Hottman, PC, an independent registered  certified public accounting firm(5)                                                                                                                                                                                                                                                                                                                      |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 23.03            |       | Consent  of Ehrhardt Keefe Steiner & Hottman, PC, an independent registered  certified public accounting firm(5)                                                                                                                                                                                                                                                                                                                      |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 23.04            |       | Consent  of Ehrhardt Keefe Steiner & Hottman, PC, an independent registered  certified public accounting firm(5)                                                                                                                                                                                                                                                                                                                      |       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |
| 23.05            |       | Consent of Ehrhardt  Keefe Steiner & Hottman, PC, an independent registered certified public  accounting firm(5)                                                                                                                                                                                                                                                                                                                      |       |

----

| (1) |   | Incorporated by  reference to the Registrant’s Registration Statement on Form 10 SB/12G  dated March 6, 2001, designated Exhibit 3.1 therein.                                                         |   |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (2) |   | Incorporated by  reference to the Registrant’s Registration Statement on Form 10 SB/12G  dated March 6, 2001, designated Exhibit 3.2 therein.                                                         |   |
| (3) |   | Incorporated by  reference to the Registrant’s Registration Statement on Form 10 SB/12G  dated March 6, 2001, designated Exhibit 99.3 therein.                                                        |   |
| (4) |   | Incorporated by  reference to Amendment No. 1 to the Registrant’s Registration Statement  on Form S-1, File No. 333-103156 dated July 9, 2003,  designated Exhibits 10.07 through 10.11 therein. |   |
| (5) |   | Previously filed.                                                                                                                                                                                                         |   |

 

F-49

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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. |
|--------------------------|----------------------------------------|
|                     |                                   |   |
| Dated: November 13, 2006 | By:                                    | /s/ RUSSELL A.  WHITNEY |
|                     |                                   | Russell A. Whitney** |
|                     |                                   | *Chief Executive Officer* |

 

In accordance with the ExchangeAct, this report has been signed below by the following persons on our behalfand in the capacities and on November 13,2006.
| **Signature**            | ** ** | **Title**                                         |
|--------------------------|------------|---------------------------------------------------|
| ** **               | ** ** | ** **                                        |
| ** **               | ** ** | ** **                                        |
| /s/ RUSSELL A.  WHITNEY  |       | Chairman of the Board and Chief Executive Officer |
| Russell A.  Whitney      |       |                                              |
|                     |       |                                              |
| /s/ NICHOLAS S.  MATURO  |       | President and Chief Operating Officer             |
| Nicholas S.  Maturo      |       |                                              |
|                     |       |                                              |
| /s/ ALFRED R.  NOVAS     |       | Chief Financial Officer                           |
| Alfred R. Novas          |       |                                              |
|                     |       |                                              |
| /s/ RONALD S.  SIMON     |       | Executive Vice President, Secretary and Director  |
| Ronald S. Simon          |       |                                              |
|                     |       |                                              |
| /s/ FREDERICK A.  CARDIN |       | Director                                          |
| Frederick A.  Cardin     |       |                                              |
|                     |       |                                              |
| /s/ CHESTER P. SCHWARTZ  |       | Director                                          |
| Chester P. Schwartz      |       |                                              |
|                     |       |                                              |
| /s/ STEPHEN L.  COOTEY   |       | Director                                          |
| Stephen L.  Cootey       |       |                                              |
|                     |       |                                              |
| /s/ ANTHONY B.  PETRELLI |       | Director                                          |
| Anthony B.  Petrelli     |       |                                              |

 

F-50

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