All statements in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as "believe," "intend," "expect," "may," "could," "would," "will," "should," "plan," "project," "contemplate," "anticipate" or similar statements. Because these statements reflect our current views concerning future events, these forward-looking statements are subject to risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to demand for our products and services; our ability to compete effectively and adjust to rapidly changing market dynamics; the timing of revenue recognition from significant contracts with schools and school districts; market acceptance of our newer products and services; continued federal and state focus on assessment and remediation in K-12 education; and the other factors described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

The Princeton Review provides integrated classroom-based, print and online products and services that address the needs of students, parents, educators and educational institutions. We offer one of the leading SAT preparation courses and are among the leading providers of test preparation courses for most major post-secondary and graduate admissions tests. The Company and its international franchisees provide test preparation courses and tutoring services for the SAT, GMAT, MCAT, LSAT, GRE and other standardized admissions tests to students throughout the United States and abroad. The Company currently operates through our Test Preparation Services and Supplemental Educational Services ("SES") divisions.

Test Preparation Services Division

The Test Preparation Services division derives the majority of its revenue from classroom-based and Princeton Review online test preparation courses and tutoring services. This division also receives royalties from its independent international franchisees, which provide classroom-based courses under the Princeton Review brand. As a result of the acquisition of Test Services, Inc. ("TSI") in March 2008, the Princeton Review franchises in several southern California locations, Utah and New Mexico ("SoCal") in July 2008 and the Princeton Review Pittsburgh, Inc. ("Pittsburgh") in October 2008, we do not have any remaining domestic franchisees as of March 31, 2009. Additionally, this division receives royalties and advances from Random House for books authored by The Princeton Review.

The Test Preparation Services division accounted for 61% of our overall revenue in the three months ended March 31, 2009, and historically has accounted for the majority of our overall revenue. As a result of the acquisitions described above (and despite the elimination of the related franchise fees), we expect Test Preparation Services revenue and income from operations to continue to increase in 2009.

Supplemental Educational Services Division

The Supplemental Educational Services ("SES") division provides state-aligned research-based academic tutoring instruction to students in schools in need of improvement in school districts throughout the country which receive funding under the No Child Left Behind Act of 2001 ("NCLB"). We expect SES revenue and income from operations to continue to increase in 2009 as a result of the full year benefit of new markets entered over the course of 2008, increased demand in existing markets and expansion into new markets.

Former K-12 Services Division

The Company's former K-12 Services Division provided a number of services to K-12 schools and districts, including assessment, professional development and intervention materials (workbooks and related products). Additionally, this division received college counseling fees paid by high schools. In March 2009, we sold our K-12 Services Division to CORE Education and Consulting Solutions, Inc. ("CORE"). The Company received $9.5 million of cash from CORE at the close of the transaction and recognized a gain of $1.0 million. In connection with the sale of its K-12 Services division, financial results associated with this business have been reclassified as discontinued operations.

Results of Operations)

Comparison of Three Months Ended March 31, 2009 and 2008



                                                   Three Months Ended          Amount of        Percent
                                                       March 31,               Increase         Increase
                                                   2009           2008        (Decrease)       (Decrease)
Revenue:
Test Preparation Services                       $   27,363      $ 23,150      $     4,213              18 %
SES Services                                        17,460        12,592            4,868              39 %

Total revenue                                       44,823        35,742            9,081              25 %
Cost of revenue:
Test Preparation Services                            9,458         8,887              571               6 %
SES Services                                         7,901         5,663            2,238              40 %

Total cost of revenue                               17,359        14,550            2,809              19 %

Gross profit                                        27,464        21,192            6,272              30 %

Operating expenses:
Selling, general and administrative                 22,096        20,594            1,502               7 %
Restructuring                                        2,918           435            2,483             571 %

Total operating expenses                            25,014        21,029            3,985              19 %

Other income (expense) and other items:
Interest expense                                      (329 )         (35 )           (294 )           840 %
Interest income                                         14           128             (114 )           (89 )%
Other income                                            25            -                25              -
Provision for income taxes                            (300 )         (78 )           (222 )           285 %

Income from continuing operations               $    1,860      $    178      $     1,682             945 %

Revenue

For the three months ended March 31, 2009, total revenue increased by $9.1 million, or 25%, to $44.8 million from $35.7 million in the three months ended March 31, 2008.

Test Preparation Services revenue increased by $4.2 million, or 18%, to $27.4 million from $23.2 million in the three months ended March 31, 2008. This increase is primarily due to incremental revenue of $5.7 million from domestic franchises acquired during 2008 as described above. This increase in revenue was offset by a $1.1 million reduction in franchise fees as a direct result of the same franchise acquisitions and a $0.3 million reduction in non-franchise licensing revenue due to the termination of a contract with a marketing partner that has filed for bankruptcy.

SES Services revenues increased $4.9 million, or 39%, to $17.5 million from $12.6 million in the three months ended March 31, 2008. This increase is primarily due to expansion into nine new markets since March 31, 2008.

Cost of Revenue

For the three months ended March 31, 2009, total cost of revenue increased by $2.8 million, or 19%, to $17.4 million from $14.6 million in the three months ended March 31, 2008.

Test Preparation Services cost of revenue increased by $571,000, or 6%, to $9.5 million from $8.9 million in the three months ended March 31, 2008 due primarily to incremental costs of $2.0 million related to the 2008 acquisitions. Excluding the impact of franchises acquired, cost of revenue decreased by $1.4 million due to improved classroom operating efficiencies which lowered relative teacher, course material and facility costs required to deliver our services. Gross margin during the period for the Test Preparation Services division increased from 62% to 65%, primarily as a result of the operating efficiencies described above.

SES Services cost of revenue increased by $2.2 million, or 40%, to $7.9 million from $5.7 million in the three months ended March 31, 2008 as a direct result of the increase in revenue. Gross margin during the period for the SES Services division remained consistent at 55% for both periods.

Selling, General and Administrative Expenses

For the three months ended March 31, 2009, selling, general and administrative expenses increased by $1.5 million, or 7%, to $22.1 million from $20.6 million in the three months ended March 31, 2008.

Test Preparation Services selling, general and administrative expenses increased by $3.0 million, or 26%, to $14.4 million from $11.4 million in the three months ended March 31, 2008. This increase is primarily due to incremental expenses related to the 2008 franchise acquisitions.

SES Services selling, general and administrative expenses remained unchanged at $3.5 million for both periods.

Corporate selling, general and administrative expenses decreased by $1.5 million, or 26%, to $4.3 million from $5.8 million in the three months ended March 31, 2008, due to reductions in corporate headcount and professional staffing fees associated with our efforts to reduce corporate expenses.

Restructuring

The Company's restructuring charges increased by $2.5 million, or 571%, to $2.9 million from $435,000 in the three months ended March 31, 2008. The increase is attributed to the restructuring initiative announced and commenced in the first quarter of 2009 related to outsourcing the Company's information technology operations, transferring the majority of remaining corporate functions located in New York City to the offices located near Boston, Massachusetts, and simplifying management's structure following the sale of the K-12 Services division. The restructuring charges incurred during the three months ended March 31, 2008 were severance expense related to restructuring activities initiated during 2007 to relocate the Company's finance and certain legal operations from New York City to offices located near Boston, Massachusetts.

Interest Expense

Interest expense increased by $294,000 to $329,000, from $35,000 in the three months ended March 31, 2008, as a result borrowings outstanding under the credit facility during the three months ended March 31, 2009. There were no outstanding borrowings under any credit facility during the three months ended March 31, 2008.

Provision for Income Taxes

The provision for income taxes increased by $222,000 to $300,000, from $78,000 in the three months ended March 31, 2008. The increase is primarily due to the expected increase in annual income from continuing operations before taxes for 2009 as compared to 2008.

Liquidity and Capital Resources

Our primary sources of liquidity during the three months ended March 31, 2009 were cash and cash equivalents on hand, cash flow generated from operations and cash proceeds from the sale of our K-12 Services division, a discontinued operation. Our primary uses of cash during the three months ended March 31, 2009 were capital expenditures and the required installment payment of a portion of the term loan under our credit facility in connection with the sale of our K-12 Services division. At March 31, 2009 we had $9.4 million of cash and cash equivalents (including $575,000 of restricted cash) and $5.0 million of unused borrowing capacity available under the revolving line of credit of our Wells Fargo credit facility.

We expect to generate positive cash flow from operations in 2009, including payments to fund 2009 restructuring activities, as a result of expected revenue growth and the continued benefit of operational improvements and cost reductions. Cash flow from operations, currently available cash and borrowings under our revolving line of credit are expected to fund short-term working capital needs, capital expenditures and scheduled debt obligations of at least the next twelve months. However, our ability to generate positive cash flows from operations is dependent on our future financial performance, which is subject to many factors beyond our control as outlined in Part II, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

In addition to generating positive income from operations, the timing of cash payments received under our customer arrangements is a primary factor impacting our sources of liquidity. Our Test Preparation Services division generates the largest portion of our cash flow from operations from its retail classroom and tutoring courses. These customers usually pay us in advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity needs. Increasingly, however, across Test Prep and SES, we are generating a greater percentage of our cash from contracts with institutions such as schools and school districts and post secondary institutions all of which pay us in arrears. Typical payment performance for these institutional customers, once invoiced, ranges from 60 to 90 days. Additionally, the long contract approval cycles and/or delays in purchase order generation with some of our contracts with large institutions or school districts can contribute to the level of variability in the timing of our cash receipts.

Cash flows provided by operating activities from continuing operations for the three months ended March 31, 2009 were $4.4 million as compared to $6.8 million used for operating activities for the three months ended March 31, 2008. Cash provided by operating activities for the three months ended March 31, 2009 was due primarily to $4.4 million of income from continuing operations excluding non-cash items such as depreciation, amortization and stock-based compensation. Changes in working capital had a neutral effect on cash flow for the three months ended March 31, 2009, as a $4.6 million increase in accounts receivable due to growth in SES and institutional Test Preparation revenues was offset by growth in accrued compensation (including severance

related to 2009 restructuring activities) totaling $4.5 million. Cash used for operating activities for the three months ended March 31, 2008 of $6.8 million was due primarily to restructuring-related payments of $4.7 million and a $2.6 million payment of a legal settlement.

Cash flows used for investing activities from continuing operations during the three months ended March 31, 2009 were $2.4 million as compared to $3.4 million used during the comparable period in 2008. Capital expenditures including the development of internal use software increased by $2.1 million and were offset by a decrease in cash expended for franchise acquisitions of $3.1 million.

Cash flows used for financing activities from continuing operations for the three months ended March 31, 2009 were $10.1 million as compared to $1.4 million provided by financing activities for the three months ended March 31, 2008. Cash used for financing activities in 2009 primarily consisted of $10.0 million in repayments of our Wells Fargo credit facility term loan, $9.5 million of which represented a required non-recurring installment payment from the cash proceeds of the K-12 Services division sale. Cash provided by financing activities in 2008 primarily consisted of proceeds from the exercise of stock options.

Cash flows provided by discontinued operations for the three months ended March 31, 2009 were $8.0 million as compared to $862,000 used by discontinued operations for the three months ended March 31, 2008. Cash flows for the three months ended March 31, 2009 include $9.2 million of net cash proceeds from the sale of the K-12 Services division.

Seasonality in Results of Operations

We experience, and we expect to continue to experience, seasonal fluctuations in our revenue, results of operations and cash flow because the markets in which we operate are subject to seasonal fluctuations based on the scheduled dates for standardized admissions tests and the typical school year. These fluctuations could result in volatility or adversely affect our stock price. We typically generate the largest portion of our test preparation revenue in the third quarter. However, as SES revenue grows, we expect this revenue will be concentrated in the fourth and first quarters to more closely reflect the after school programs' greatest activity during the school year.