Form 10-K

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

The aggregate market value of registrant’s common stock held by non-affiliates, based upon the closing price of the common stock on June 30, 2011, as reported by the NASDAQ Global Market, was approximately $10.2 million. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock, based on Schedule 13G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The registrant had 56,392,010 shares of $0.01 par value common stock outstanding at March 31, 2012.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed elsewhere in this Annual Report under “Item 1A. Risk Factors” in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances occurring after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

In this Annual Report, unless the context indicates otherwise, “The Princeton Review,” the “Company,” “we,” “us” and “our” refer to The Princeton Review, Inc. and its subsidiaries and predecessors. The term “common stock” means our common stock, par value $0.01 per share.

On March 26, 2012, we entered into an Asset Purchase Agreement (the “Agreement”) with an affiliate of Charlesbank Capital Partners (“Buyer”) pursuant to which, upon the terms and subject to the conditions set forth in the Agreement, we will sell, and Buyer will buy, substantially all of the assets of our Higher Education Readiness (“HER”) division, including the name and brand of The Princeton Review. The consideration for the sale of the HER division will be $33.0 million in cash, plus the assumption of $12.0 million in net working capital liabilities. The purchase price will be adjusted to account for any variance from the target working capital level. We expect to use the net proceeds from the sale to repay obligations outstanding under our senior credit facilities with General Electric Capital Corporation. Upon consummation of the transaction, the Company will serve as a holding company for the Penn Foster division, will cease to be known as The Princeton Review and will formally adopt a new, to be determined, corporate name.

The information presented below describes our business as it existed on and prior to December 31, 2011.

The Princeton Review is a leading provider of in-person, online and print education products and services targeting the high school and post-secondary markets. The Company was founded in 1981 to provide SAT preparation courses. Today we believe that we are among the leading providers of test preparation courses for most major post-secondary and graduate admissions tests. In December 2009, we acquired Penn Foster Education Group, a global leader in online education that provides career-focused degree and vocational programs in the fields of allied health, business, technology, education, and select other trades.

At the end of the 2009-2010 school year ending in June 2010, we exited the Supplemental Educational Services (“SES”) business which provided tutoring and supplemental educational services under the No Child Left Behind Act of 2001. On March 12, 2009, we completed the sale of substantially all the assets of our K-12 Services division to CORE Education and Consulting Solutions, Inc. pursuant to an Asset Purchase Agreement dated as of December 27, 2008. Our K-12 Services division provided a range of services to K-12 schools and school districts to help primary and secondary school students and teachers measurably improve academic performance. The accompanying consolidated financial statements reflect the K-12 Services division as a discontinued operation.

Through November 2011 the Company operated through the following three divisions:

As of December 31, 2011, we operate through our remaining two divisions: HER and Penn Foster.

We were incorporated in Delaware in March 2000. Our Internet website address is www.PrincetonReview.com. We post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”) on the investor relations page of our website: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings on our website are available free of charge. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The HER division provides test preparation and other college readiness services to students taking the following major U.S. standardized tests:

Our test preparation programs are centered around our proprietary course methodology, quality instruction and strong customer service. Our experienced teachers generally work with small groups of students in our high school programs. In recent years we have expanded our product offerings to address the varied needs of our customers with respect to course duration, class frequency and price, among other factors.

We believe that an important component of our test preparation programs is the high quality study materials and the advanced diagnostic analysis that our students receive. We consistently invest in research and development to enhance the materials used in our programs. As a result, our students receive comprehensive testing materials, ample practice questions, testing drills, mock exams and a thorough analysis of their progress as they proceed through our programs. We also believe we provide among the best teacher training in the industry.

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

Our online programs are fully interactive and are particularly attractive to students who want the flexibility to prepare at any time of the day or night and on short notice. The online programs are designed for use by all of our classroom-based and tutoring students as well. Students may take tests or simply do extra work online on their own schedule. We offer a suite of online products, with a range of content options, which may be used to augment classroom courses or private tutoring or may be used instead of those offerings, including private tutoring programs delivered online. Our online tools have enriched all of our products while providing more flexibility by offering all Princeton Review students the ability to choose their best and most convenient way of learning as they progress through our programs.

In addition to offering our standardized test preparation programs to individual students, we also offer our SAT, SAT Subject Test and ACT test preparation and college readiness services to individual schools and school districts throughout the United States. The Princeton Review works with hundreds of such institutional clients to provide test preparation and college readiness services to their students. These clients range from remote private schools to large urban school districts and other sponsoring non-educational organizations. Our institutional programs are custom-designed to meet the needs of these institutional clients and their students. Using similar materials and techniques, our teachers and, occasionally, district teachers trained by our instructors, deliver test preparation, remediation and enrichment programs to districts of all demographics. We also offer extensive testing and professional development services to teachers.

The Princeton Review: Cracking the SAT, ACT, GMAT, LSAT & GRE 2011 with DVD Editions

The Princeton Review: The Best 376 Colleges, Best 300 Business Schools, Best 172 Law Schools, Best 168 Medical Schools

We also have an SAT application for the Apple^® iPad^® where students can input their goal scores and receive an assessment of their SAT skills based on their completion of 45 questions. In addition, we have popular mobile phone applications focused on vocabulary building, including two volumes of SAT Vocab Challenge and a GRE Vocab Challenge.

Historically, our classroom-based test preparation courses and tutoring services in North America had been delivered through Company-operated locations and through our independent franchisees, and our services in the rest of the world had been delivered solely through independent franchisees. Over the past several years, we completed a number of acquisitions of businesses operated by our former domestic franchisees, and in 2008 we acquired all of our remaining independent franchises in North America. As a result, our international operations are our only operations conducted through independent franchisees, and total revenue from our independent international franchisees is less than 1% of our total 2011 revenue. Our franchisees provide test preparation courses and tutoring services under the Princeton Review brand within a specified territory, in accordance with franchise agreements with us. Our franchisees pay us a royalty based on their cash receipts collected under the Princeton Review name. Certain franchisees also pay a fee for use by their students of our online course tools. Our franchisees also purchase our course materials, which they use in conducting their course and tutoring programs. Our franchisees do not provide Princeton Review online courses.

As of December 31, 2011, the Company had agreements with 16 independent franchisees to operate Company franchise businesses in the following 18 countries outside of the United States: Bahrain, Egypt, India, Jordan, Kuwait, Malaysia, Mexico, Northern Cyprus, Oman, People’s Republic of China, Qatar, Saudi Arabia, South Korea, Syria, Taiwan, Thailand, Turkey and the United Arab Emirates. In the spring of 2011, we terminated our franchisee in Pakistan for default under its Franchise Agreement and in January 2012 we formally terminated our relationship with our Syria franchisee. In addition, our Israeli franchisee chose not to renew its territorial rights and ceased its franchisee business in June 2011.

We believe that the majority of our students and their parents choose our test preparation programs based on the strength of our brand and recommendations of other students, parents, teachers and counselors. We also build awareness of our brand and promote our products through our retail locations, national events and conferences, and relationships with other companies that publish and distribute our products, including Random House, which publishes and distributes the books we author. Nationally, we use the Internet, including search engine marketing, email campaigns, electronic media, and our website at PrincetonReview.com, and direct mail to market our products and services to students and parents. These efforts drive enrollment and provide overall brand awareness. We pursue enrollment partnerships with large student groups and corporations that send a large number of students to college and graduate school. Through these relationships we receive preferential marketing exposure and qualified prospects. A robust national event and conference schedule, executed at a local level, rounds out our lead generation efforts. Locally, our retail sites manage the day-to-day execution of our marketing campaigns. Local sites augment our national efforts with highly targeted activities (advertisements in local school newspapers, distribution of posters and flyers in high traffic areas, and sponsorship of school activities) that serve to fill their course schedules and prospect pipelines. Virtually every employee in our regional offices is part of the sales force. They, along with our contact center representatives, counsel students and parents regarding specific program features and benefits across the entire suite of products. Educators remain one of the

most important influencers of test preparation. As such, we devote considerable efforts to building positive relationships with schools. We have a sales team that specifically targets educational institutions and works directly with school administrators to develop programs that meet the unique needs of their students and families.

We believe that successful product design, development and enhancement have been, and will continue to be, essential to the success of our business. We believe that the strength of our reputation and brand name is directly attributable to the quality of our products and services, and we expect to continue to devote significant resources to enhancing our current products and services and offering additional high-quality products and services that are responsive to our customers’ needs. We rely on our development staff, teachers and other education experts to create and refine the materials used in our HER division. Our goal is to design and improve our products in such a way as to offer our students the best and most productive overall experience, while addressing their preferences and fitting within their lifestyles. We seek to accomplish this by:

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

The markets for college readiness services are highly competitive. Our HER division faces competition in standardized test preparation primarily from one other established national company, Kaplan, Inc., a division of The Washington Post Company. We also face competition from many local and regional companies that provide test preparation, career counseling and application assistance to students. For example, we estimate that a majority of pre-college test preparation services are performed by these local and regional providers and other companies who service this fragmented market, even though each of these competitors individually has a smaller market share than us. Finally, we face competition from new and emerging web-based providers of test preparation and admissions counseling services that reach a national audience and operate with limited overhead costs, allowing them to aggressively compete in pricing.

We believe that the principal competitive factors in the HER business include the following:

We believe that we compete favorably with our competitors on the basis of these factors. We believe that our primary competitive advantage is our well-known and highly trusted Princeton Review brand, our extensive experience in test preparation, admissions and online education, our innovative, high-quality educational products and services, our rigorous teacher training and our employees. We also believe that our ability to attract students, parents and educators to our www.PrincetonReview.com web site offers higher education institutions access to a large body of potential applicants and offers sponsors and merchandisers an attractive source of potential consumers.

We experience some seasonal fluctuations in revenue in the test preparation business as a result of the scheduled dates for standardized admissions tests and the typical school year calendar. We typically generate the largest portion of our test preparation revenue in the third quarter.

In December 2009, we acquired Penn Foster Education Group, the oldest and one of the largest online education companies in the United States, for an aggregate cash purchase price of $170.0 million plus a working capital payment of approximately $6.2 million paid at closing, and $0.5 million paid in March 2010. We financed the acquisition by borrowing $157.3 million and issuing an aggregate of 98,275 shares of Series E Non-Convertible Preferred Stock.

Penn Foster offers academic programs through three primary educational institutions—Penn Foster Career School, Penn Foster College and Penn Foster High School. Each institution offers students flexibility in scheduling the start date of enrollment, scheduling lessons and completing coursework. All course materials and supplies are mailed to students and are available online (except third-party textbooks). Students are given access to a personal homepage from which they can access online study guides, take exams, submit assignments, view financial standing, access the Penn Foster library and librarian, view messages sent by the school, view grade history and access online blogs, chat groups, discussion boards and career services. Penn Foster uses the services of over 130 faculty members who provide on-demand support for all course offerings via email, message boards, webinars and telephone.

Penn Foster Career School programs teach current marketplace skills and are specifically designed to provide entry-level vocational training to students. Penn Foster Career School currently offers 68 career diploma and 50 certificate programs in allied health, business, technology and trade. Programs are continually refreshed and new programs are developed based on current labor market needs and the dynamics of specific career paths.

Penn Foster Career School is regionally accredited by the Middle States Commission on Secondary Schools, nationally accredited by the Distance Education and Training Council and licensed by the Pennsylvania State Board of Private Licensed Schools. The school has also been approved by the International Association of Continuing Education and Training.

Penn Foster College offers 21 associate degree and two bachelor’s degree programs across the fields of allied health, business, engineering and criminal justice. Penn Foster College is nationally accredited by the Distance Education and Training Council, is licensed by the Arizona State Board for Private Postsecondary Education and also carries industry recognitions or approvals such as from the American Veterinary Medical Association for the Veterinary Technician Associate Degree program. All Penn Foster College programs are also affiliated with Defense Activity for Non-Traditional Education Support (DANTES), which qualifies United States military personnel for tuition reimbursement.

To enroll in one of Penn Foster College’s degree programs, students are required to have a high school diploma or Graduate Equivalency Degree (GED) and must have Internet access. To earn an associate degree, a student must complete between 60 and 77 credits (depending on the course of study) and pass a proctored exam at the end of the four semesters of the program. Students may complete associate degree programs in as few as 18 months, but they are given up to six years from the date of enrollment to graduate.

Penn Foster High School is one of the largest virtual high schools in the United States with more than 40,000 active students. Penn Foster High School is regionally accredited by the Middle States Commission on Secondary Schools and nationally accredited by the Distance Education and Training Council. The high school is also licensed by the Pennsylvania State Board of Private Licensed Schools and registered with the NCAA Initial-Eligibility Clearinghouse.

Each year, more than 8,000 students earn their high school diplomas through Penn Foster High School. The program requires completion of 21.5 credits for graduation, with each credit equivalent to 120 hours of coursework. Requirements include 16 credits in core academic subjects and five elective credits in disciplines chosen by the student and his or her counselor.

Examples of the more than 105 Penn Foster High School course offerings include the following:

Penn Foster’s marketing and enrollment activities are managed in-house through an enrollment and student services infrastructure that integrates Penn Foster’s lead generation and marketing capabilities with an on-site, state-of-the-art call center, a proprietary learning management system, curriculum development capabilities and robust Customer Relationship Management (CRM) technology. The Foster Engine generates and manages approximately 1.2 million leads annually. Penn Foster maintains the capabilities of a full service advertising agency and markets to prospective students through various channels, including Internet, television, print and direct mail. Advertising campaigns direct potential students to the Penn Foster web site or to our CRM center, which provides enrollment, student and retention services. The CRM center is equipped with a 283-seat call center with state-of-the-art communications, scripting and enrollment technology.

Penn Foster owns the course content for over 98 career programs, 21 degree programs, 105 high school courses and 2,000 industrial training courses. These courses and programs are continually refreshed and can be repurposed for a variety of programs, sales channels and delivery methods. We develop new certificate, diploma and degree programs by creating proprietary Penn Foster branded study guides to complement third-party textbooks. We also acquire intellectual property on a work-for-hire basis to permit the efficient reuse and repurposing of educational content across a wide array of programs. Since 2005, Penn Foster has launched a total of 80 new or updated career diploma/certificate programs, 15 college programs and 50 high school courses.

Our Penn Foster division faces competition from global corporations such as The Washington Post’s Kaplan University and the University of Phoenix, small providers operating a single physical campus, and traditional not-for-profit community colleges. Nationally, over 1,000 community colleges offer associate degrees, career diplomas and certificate programs. In addition, there are more than 700 vocational-technology and career schools in the United States. The Company considers the following schools among its most direct competitors: ITT, Allied Business Schools, Inc., Ashworth College (formerly Professional Career Development Institute), Universal Technical Institute, Corinthian College and Lincoln Tech. Penn Foster’s primary channel for generating student acquisition is the Internet, utilizing paid listings, third party (affiliate) lead aggregators, and natural search based on brand recognition. As a result of these Internet marketing efforts, the Penn Foster website is among the top ten most visited education websites in the world. We believe Penn Foster competes favorably because of its affordable pricing, customized payment plans, asynchronous academic calendar, exceptional student services, and career-focused secondary, vocational, and degree programs.

In the United States, post-secondary education is highly regulated by accrediting bodies, state regulatory and licensing bodies and federal requirements under the Higher Education Act of 1965 Title IV. An institution’s accreditation affects financial aid, credit transferability and overall reputation. There are three main types of accreditation: Regional, National and Programmatic. Regional accreditation is highly focused on academic quality. There are six regional accrediting bodies including: Middle States Association of Colleges and Schools; New England Association of Schools and Colleges; The Higher Learning Commission: A Commission of the North Central Association of Colleges and Schools; Northwest Commission on Colleges and Universities; Southern Associations of Colleges and Schools; and Western Association of Schools and Colleges. National accreditation associations offer accreditation for specific types of institutions, such as private trade and technical schools, distance education programs and private business colleges. National accreditation is also focused on the academic quality and integrity of the institution as well as on student outcomes, such as placement into subject area and student satisfaction. Programmatic accreditation is highly focused and evaluates specific units, schools or programs within an institution. Penn Foster Career School is regionally accredited by the Commission on Secondary Schools of the Middle States Association of Colleges and Schools and is nationally accredited by the Distance Education and Training Council. Penn Foster College is nationally accredited by the Distance Education and Training Council. The Associate of Science Degree program in Veterinary Technician is programmatically accredited by the AVMA, and the Associate of Science Degree program in Medical Assistant is programmatically accredited by SBHES. Penn Foster High School is regionally accredited by the Commission on Secondary Schools of the Middle States Association of Colleges and Schools and nationally accredited by the Distance Education and Training Council.

State regulations and licensing requirements vary from state to state and often focus on consumer protection. Before graduates can work in their profession, they must adhere to state regulatory and licensing requirements.

Until November 2011, the CEP division provided services through strategic relationships with institutions of higher education to expand enrollment capacities, develop, market and launch new educational programs, and support various technical, operational and financial activities associated with the educational initiatives.

Through our strategic relationship with NLC initiated in 2010, the CEP division provided various services to NLC to support the development and launch of new programs, including bachelor degree completion and certificate programs, to approximately 11.5 million members of the AFL-CIO and their families. The provided services covered a broad range of functions, including marketing, enrollment support, technical support for the development of online courses, technical support for faculty and students and student billing and related services.

In the Spring of 2011 the first of three programs of NLC’s newly constituted School of Professional Studies developed as a result of the strategic relationship commenced, offering fully online bachelor’s degree completion programs in Construction Management, Emergency Readiness and Response Management and Business Administration. These programs were specifically geared for members of various unions to advance in their current jobs or move into growth areas for new jobs.

Our strategic relationship with NLC was in the form of a limited liability company called NLC-TPR Services, LLC (“Services LLC”) which was owned 49% by the Company and 51% by NLC. Services LLC was governed and initially funded under the terms of a Limited Liability Company Agreement (the “LLC Agreement”) and a Contribution Agreement (the “Contribution Agreement”) between Services LLC, the Company and NLC. These agreements required the Company to provide substantially all of the initial capital contributions and, to the extent of those contributions, absorb all of the losses of Services LLC.

As a result of our decision to place renewed focus on our core business, on November 4, 2011 we entered into an agreement with NLC pursuant to which the parties agreed to separate their respective business interests and terminate the NLC strategic relationship, thereby relieving us of the obligation to fund additional capital contributions.

Under our collaboration with BCC (the “Collaboration”), the CEP division provided program funding, facility procurement and management services as well as certain other services to BCC to enable BCC to offer a new allied health care initiative called eHealth Careers. The Collaboration enabled BCC to expand its allied health care program offerings, providing students a faster track to obtain health care degrees, in newer facilities and made use of more online and “hybrid” (partially on-line) courses in return for a higher level of tuition and fees than BCC’s normal health care degree programs. The eHealth Careers program consisted of programs to train students for careers in such fields as medical coding, phlebotomy, therapeutic massage, complementary healthcare and EMT services,

Under the Collaboration we funded all capital and operating expenditures of the health care initiative including the lease, build-out and management of a new facility in New Bedford, Massachusetts, marketing programs promoting the educational programs of the BCC Collaboration and expenses incurred by BCC in the administration and operation of BCC Collaboration course programs. In exchange for these services, BCC compensated us through reimbursement of all costs incurred in connection with the BCC Collaboration plus a services fee, to the extent of revenues collected for the BCC Collaboration course programs.

On May 6, 2011, the Company divested its interest in its Community College Partnerships business, including the BCC Collaboration, through a sale of substantially all of the assets used exclusively in connection with the Community College Partnerships business.

On November 4, 2011, we entered into an agreement (the “Separation Agreement”) by and among NLC, NLC-TPR Services, LLC (“Services LLC” and together with NLC, the “NLC Parties”), and the Company under which the parties agreed to separate their respective business interests and terminate the existing business

relationships between us and the NLC Parties. The Separation Agreement, among other matters, terminated all future obligations under the April 20, 2010 Contribution Agreement, as amended, between us and the NLC Parties (the “Contribution Agreement”). We entered into the Contribution Agreement in connection with the formation of a strategic relationship between us and NLC. Per that relationship, the Company and NLC formed Services LLC, a venture owned 49% by the Company and 51% by the NLC, that provided various services to NLC to support the development and launch of new programs. The services included a broad range of marketing and enrollment support, technical support for development of on-line courses, technical support for faculty and students, and student billing and related services.

Per the Contribution Agreement, we were required to make to Services LLC during the term of the Contribution Agreement (i) scheduled capital contributions in the aggregate amount of $20.75 million, and (ii) working capital contributions not to exceed $12.25 million in the aggregate, plus loans for working capital purposes of up to an additional $2.0 million. The Parties entered into the Separation Agreement to (i) effect a full and final settlement and termination of their financial and other obligations to each other relating to Services LLC, including all obligations under the Contribution Agreement, (ii) transfer our 49% interest in Services LLC to NLC and (iii) release each other from future claims and associated liabilities.

On May 6, 2011, we closed the sale of the assets of the Community College Partnerships business to Higher Education Partners, LLC in accordance with the terms and conditions of an Asset Purchase Agreement dated as of April 25, 2011 for $3.0 million in cash that included the value of certain closing adjustments and certain liabilities assumed by the buyer.

On December 7, 2009, we purchased Penn Foster Education Group, Inc. (the “PF Acquisition”) for an aggregate purchase price in cash of $170.0 million plus a working capital payment of approximately $6.2 million paid at closing and $0.5 million paid in March 2010. To finance the PF Acquisition, we (i) borrowed $40.0 million through a term loan under a credit agreement entered into with General Electric Capital Corporation, (ii) borrowed $40.8 million under a bridge note purchase agreement entered into with Sankaty Credit Opportunities IV, LP (“Sankaty”), (iii) borrowed $51.0 million under a senior subordinated note purchase agreement entered into with Sankaty and Falcon Mezzanine Partners II (and certain of its affiliates) (“Falcon”), (iv) borrowed $25.5 million in junior subordinated debt under a securities purchase agreement entered into with Sankaty and Falcon, and (v) issued an aggregate of 98,275 shares of Series E Non-Convertible Preferred Stock (“Series E Preferred Stock”) with a stated value of $1,000 per share, including 54,000 shares of Series E Preferred Stock in exchange for all of our outstanding Series C Convertible Preferred Stock.

On March 12, 2009, we completed the sale of substantially all the assets of the K-12 Services division to CORE Education and Consulting Solutions, Inc. (“CORE”) in accordance with the terms and conditions of an Asset Purchase Agreement dated as of December 27, 2008. The aggregate consideration for the sale consisted of (1) $9.5 million in cash paid on the closing date and (2) additional cash consideration of $2.3 million, which represented the net working capital of the K-12 Services division as of the closing date.

On March 7, 2008, we acquired Test Services, Inc. (“TSI”), the operator of eight of our franchises, from Alta Colleges, Inc. (“Alta”), the parent company of TSI, through a merger in which TSI became a wholly owned subsidiary of the Company (the “TSI Merger”) pursuant to a Merger Agreement among the parties (the “TSI Merger Agreement”). The consideration paid at the effective time of the TSI Merger to Alta consisted of 4,225,000 shares of the Company’s common stock (the “Alta Shares”), and $4.6 million in cash. Because the aggregate value of the Alta Shares, plus $4.6 million, was less than $36 million on March 31, 2010, we became obligated to pay additional consideration of $9.9 million to Alta (the “Additional Consideration”) in the form of additional shares of Company common stock equal to the shortfall of such value below $36 million, calculated in accordance with the TSI Merger Agreement. On March 31, 2010, in accordance with the merger agreement, we issued 1,437,000 shares of common stock to Alta representing $5.6 million of the Additional Consideration. Pursuant to an agreement also entered into on March 31, 2010, we amended the post-closing payment terms of the merger agreement and agreed to pay the balance of the Additional Consideration of $4.3 million (the “Remaining Additional Consideration”) in shares of our common stock, subject to stockholder approval at the

Annual Meeting. Our stockholders approved that issuance of common stock to Alta at our June 22, 2010 Annual Meeting, and on August 30, 2010 we issued 2,049,309 shares of common stock in full settlement of the Remaining Additional Consideration. We intend to continue to pursue strategies to maximize stockholder value, which may include acquisitions and partnerships or joint ventures that will help us further expand our product offerings or grow geographically or other strategic alternatives, such as dispositions, reorganizations, recapitalizations or other similar transactions. From time to time, we have made investments in businesses with which we wanted to build strategic relationships, and we may do so in the future. We anticipate that future acquisitions or strategic investments, if consummated, would involve some combination of cash, debt and the issuance of our stock.

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

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

We have used “The Princeton Review” as our principal service and trademark for test preparation services and related publications and materials since 1982. We are party to an agreement with Princeton University under which it has agreed not to oppose or contest our use or registration of these marks anywhere in the world and also to provide us consent and assistance where necessary to secure such registration, as long as we include a disclaimer of affiliation with the University in the size and manner specified in the agreement and annually inform our employees and franchisees of the requirement for use of the disclaimer.

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

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

As of December 31, 2011, we had approximately 854 full-time employees and 193 part-time employees, not including our part-time teachers. As of December 31, 2011 we also had approximately 4,737 additional part-time

teachers or adjunct faculty. 200 of our Penn Foster employees are covered by a collective bargaining agreement with United Steel, Paper, and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Serviceworkers International Union, AFL-CIO-CLC. We consider our employee relations to be good.

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

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

Our business has substantial indebtedness, which could, among other things, make it more difficult for us to satisfy our debt obligations, require us to use a large portion of our cash flow from operations to repay and service our debt or otherwise create liquidity problems, limit our flexibility to adjust to market conditions, place us at a competitive disadvantage, expose us to interest rate fluctuations and raise substantial doubt as to our ability to continue as a going concern.

We currently have, and will likely continue to have, a substantial amount of indebtedness. Moreover, our ability to incur additional indebtedness is subject to restrictions under our outstanding loan agreements.

Our substantial indebtedness could affect our future operations in important ways. For example, it could:

We cannot be certain that our cash flow from operations will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If our cash flow and capital resources prove inadequate, we could face substantial liquidity problems and might be required to dispose of material assets or operations, restructure or refinance our debt, seek additional equity capital or borrow more money. We cannot guarantee that we will be able to do so on acceptable terms or at all.

Our loan agreements contain certain financial covenants that we may not satisfy which, if not satisfied, could result in the acceleration of the amounts due under these facilities and the limitation of our ability to borrow additional funds in the future.

The agreements governing our indebtedness subject us to various financial and other covenants with which we must comply on an ongoing or periodic basis. These include covenants pertaining to capital expenditures,

interest coverage ratios, leverage ratios and minimum cash requirements. If we violate any of these covenants, we may suffer a material adverse effect. Most notably, our outstanding debt could become immediately due and payable, our lenders could proceed against any collateral securing such indebtedness and our ability to borrow additional funds in the future may be limited.

We have a history of significant operating losses and have substantial doubt about our ability to continue as a going concern and may not be able to achieve sustained profitability if we are unable to increase revenue from our newer products and services and successfully implement a number of new initiatives, in which case we could experience an adverse change in the market price of our common stock.

Over the last few years, the Company has significantly restructured its operations, expanded certain business lines and invested in systems and infrastructure. These investments, combined with Sarbanes-Oxley compliance costs and restructuring costs, have driven losses in each of our last three fiscal years. We have incurred net losses of approximately $136.1 million, $51.7 million, and $12.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, we had an accumulated deficit of approximately $317.4 million.

In order to achieve sustained profitability we will need to continue to implement changes to existing business processes, significantly reduce overhead expense and drive profitable revenue growth. The Company is re-engineering processes and systems to reduce our overhead, continue to improve our internal control management process and upgrade or replace certain critical business systems.

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

Adverse conditions in the global economy could adversely affect our revenues.

As widely reported, financial markets in the United States and internationally have been experiencing extreme disruptions since 2008, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. The impact of these disruptions on our customers could result in a decrease in sales of our products and services. The Company is unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries. Should these economic conditions result in the Company not meeting its revenue growth objectives, the Company’s operating results and financial condition could be adversely affected.

If colleges and universities reduce their reliance on standardized admissions tests, our business will be materially adversely affected.

The success of our Higher Education Readiness business depends on the continued use of standardized tests. If the use of standardized tests declines or falls out of favor with educational institutions or state and local governments, the markets for many of our products and services will deteriorate and our business will be materially adversely affected.

Our contracts with schools, school districts, municipal agencies and other governmental bodies present several risks, including the timing of revenue recognition, which, combined with fixed expenses, puts a strain on our working capital requirements.

The Company enters into a number of contracts with schools, school districts, municipal agencies, and other governmental bodies. These contracts present several types of risks and uncertainties. Many of our contracts with school districts are school-year contracts subject to annual renewal at the option of the school district, and in many instances the school district can terminate or modify the contracts at their convenience. Any number of factors could cause a school district to terminate or fail to renew a contract or otherwise affect a school district’s

willingness to contract with us, including budget cuts, negative publicity (whether or not the reason for such publicity is within our control) and changes in the composition of local school boards or changes in school district administration. Any termination or non-renewal of a contract with a school district could have an adverse effect on our results of operations, and a termination or non-renewal caused by our failure to improve the poor academic performance of students enrolled in our programs could adversely affect our ability to secure contracts with other school districts. Additionally, the approval processes of some of our customers in this area, which are required for formal contract execution, are lengthy and cumbersome and, in many cases, are not completed prior to the time we begin performance. This means that we, at times, incur substantial costs prior to the formal execution of these agreements by the customer.

If we fail to comply with applicable state and federal regulations, we may face government sanctions and other adverse consequences.

As a result of providing services funded by government programs, we are subject to increased state and federal regulation. Compliance with state and federal regulations can be costly and time consuming, and we cannot be sure that we will not encounter delays, expenses or other difficulties. Further, our failure to comply with these regulations could result in financial penalties, restrictions on our operations, reputational harm and decreased ability to secure contracts in other jurisdictions.

U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales. However, an increasing number of states have considered or adopted laws that attempt to impose obligations on out-of-state retailers to collect taxes on their behalf. A significant portion of our revenue is earned in jurisdictions where we collect sales tax or its equivalent. A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not currently do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.

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

The markets for our products and services are highly competitive, and we expect increased competition in the future that could adversely affect our revenue, profitability and market share. In particular, competition in the markets served by our Higher Education Readiness division have resulted in recent price reductions in many of our services offered by that division. Our current competitors include but are not limited to:

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

Negative developments in school funding or education laws could reduce our institutional revenue.

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

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

We experience, and expect to continue to experience, seasonal fluctuations in our revenue because some of 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.

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

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

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

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

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

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

Failure to protect our intellectual property could materially adversely affect our business. We depend on our ability to protect our brand, our products and services and the systems that deliver those products and services to our customers. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to protect these products. These intellectual property rights distinguish our products and services from those of our competitors. If others are able to copy, use and market these products and delivery systems, then we may not be able to maintain our competitive position. Despite our best efforts, there can be no assurance that our intellectual property rights will not be infringed, violated or legally imitated. Existing laws do not provide complete protection and policing the unauthorized use of our products and services requires significant resources.

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

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

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

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

Changes in our senior management or difficulties recruiting and retaining qualified personnel could have a material adverse effect on our business.

We depend on the contributions and abilities of key executives and other employees. In addition, over the past three years we have experienced a great deal of turnover within our finance and accounting department, including most recently as a result of the relocation of most of our accounting operations to Scranton, Pennsylvania in connection with combining our finance and accounting department with that of Penn Foster. In addition, two of our executive officers are new to the Company since February 2011, and as a result the Company could experience instability from a lack of historical knowledge and familiarity with all aspects of the Company’s business and operations.

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

Less than 1% of our 2011 revenue was derived from royalties paid to us by our international franchisees and from sales of our course and marketing materials to these franchisees. If our franchisees do not successfully provide test preparation services in a manner consistent with our standards and requirements, including failing to hire and train qualified managers or instructors or failing to abide by all applicable laws and regulations, our image and reputation may suffer and our revenue could decline. Moreover, since all of our franchisees are currently located outside the United States, we have limited ability to monitor the day to day operations of their businesses. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreement, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer and our revenue could decline.

We cannot be certain that we will be able to obtain additional capital on favorable terms. If we fail to raise additional funds, we may need to reduce our growth to a level that can be supported by our cash flow.

In the future, we may require additional capital to finance ongoing operations or the growth of our business. To the extent that our existing sources of liquidity, cash flow from operations and anticipated credit line are insufficient to fund our activities, we may need to raise additional funds. The current disruptions in the financial

markets in the United States and internationally have severely impacted liquidity and diminished credit availability and it may be difficult for the Company to obtain additional funds. In the event we are not successful in obtaining additional capital, we may not be able to:

Charges and other costs related to completed acquisitions could negatively affect our results of operations.

An accounting standard relating to goodwill and other intangible assets requires goodwill and other intangible assets that have an indefinite useful life to be reviewed at least annually for impairment, or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. To the extent these assets are deemed to be impaired, they must be written down. Any future write down of goodwill, while non-cash, would adversely affect our operating results. During the year ended December 31, 2011, we recognized a loss on impairment of goodwill and other assets of $99.9 million. As of December 31, 2011, we had goodwill of $100.5 million related to acquisitions.

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

We may undertake sales or other strategic dispositions or alternatives relating to certain businesses or operations to attempt to maximize stockholder value. These transactions involve a number of risks, including:

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

We could become liable for the actions of instructors and other personnel at the facilities we use to provide our classroom-based services. In the event of on-site accidents, injuries or other harm to students, we could face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for the injuries. Although we maintain liability insurance, this insurance coverage may not be adequate to protect us fully from these claims. In addition, we may not be able to obtain liability insurance in the future at reasonable prices or at all. A successful liability claim could adversely affect our reputation and our financial results. Even if unsuccessful, such a claim could cause unfavorable publicity, entail substantial expense and divert the time and attention of key management personnel.

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

If our primary and backup computer systems were to fail or be disrupted, our services could be interrupted and we may lose revenue and future business. We depend on the efficient and uninterrupted operation of our

computer and communications hardware and software systems. These systems and operations are vulnerable to damage or interruption from floods, fires and power loss and similar events, as well as computer viruses, break-ins, sabotage, intentional acts of terrorism, vandalism and other misconduct and disruptions or delays occurring throughout the Internet network infrastructure. Although all of our material systems are redundant, short-term service interruptions may take place if our primary systems were to fail or be disrupted and we are forced to transition to backup systems. Accordingly, our online operations are dependent on our ability to maintain our systems in effective working order and to protect them from disruptive events. While most of our primary systems are located at professional data centers with redundancy for power, A/C and internet access, we do not have a formal disaster recovery plan, and our insurance policies may not adequately compensate us for any losses that may occur due to failures of or interruptions in our systems. Furthermore, we have spent significant resources over the last 3 years upgrading many of our information technology systems, including those that we use in our HER business. In August 2011 this upgrade was completed and we began using the new systems. The continuing transition to the new systems may cause disruptions, delays or other failures which could adversely affect our business. Any disruptions, delays or other failures resulting from that upgrade or the acts or omissions of our third party provider or certain systems operations could reduce our revenues, harm our reputation and cause us to incur substantial expense.

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

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

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

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

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

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

Some of our services require the disclosure of sensitive information by the user. We rely on a number of security systems for our services to protect this information from unauthorized use or access. If the security

measures that we use to protect personal information or credit card information are ineffective, we may be subject to liability, including claims for invasion of privacy, impersonation, unauthorized purchases with credit card information or other similar claims. In addition, the Federal Trade Commission and several states have investigated the use of personal information by certain Internet companies. We could incur significant expenses if new regulations regarding the use of personal information are introduced or in responding to investigations of privacy or security practices.

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

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

Securities class action lawsuits alleging fraud have often been filed against companies following periods of volatility in the market price of their securities. The Company is the target of three such lawsuits and in the future, we may be the target of additional similar lawsuits. Such lawsuits could result in substantial costs and the diversion of our management’s attention and resources, which could seriously harm our financial results or result in a decline in the market price of our common stock. Declines in the market price of our common stock could also harm employee morale and retention, our ability to attract qualified employees and our access to capital.

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

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

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

Certain rights granted to the holders of our Series D Preferred Stock may make it more difficult for other stockholders to influence significant corporate decisions and may hinder a change of control.

Certain terms of our Series D Preferred Stock may make it more difficult for other stockholders to influence significant corporate decisions. For example, the holders of our Series D Preferred Stock:

These rights (and all other rights and privileges relating to the Series D Preferred Stock) may adversely affect the value (or perceived value) of our shares of common stock.

Our headquarters are located in Framingham, Massachusetts, where we lease approximately 17,000 square feet of office space under a lease that expires on January 31, 2013. As of December 31, 2011, we also leased an aggregate of approximately 297,000 square feet of office space for additional operations in New York, New York, and our approximately 82 regional offices or classroom locations located in 27 states, Washington D.C., Canada and Puerto Rico, as well as two Penn Foster offices in Scottsdale, Arizona and Montreal, Quebec. Until May 6, 2011, we also leased approximately 16,000 square feet of facility space in New Bedford, Massachusetts for the operations of our collaboration with Bristol Community College under our CEP division, which Lease was transferred to the buyer as part of the sale of the assets of the Community College Partnerships business. We own our 118,300 square foot office building in Scranton, Pennsylvania and a 82,180 square foot distribution facility in Ransom, Pennsylvania.

From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, we do not believe that we are currently a party to any material legal proceedings other than as described below.

complaint, as amended, alleged material misstatements and omissions in the Company’s April 2010 public offering materials. On March 6, 2012, the Court granted the defendants’ motions to dismiss this action with prejudice, and entered judgment for defendants that same day.

Additionally, on August 10, 2011, Eric J. Golden filed a shareholder derivative complaint in the United States District Court for the District of Massachusetts against certain of the Company’s current and former directors, Eric J. Golden v. Lowenstein, et al. The complaint alleges, among other theories, that the defendants breached their fiduciary duties by causing or allowing the Company to make material misstatements and omissions in connection with its public filings and statements during the period from March 12, 2009 through March 11, 2011. On September 28, 2011, the Court ordered the Golden action stayed pending a final decision on any motion to dismiss the Washtenaw action. On April 9, 2012, the parties in the Golden action jointly moved for an order granting Plaintiffs’ request to voluntarily dismiss this action without prejudice. On April 11, 2012, the Court granted the motion for dismissal, dismissing the action without prejudice and with all parties bearing their own costs.

Further, On November 14, 2011, Calvin Di Nicolo filed a shareholder derivative complaint in the United States District Court for the District of Massachusetts against certain of the Company’s current and former officers and directors. The complaint alleges, among other theories, that the defendants breached their fiduciary duties by causing or allowing the Company to make material misstatements and omissions in connection with its public filings and statements during the period from March 12, 2009 through March 8, 2011. On January 12, 2012, the Court ordered the Di Nicolo action stayed pending a final decision on any motion to dismiss the Washtenaw action. On April 9, 2012, the parties in the Di Nicolo action jointly moved for an order granting Plaintiffs’ request to voluntarily dismiss this action without prejudice. On April 11, 2012, the Court granted the motion for dismissal, dismissing the action without prejudice and with all parties bearing their own costs.

On January 21, 2011, the Company received a Civil Investigative Demand from the U.S. Attorney’s Office for the Southern District of New York, seeking documents and information relating to the Supplemental Education Services provided by the Company in New York City during 2002-2010. The Company is cooperating with the U.S. Attorney’s Office in providing the requested documents and information. Anticipated losses associated with this matter are subject to a range that is not currently estimable. However, management has accrued approximately $0.2 million for this matter as of December 31, 2011.

Our common stock trades on the OTCQB tier of the OTC Markets under the symbol “REVU.” The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock on the NASDAQ Capital Market, where we were listed as of December 31, 2011:

As of March 31, 2012, the last reported sale price of our common stock on the NASDAQ Capital Market was $0.06 per share. As of March 31, 2012, there were 50 stockholders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

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

See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

We have issued restricted stock units to certain of our employees under the terms of our 2000 Stock Incentive Plan, as amended, or outside of such plan. On the date that these restricted stock units vest, we withhold, via a net exercise provision pursuant to the applicable restricted stock unit agreements, a number of vested shares with a value (based on the closing price of our common stock on such vesting date) equal to tax withholdings required by us. In the fourth quarter of 2011 we withheld an aggregate of 6,027 shares of common stock at prices from $0.09 to $0.15. Upon their withholding, these shares are retired to treasury stock.

The following table sets forth our selected historical financial data for each of the five years in the period ended December 31, 2011, which has been derived from our consolidated financial statements. The financial data for the consolidated balance sheet data as of December 31, 2011 and 2010 and the consolidated statement of operations and cash flows for the years ended December 31, 2011, 2010 and 2009 has been derived from the consolidated financial statements included elsewhere herein. The information shown below is qualified by reference to and should be read together with our consolidated financial statements and their notes and

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. We have calculated the weighted average shares used in computing net income (loss) per share as described in Note 1 to our consolidated financial statements.

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

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

On March 26, 2012, we entered into an Asset Purchase Agreement (the “Agreement”) with an affiliate of Charlesbank Capital Partners (“Buyer”) pursuant to which, upon the terms and subject to the conditions set forth in the Agreement, we will sell, and Buyer will buy, substantially all of the assets of our Higher Education Readiness (“HER”) division, including the name and brand of The Princeton Review. The consideration for the sale of the HER division will be $33.0 million in cash, Plus the assumption of $12.0 million in net working capital liabilities. The Purchase price will be adjusted to account for any variance from the target working capital level. We expect to use the net proceeds from the sale to repay obligations outstanding under our senior credit facilities with General Electric Capital Corporation. Upon consummation of the transaction, we will serve as a holding company for the Penn Foster division, will cease to be known as The Princeton Review and will formally adopt a new, to be determined, corporate name.

The information presented below describes our business as it existed on and prior to December 31, 2011.

On December 7, 2009, we acquired Penn Foster Education Group (“Penn Foster”), the oldest and one of the largest online education companies in the United States, for an aggregate purchase price in cash of $170.0 million plus a working capital payment of approximately $6.2 million paid at closing and $0.5 million paid in March 2010. To finance the acquisition, we (i) borrowed $40.0 million through a term loan under a credit agreement entered into with General Electric Capital Corporation (ii) borrowed $51.0 million under a senior subordinated note purchase agreement entered into with Sankaty Credit Opportunities IV, LP (“Sankaty”) and Falcon Mezzanine Partners II (and certain of its affiliates) (“Falcon”), (iii) borrowed $25.5 million in junior subordinated debt under a securities purchase agreement entered into with Sankaty and Falcon, (iv) borrowed $40.8 million under a bridge note purchase agreement entered into with Sankaty, and (v) issued an aggregate of 98,275 shares of Series E Non-Convertible Preferred Stock (“Series E Preferred Stock”) with a stated value of $1,000 per share, including 54,000 shares of Series E Preferred Stock in exchange for all outstanding Series C Convertible Preferred Stock.

In 2011 we operated through our HER and Penn Foster divisions. We exited the SES business as of the end of the 2009-2010 school year and therefore do not report under this segment beyond 2010.

Higher Education Readiness Division (formerly referred to as our Test Preparation Services Division)

The HER division provides in-person and online test preparation courses, including classroom-based and small group instruction and individual tutoring in test preparation and academic subjects. Additionally, the division receives royalties from its independent international franchisees that provide test preparation courses under the Princeton Review brand as well as from the sale of more than 185 print and software titles on test preparation, academic admissions and related topics under the Princeton Review brand sold primarily through Random House, Inc.

The Penn Foster division provides regionally and nationally accredited, career-focused, online degree and vocational programs in the United States, Canada and over 150 countries around the world. These academic programs are offered through three primary educational institutions – Penn Foster Career School, Penn Foster College and Penn Foster High School. Each institution offers students flexibility in scheduling the start date of enrollment, scheduling lessons and completing coursework. All course materials and supplies are mailed to students and are available online (except third-party textbooks). Students are given access to a homepage from which they can access online study guides, view financial and academic records, access the Penn Foster library and librarian, view messages sent by the school, view grade history and access online blogs, chat groups, discussion boards and career services. Penn Foster uses the services of over 130 faculty members who provide on-demand support for all course offerings via email, message boards, webinars and telephone.

The SES division provided 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”). In the 2009-2010 school year we experienced greater variability in school districts’ willingness to fully utilize funds allocated to SES programs, as well as generally later program start

dates and greater competition from individual school districts that developed and offered internally developed SES programs. In addition, there was increased uncertainty about the future of NCLB and the concept of adequate yearly performance as a means of allocating Title I funding. On May 18, 2010, we announced our intention to exit the SES business as of the end of the 2009-2010 school year. After completing programs offered in the 2009-2010 school year, we closed certain offices and terminated employees associated with the SES business.

The former Career Education Partnerships (“CEP”) division was established in 2010 to provide services through strategic partnerships that assisted educational institutions in expanding enrollment capacities, developing, marketing and launching new educational programs, and supporting various technical, operational and financial activities associated with the educational initiatives. The CEP division included a strategic relationship with the National Labor College (“NLC”) that was established in April 2010 and a collaboration agreement with Bristol Community College (“BCC”) that was created in September 2010. Due to less than anticipated enrollments in the underlying programs and a renewed commitment by management to focus on the core HER and Penn Foster businesses, in 2011 we terminated the strategic ventures with NLC and BCC, ceased all activities relating to strategic venture partnerships and discontinued the CEP division.

The NLC strategic relationship was formed in April 2010 through the creation of NLC-TPR Services, LLC (“Services LLC”), a limited liability company owned 49% by us and 51% by NLC. Services LLC was formed in order to provide various services to NLC to support the development and launch of new programs, including a broad range of marketing and enrollment support, technical support for development of online courses, technical support for faculty and students, and student billing and related services. We concluded under the accounting guidance for variable interest entities that we were the primary beneficiary of Services LLC and therefore we were required to consolidate the financial results of Services LLC for financial reporting purposes.

Services LLC was governed and initially funded under the terms of a Limited Liability Company Agreement (the “LLC Agreement”) and a Contribution Agreement (the “Contribution Agreement”) between Services LLC, the Company and NLC. These agreements required us to provide substantially all of the initial working capital contributions, up to an aggregate amount of $12.3 million, and to the extent of those contributions absorb all of the losses of Services LLC. We made working capital contributions to Services LLC of $1.1 million and $1.2 million during the years ended December 31, 2011 and 2010, respectively.

Under the Contribution Agreement, which was amended in October 2010, NLC contributed a ten-year license to Services LLC to use NLC and AFL-CIO trademarks and membership lists in support of the administration, marketing and servicing of the NLC educational programs. In exchange for this license, we were required to contribute an aggregate of $20.8 million in cash payments to Services LLC (the “Capital Contribution”), to be distributed immediately upon receipt to NLC as a return of capital. We paid $5.0 million of the Capital Contribution during the second and third quarters of 2010 and an additional $5.8 million in the first quarter of 2011. Provided that NLC obtained future specified regulatory approvals, when and if necessary, and maintained its education regulatory status and certain other conditions, we were obligated to pay $5.0 million of the Capital Contribution in January 2012 and $5.0 million in January 2013. In accordance with the accounting guidance for variable interest entities and consolidations, we accounted for the Capital Contribution as the acquisition of a $20.8 million license from NLC. Accordingly, we recorded this license in other intangible assets in the accompanying 2010 consolidated balance sheet and began amortizing the asset on a straight-line basis over a ten year life. We also recorded our remaining obligation for the Capital Contribution as deferred acquisition payments ($5.8 million current, $10.0 million long term) in the accompanying 2010 consolidated balance sheet.

In November 2011, we terminated the NLC strategic relationship, whereby we transferred our 49% ownership interest in Services LLC to NLC and were relieved of all future funding obligations to Services LLC

and NLC, including the remaining $10.0 million Capital Contribution obligation for deferred acquisition payments. Under the terms of the settlement agreement, we made a final working capital payment of $0.5 million at closing. Based on this net settlement value of $9.5 million, we recorded an impairment loss of $8.4 million against the NLC license intangible asset in the third quarter of 2011. Because of the third quarter impairment charge, the carrying amount of the net assets disposed of on the closing date (primarily the NLC license intangible asset) essentially agreed to the net settlement value of $9.5 million, and therefore no gain or loss was recognized from the termination transaction in the fourth quarter of 2011. We reported the NLC license impairment loss, along with the operating results of the CEP division as discontinued operations in the accompanying consolidated statements of operations and consolidated statements of cash flows.

The Community College Partnerships business was established when we entered into an agreement with BCC in September 2010 to collaborate on education, training and degree-granting programs for healthcare professionals by expanding the number of students admitted to BCC’s healthcare professional degree-granting programs. Through the collaboration, we funded all capital and operating expenditures of the collaboration including the lease, build-out and management of a new facility in New Bedford, Massachusetts, marketing programs promoting the educational programs of the collaboration and expenses incurred by BCC in the administration and operation of the collaboration course programs. In exchange for these services, BCC compensated us through reimbursement of all costs incurred in connection with the collaboration plus a services fee, to the extent of revenues collected for the collaboration course programs.

In March 2011, we committed to a plan to dispose of the Community College Partnerships business and in May 2011, completed the sale of substantially all of the assets and liabilities of the Community College Partnerships business to Higher Education Partners, LLC (the “Buyer”), a company that is partially owned by our former Chief Executive Officer. The aggregate consideration received consisted of $3.0 million in cash that included the value of certain closing adjustments and certain liabilities assumed by the Buyer. The carrying amounts of assets and liabilities sold on the closing date were $3.2 million and $1.6 million, respectively, and we recorded a gain on the sale of these assets and liabilities of $1.4 million within discontinued operations in the consolidated statement of operations.

The former K-12 Services division provided a number of services to K-12 schools and school districts, including assessment, professional development and intervention materials (workbooks and related products). Additionally, this division received college counseling fees paid by high schools. In September 2008, we committed to a plan to dispose of the K-12 Services division and in March 2009, we completed the sale of substantially all of the assets and liabilities of the K-12 Services division to CORE Education and Consulting Solutions, Inc. (“CORE”), a subsidiary of CORE Projects and Technologies Limited, an education technology company. The aggregate consideration for the sale consisted of (i) $9.5 million in cash paid on the closing date and (ii) additional cash consideration of $2.3 million, which represented the net working capital of the K-12 Services division as of the closing date, which was finalized and paid in October 2009. As a result of this sale, a $3.2 million gain was recognized in 2009 and recorded as gain from disposal of discontinued operations in the accompanying 2009 consolidated statement of operations. In March 2010, we subleased the former K-12 Services facility located in New York City for the remaining term of the original lease, which expires in July 2014. We recorded a liability of $1.3 million in 2010 based on the estimated fair value of the remaining contractual lease rentals, reduced by the sublease rentals expected to be received under the sublease agreement. The charge for the liability was recorded in discontinued operations in the accompanying 2010 consolidated statement of operations.

Total revenue decreased by $25.1 million, or 12%, to $188.8 million in 2011 from $213.8 million in 2010. Excluding the impact of the former SES Services division, total revenue decreased by $10.4 million, or 5%, to $188.8 million from $199.2 million in 2010.

HER revenues decreased by $2.5 million, or 2%, to $100.3 million in 2011 from $102.8 million in 2010. Retail revenue decreased by approximately $6.0 million due primarily to lower enrollments despite a consumer shift towards our premium-priced products and growth in our online revenue as we continue to market our expanding online course content. Institutional revenue decreased by $1.3 million due to the loss of certain contracts in the first and second quarters of 2011, despite increases in sales bookings over the prior period. Institutional sales growth occurred in the second half of 2011. The revenue decreases were partially offset by a $4.8 million increase in licensing revenue due primarily to non-recurring, guaranteed royalty fees from Random House, Inc. under our new master publishing agreement.

Penn Foster revenues decreased by $7.9 million, or 8%, to $88.4 million in 2011 from $96.4 million in 2010. The decrease is primarily the result of lower enrollments in Penn Foster’s Career School during 2011, as compared to 2010, despite slightly higher revenues per enrollment. The lower enrollments were primarily attributed to a significant reduction in leads, as our conversion rate for leads to enrollments remained flat compared to the prior year. A lead represents a prospective student that has expressed interest in a Penn Foster course offering, either through our website, call center or by mail.

SES Services revenues of approximately $14.7 million for the year ended December 31, 2010 consisted of fees earned for the 2009-2010 academic year, which ended in June 2010. After completing programs offered in the 2009-2010 school year, we closed our SES offices and terminated employees associated with the SES business.

Total cost of goods and services sold decreased by $10.7 million, or 14%, to $66.3 million in 2011 from $77.0 million in 2010. Excluding the impact of the former SES Services division, total cost of goods and services sold decreased by $3.1 million, or 4%, to $66.3 million from $69.4 million in 2010.

HER cost of goods and services sold decreased by $1.1 million, or 3%, to $38.1 million in 2011 from $39.2 million in 2010 due primarily to a revenue mix shift. This decrease was partially offset by higher material costs from the acceleration of course material shipments, as newly implemented systems allow the division to ship materials to customers upon enrollment, rather than at course commencement. Gross margin during the year for the HER division remained flat at 62%.

Penn Foster cost of goods and services sold decreased by $2.1 million, to $28.2 million in 2011 from $30.3 million in 2010 due primarily to reduced course material costs associated with the lower enrollments. Gross margin during the period for the Penn Foster division decreased modestly from 69% to 68%.

SES Services cost of goods and services sold of $7.5 million for the year ended December 31, 2010 consisted of teacher compensation and course costs incurred for the 2009-2010 academic year, which ended in June 2010. After completing programs offered in the 2009-2010 school year, we closed our SES offices and terminated employees associated with the SES business.

Selling, general and administrative expenses decreased by $5.7 million, or 5%, to $108.7 million in 2011 from $114.4 million in 2010. Excluding the impact of the former SES Services business, total selling, general and administrative expenses decreased by $0.2 million to $108.7 million in 2011 from $108.9 million in 2010.

HER selling, general and administrative expenses increased by $1.2 million or 3%, to $49.2 million from $48.0 million in 2010 due primarily to new call center resources and travel expenses associated with expanded sales efforts combined with the third quarter 2011 implementation of new systems that resulted in temporary increases in staff levels and travel expenses.

Penn Foster selling, general and administrative expenses decreased by $2.1 million or 5%, to $43.3 million from $45.4 million in 2010 due primarily to lower advertising and promotional expenses and reduced headcount.

SES Services selling, general and administrative expenses of $5.5 million for the year ended December 31, 2010 consisted of compensation, travel and office expenditures associated with supporting the SES business. After completing programs offered in the 2009-2010 school year, we closed our SES offices and terminated employees associated with the SES business.

Corporate selling, general and administrative expenses increased by $0.7 million, or 5%, to $16.2 million from $15.5 million in 2010. Increases in professional fees were partially offset by reductions in compensation, primarily attributed to reduced headcount and lower incentive compensation.

For the year ended December 31, 2011, depreciation and amortization expense decreased by $14.3 million to $19.8 million from $34.1 million in the year ended December 31, 2010. The decrease is partially the result of $6.6 million of accelerated depreciation and amortization charges in the prior period that were not repeated in the current period. In addition, during the prior period we changed our estimated useful lives for certain fixed assets, resulting in additional depreciation and amortization expense for that period of $1.6 million. Also, approximately $7.6 million of the decrease is attributable to certain intangible assets acquired with the Penn Foster acquisition

being amortized on an accelerated basis, resulting in higher amortization in the prior period. Lastly, approximately $0.9 million of the decrease was due to the impact of assets reaching the end of their depreciable lives. These decreases were partially offset by $2.4 million of new depreciation in 2011 associated with internally developed software from our company-wide project to replace and integrate legacy system infrastructure with Penn Foster’s financial system, which was completed in August 2011.

For the year ended December 31, 2011, restructuring and other related expenses were $1.6 million as compared to $4.3 million in 2010. The charges for 2011 include approximately $1.2 million of legal and financial restructuring advisory fees and other professional fees incurred during the fourth quarter of 2011 associated with our efforts to evaluate and/or pursue various alternatives for addressing our capital structure in the near term. In addition, the 2011 charges include approximately $0.3 million of employee severance and termination benefits associated with a new initiative to streamline the operations of our HER and Penn Foster divisions. We expect this initiative to carry into the first and second quarters of 2012 as we continue to evaluate both divisions’ organizational structures, resource requirements and facility needs. The 2011 charges also include approximately $0.1 million, primarily relating to an adjustment to the liability for the remaining contractual payments for our former administrative office in New York City, as we consummated an agreement to terminate the lease effective March 31, 2011.

The restructuring charges for 2010 include $0.4 million of severance and termination benefits primarily related to the migration of call center and accounting operations based in Houston, Texas and Framingham, Massachusetts, respectively, to the Penn Foster headquarters in Scranton, Pennsylvania and $2.1 million of lease termination charges and other charges associated with the closure of our administrative office in New York City. The charges also include $0.8 million of employee severance and termination benefits and $1.0 million of office shut-down expenses associated with our decision to exit the SES business as of the end of the 2009-2010 school year.

Acquisition and integration expenses decreased by $2.3 million, or 43%, to $3.1 million in 2011 from $5.4 million in 2010. Accounting and advisory fees incurred in the prior period relating to the acquisition and audit of Penn Foster were not incurred during the current period, while both periods include integration costs associated with combining our legacy systems and operations with Penn Foster. Our multi-year company-wide effort to replace legacy system infrastructure and integrate it with Penn Foster’s financial systems was completed by the end of 2011, and we do not anticipate incurring significant integration expense in future periods.

During the third quarter of 2011, we recognized a loss on impairment of goodwill and other assets of $83.5 million. We continued to experience lower than expected profitability in the HER and Penn Foster businesses and accordingly, prepared a revised plan for 2011 and beyond that incorporated updated estimates of future demand for product offerings and projected cash flows from the implementation of new initiatives and operating strategies. As a result of these events, management determined that it was appropriate to perform interim tests for impairment in our HER and Penn Foster reporting segments and as a result, we determined that the HER division’s goodwill was impaired by $76.7 million. In addition, we determined that the Penn Foster division’s trade name, an indefinite-lived intangible asset, was impaired by $6.8 million but that the overall estimated fair value of the Penn Foster division exceeded its carrying value by approximately 9% and that goodwill allocated to the Penn Foster division was not impaired.

During the fourth quarter of 2011, we recognized a loss on impairment of goodwill and other assets of $16.4 million relating to our HER division. Management determined that it was appropriate to test for impairment in the HER and Penn Foster reporting segments because of the agreement to sell the HER division

that was entered into in March 2012 and the conclusion that there was doubt as to our ability to continue as a going concern. We determined that the remaining portion of the HER division’s goodwill was fully impaired, resulting in a goodwill impairment charge of $8.0 million. In addition, we determined that the carrying amount of the HER long-lived asset group exceeded the undiscounted cash flows expected to result from the use and anticipated disposition of the HER division. This resulted in an impairment charge of $8.4 million that was allocated to the HER division’s franchise cost intangible asset and the HER division’s internally developed software. There were no impairments in the Penn Foster reporting segment during the fourth quarter of 2011.

Interest expense decreased by $0.3 million, or 1%, to $21.5 million in 2011 from $21.8 million in 2010. A decrease of $2.3 million associated with the repayment of our bridge notes in April 2010 was partially offset by increases in interest under our credit facility due to increased borrowing levels and increases in interest under our senior subordinated and junior subordinated notes due to compounded pay-in-kind interest.

In November and December 2011, amendments to our senior subordinated notes increased our short-term liquidity by temporarily converting the 13.0% cash interest component to a payable in kind feature. Specifically, the existing interest rate under these notes of 17.5% per annum, was amended to 18.5% per annum, all of which is payable quarterly in kind from October 1, 2011 through March 31, 2013. At that time, the interest rate will revert back to 17.5% per annum, with the quarterly 13.0% cash and 4.5% payable in kind features resuming.

Other expense, net for the year ended December 31, 2011 primarily consists of $0.4 million of charges attributed to the expiration of certain tax indemnifications relating to uncertain tax positions from periods prior to the acquisition of Penn Foster and a charge of $0.1 million for third party fees associated with the amendment of our debt agreements in November and December 2011. These charges were partially offset by $0.3 million of income recognized from the change in fair value of our embedded derivatives.

Other expense, net for the year ended December 31, 2010 primarily consisted of a charge of $1.0 million related to fees and the write-off of unamortized debt issuance costs, discounts and an embedded derivative associated with the repayment in full of our bridge notes in April 2010 and a charge of $0.2 million relating to fees and expenses associated with the refinancing of our credit facility with GE Capital in August 2010. These charges were partially offset by $0.8 million of income recognized from the change in fair value of our embedded derivatives.

During 2010 and 2011, we continued to record a valuation allowance against the domestic deferred tax assets net of deferred tax liabilities that are scheduled to reverse in the foreseeable future. We will continue to record such allowances until we have established a reasonable history of generating pre-tax income coupled with an expectation of generating future pre-tax profits which substantiate an ability to recover net deferred tax assets. Accordingly, any tax benefit or provision we have recorded in 2011 or 2010 relates primarily to deferred taxes due to the temporary difference related to tax-deductible goodwill and indefinite-lived assets which cannot be expected to reverse in the foreseeable future, taxes on income related to our Canadian operations, withholding tax on income from foreign franchisees, and state taxes.

For the year ended December 31, 2011, we recorded a benefit for income taxes of $8.5 million, compared to a provision for income taxes of $1.7 million in 2010. The change during the period is primarily the result of us recording a $84.7 million goodwill impairment charge, resulting in a deferred tax asset of $8.2 million for future deductible temporary differences related to goodwill. The difference between our effective tax rate and the U.S. federal statutory rate of 34% is mainly due to tax benefits related to the goodwill and indefinite-lived asset impairment charges, state gross receipt based taxes, income taxes for our Canadian operations, foreign withholding taxes, and the partial release of a reserve due to the expiration of the statute of limitations.

Total revenue increased by $70.3 million, or 49%, to $213.8 million in 2010 from $143.5 million in 2009 .

HER revenue decreased by $7.6 million, or 7%, to $102.8 million in 2010 from $110.4 million in 2009. Approximately $4.4 million of the decrease was primarily attributable to a decrease in classroom-based course revenue, despite an increase in the total enrollments, as a higher percentage of our enrollments were in lower priced services. Tutoring revenue declined by approximately $3.6 million due to reduced hours of tutoring per student despite increased enrollments and increases in price per hour of tutoring. Institutional revenue decreased by approximately $0.8 million due to some one-time perpetual license sales in 2009 that were not repeated in 2010. These decreases were partially offset by an increase of $0.5 million in online revenues as we continued to market our expanding online course content, and an increase of $0.7 million in licensing revenue due to new publications and increased book sales.

Penn Foster revenues increased by $90.9 million, to $96.4 million in 2010 from $5.5 million in 2009. These revenues primarily represent tuition sales from individual students enrolled and completing exams in Penn Foster’s online Career School, College and High School educational institutions. The increase in revenues was primarily attributable to the Company having owned the division for the full year in 2010, as compared to the prior year when the division was acquired on December 7, 2009. The division has been pursuing a strategy of shifting enrollment focus to a more committed student base, resulting in higher revenues per enrollment. Consistent with this strategy, slightly lower enrollments during 2010, as compared to 2009 (including the pre-acquisition period), were offset by higher revenues per enrollment. In addition, effective pricing and favorable retention initiatives implemented during 2009 had a positive impact on 2010 revenues.

SES revenues decreased by $12.9 million, or 47%, to $14.7 million in 2010 from $27.6 million in 2009. This decrease was primarily attributed to declining enrollments due to the reduction in school district allocation

of funds to SES programs and greater competition from individual school districts that developed and offered internally developed SES programs. We did not generate any SES Services revenue beyond 2010 as we exited the SES business as of the end of the 2009-2010 school year.

For the year ended December 31, 2010, total cost of goods and services sold increased by $21.0 million, or 37%, to $77.0 million in 2010 from $56.0 million in 2009.

HER cost of goods and services sold decreased by $0.8 million, or 2%, to $39.2 million in 2010 from $40.0 million in 2009. Gross margin during the year for the HER division decreased modestly from 64% to 62%, primarily as a result of a slight reduction in class sizes. The reduction in class size is due to the increased number of options for our students.

Penn Foster cost of goods and services sold increased by $28.4 million, to $30.3 million in 2010 from $1.9 million in 2009. These expenses represent course materials and education, distribution and customer service costs associated with the revenue generated by the Penn Foster division. The increase was primarily attributable to the Company having owned the division for the full year in 2010, as compared to the prior year when the division was acquired on December 7, 2009. Gross margin during 2010 for the Penn Foster division was 69%.

SES cost of goods and services sold decreased by $6.6 million, or 47%, to $7.5 million in 2010 from $14.2 million in 2009 as a result of the decreased student enrollments. This decrease was partially offset by a $0.9 million inventory write-off associated with our decision to exit the SES business as of the end of the 2009-2010 school year. Gross margin for the SES Services division remained flat from 2009 to 2010 at 49%.

For the year ended December 31, 2010, selling, general and administrative expenses increased by $35.8 million, or 46%, to $114.4 million in 2010 from $78.6 million in 2009.

HER selling, general and administrative expenses decreased by $3.1 million, or 6%, to $48.0 million in 2010 from $51.1 million in 2009. This decrease is primarily due to increased efforts to reduce expenses, including salaries and advertising and marketing expenses.

Penn Foster selling, general and administrative expenses increased by $43.0 million, to $45.4 million in 2010 from $2.4 million in 2009. These expenses represent advertising, promotional, marketing and administrative costs for the Penn Foster division. The increase was primarily attributable to the Company having owned the division for the full year in 2010, as compared to the prior year when the division was acquired on December 7, 2009.

SES selling, general and administrative expenses decreased by $7.3 million, or 57%, to $5.5 million in 2010 from $12.8 million in 2009. The decrease is due primarily to lower compensation expense and cost reductions as a result of the decline in revenue and due to our decision to exit the SES business as of the end of the 2009-2010 school year. We do not expect to incur any SES selling, general and administrative expenses beyond December 31, 2010.

Corporate selling, general and administrative expenses increased by $3.2 million or 26%, to $15.5 million in 2010 from $12.3 million in 2009 primarily due to increased compensation expense and increased professional service fees attributed to our outsourced information technology function and due to the elimination of corporate overhead allocated to the SES business during the third and fourth quarters of 2010, as we are no longer operating the SES business following the 2009-2010 school year which ended in June 2010.

For the year ended December 31, 2010, depreciation and amortization expense increased by $25.8 million to $34.1 million from $8.3 million in 2009. The increase is primarily the result of $19.6 million of incremental depreciation and amortization on the fixed and intangible assets acquired with Penn Foster on December 7, 2009, coupled with $6.6 million of accelerated depreciation and amortization charges associated with actions taken to exit the SES business, to close our administrative office in New York City and to cease use of our legacy ERP system and utilize Penn Foster’s ERP system prospectively. In addition, we changed the estimated useful lives for certain fixed assets under a revised depreciation policy, resulting in additional depreciation and amortization of $1.6 million. These increases were partially offset by a $2.0 million decrease due to the impact of assets reaching the end of their depreciable lives.

For the year ended December 31, 2010, restructuring charges were $4.3 million as compared to $7.7 million in 2009. The restructuring charges for 2010 include $0.4 million of severance and termination benefits primarily related to the migration of call center and accounting operations based in Houston, Texas and Framingham, Massachusetts, respectively, to the Penn Foster headquarters in Scranton, Pennsylvania and $2.1 million of lease termination charges and other charges associated with the closure of our administrative office in New York City. The charges also include $0.8 million of employee severance and termination benefits and $1.0 million of office shut-down expenses associated with our decision to exit the SES business as of the end of the 2009-2010 school year.

The restructuring charges for 2009 related to two restructuring initiatives that were commenced during the year. In the first quarter of 2009, we announced and commenced an initiative to outsource our information technology operations, transfer the majority of remaining corporate functions located in New York City to offices located near Boston, Massachusetts, and simplify our management structure following the sale of the K-12 Services division. This initiative resulted in $5.4 million of restructuring charges, primarily related to employee severance and termination benefits and external transition fees and duplicative costs associated with the transition of information technology operations to a third party. Substantially all cash payments associated with this initiative were made by the end of 2009.

Following our acquisition of Penn Foster on December 7, 2009, we announced and commenced a restructuring initiative in the fourth quarter of 2009 that involved the consolidation of our real estate portfolio and certain operations, the reorganization of our management structure and the elimination of certain duplicative assets and functions. In conjunction with this initiative, certain senior management roles were eliminated and on December 17, 2009, we notified certain employees of our intention to close our administrative office in New York City. We incurred restructuring charges of $2.3 million for this initiative related to employee severance and termination benefits.

Acquisition and integration expenses increased by $2.4 million, or 80%, to $5.4 million in 2010 from $3.0 million in 2009. Acquisition and integration expenses in 2010 consist primarily of accounting and advisory fees associated with the acquisition and audit of Penn Foster and integration costs associated with combining our legacy systems and operations with Penn Foster. Acquisition and integration expenses in 2009 consisted of legal and accounting fees associated with due diligence and other preparations for the acquisition of Penn Foster on December 7, 2009.

Interest expense increased by $19.2 million, to $21.8 million in 2010 from $2.6 million in 2009, primarily as a result of the indebtedness to fund the Penn Foster acquisition on December 7, 2009. In April 2010, we repaid

our bridge notes in full with proceeds from a public stock offering and, as a result, saved approximately $1.6 million in quarterly interest charges. In August 2010, we refinanced our $50.0 million credit facility with General Electric Capital Corporation (“GE Capital”) by entering into a $72.5 million credit facility, consisting of a $60.0 million senior secured term loan and a $12.5 million senior secured revolving credit facility, with GE Capital and a syndicate of banks. The new credit facility provides for more favorable interest rates and greater flexibility with respect to financial maintenance covenants.

Other expense, net for year ended December 31, 2010 primarily consists of a charge of $1.0 million related to fees and the write-off of unamortized debt issuance costs, discounts and an embedded derivative associated with the repayment in full of our bridge notes in April 2010 and a charge of $0.2 million relating to fees and expenses associated with the refinancing of our credit facility with GE Capital in August 2010. These charges are primarily offset by $0.8 million of income recognized from the change in fair value of our embedded derivatives.

Other expense, net for the year ended December 31, 2009 included a charge of $0.9 million related to a prepayment premium fee and the write-off of unamortized debt issuance costs related to the retirement and cancelation of the Wells Fargo credit facility on December 7, 2009. This charge was offset in part by $0.1 million of income recognized from the change in fair value of our embedded derivatives and $0.2 million of income recognized from additional proceeds received from the sale of stock in a private investment that occurred in September 2008.

During 2009 and 2010, we continued to record a valuation allowance against the domestic deferred tax assets net of deferred tax liabilities that are scheduled to reverse in the foreseeable future. We will continue to record such allowances until we have established a reasonable history of generating pre-tax income coupled with an expectation of generating future pre-tax profits which substantiate an ability to recover net deferred tax assets. Accordingly, any tax benefit or provision we have recorded in 2010 or 2009 relates primarily to deferred taxes due to the temporary difference related to tax-deductible amortization of goodwill which cannot be expected to reverse in the foreseeable future, taxes on income related to our Canadian operations, withholding tax on income from foreign franchisees, and state taxes.

For the year ended December 31, 2010, the provision for income taxes increased by $0.9 million, to $1.7 million, from $0.8 million for the year ended December 31, 2009. The increase is mainly a result of state income taxes arising from the operations of Penn Foster. The difference between the Company’s effective tax rate and the U.S. federal statutory rate of 34% is mainly due to state and foreign income taxes from operations in jurisdictions that cannot benefit from the Company’s losses, as well as the effect of tax-deductible goodwill, for which a deferred tax liability has been recorded.

Our primary sources of liquidity during the year ended December 31, 2011 were cash and cash equivalents on hand, cash flow generated from operations, borrowings under our revolving credit facility and proceeds from the sale of our Community College Partnerships business, a discontinued operation. Our primary uses of cash during the year ended December 31, 2011 were capital expenditures, scheduled repayments of our term loan credit facility, voluntary repayments of borrowings under our revolving credit facility and investments in our former NLC strategic venture, a discontinued operation. At December 31, 2011 we had $11.7 million of liquidity, comprised of $5.6 million of cash and cash equivalents, $1.1 million of accessible borrowing availability under our $12.5 million revolving credit facility and $5.0 million of borrowing availability under a new facility obtained from our senior subordinated note holders in November 2011 (described below).

As of December 31, 2011, we were in compliance with our debt covenants. On March 26, 2012, we entered into an asset purchase agreement to sell our HER division. Upon the closing of the sale, which is expected to occur within the next 30 to 60 days (the “Sale Closing”), we will report the HER division as a discontinued operation beginning in the first quarter of 2012 (the “HER Discontinued Operation”). As a result of the HER Discontinued Operation, we will no longer be able to include the division’s current and prior earnings for the purposes of determining compliance with our existing debt covenants. We are currently discussing with our lenders a debt covenant waiver or amendment that accounts for the HER Discontinued Operation impact, but there are no assurances that we will be able to comply with our future covenants without such a waiver or an amendment.

In addition, we continue to operate with limited liquidity. Total liquidity as of December 31, 2011 was $11.7 million, comprised of $5.6 million of cash and cash equivalents, $1.1 million of accessible borrowing availability under our $12.5 million revolving credit facility and $5.0 million of borrowing availability under a new facility obtained from our senior subordinated note holders in November 2011. While, upon the Sale Closing, we expect to receive cash proceeds in excess of $25.0 million, our senior secured debt agreements require the sale proceeds to be used to reduce its existing debt. We are currently discussing with our senior secured lenders an amendment or refinancing to improve the liquidity position of the Company, but there are no assurances that we will be able to secure such an amendment or refinancing.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. We have incurred losses from continuing operations and have a net working capital deficit and a stockholders’ deficit. These conditions, including the limited liquidity described above raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management continues to take actions to increase profitability and liquidity by improving operating efficiencies and sales execution. In addition, management continues to aggressively pursue opportunities to address its capital structure in the near term by evaluating and/or pursuing various alternatives including, but not limited to, raising capital through issuances of new securities, swapping debt for equity, securing additional debt financing from new or existing investors and/or raising capital through the sale of assets, including the aforementioned agreement to sell the HER division. As part of these efforts, we have engaged legal and financial restructuring advisors, and are in discussions with our senior credit facility lenders, subordinated note holders and preferred stockholders regarding the terms of a restructuring. While there is no assurance that we will be able to successfully restructure our debt, we anticipate that a restructuring to significantly deleverage our balance sheet will entail significant dilution to the Company’s existing stockholders that results in the stockholders owning, at most, a very small percentage of our outstanding common stock.

In November 2011, we terminated the NLC strategic venture, relieving us from future funding obligations to the venture and NLC, including the $10.0 million obligation for deferred acquisition payments. In November and December 2011, we also amended our existing debt agreements. The amendments provide us with greater flexibility in maintaining covenant compliance by waiving maximum leverage ratio covenants through March 2012, and increasing leverage ratio limits through the remainder of 2012. The amendments also waive minimum fixed charge coverage ratios through December 2012 and lower a minimum liquidity covenant requirement through maturity. Additionally, the amendments require us to maintain minimum adjusted EBITDA levels (as defined) and in June 2012, we will be required to maintain minimum ratios of adjusted EBITDA (as defined) to cash interest expense (as defined).

The amendments of our Senior Subordinated Note Purchase Agreement with investment funds of Falcon Investment Advisors and Sankaty Advisors, LLC in November and December 2011 also increased our short-term liquidity by converting the 13.0% cash component of the senior subordinated notes interest rate to a payable-in-kind feature through March 31, 2013. Specifically, the existing interest rate under the senior subordinated notes of 17.5% per annum, of which 13.0% was payable quarterly in cash and 4.5% was payable quarterly in kind, is amended to 18.5% per annum, all of which is payable quarterly in kind from October 1, 2011 until March 31, 2013. At that time the interest rate will resort back to 17.5% per annum, with the quarterly 13.0% cash and 4.5% payable in kind features resuming.

The amendment to the Senior Subordinated Note Purchase Agreement also provides us with a second lien delayed draw facility whereby we may borrow up to $5.0 million at any time through June 30, 2012. Once utilized, the delayed draw facility will bear interest at 17.5%, payable in cash on a quarterly basis. This facility matures on March 7, 2015 and is subject to the same covenant requirements as the Senior Subordinated Notes.

In addition to generating positive income from operations, the timing of cash payments received under our customer arrangements is a primary factor impacting our liquidity. Our HER and Penn Foster divisions generate the largest portion of our cash flow from operations primarily from retail classroom, online and tutoring courses. These customers usually pay us in advance or contemporaneously with the services we provide, thereby supporting our short-term liquidity needs. Across HER and Penn Foster, we also generate 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 year ended December 31, 2011 were $4.6 million as compared to $6.6 million for the year ended December 31, 2010. The decrease is primarily the result of reduced profitability in our HER and Penn Foster divisions and the loss of operating cash flow from the former SES Services business, partially offset by lower cash interest payments from the conversion of senior subordinated note interest from cash to payable in kind during the fourth quarter of 2011 and from the April 2010 elimination of the bridge notes.

Cash flows provided by operating activities from continuing operations for the year ended December 31, 2010 were $6.6 million as compared to $3.5 million for the year ended December 31, 2009. The increase for this period was primarily attributed to cash generated from Penn Foster’s operations, having owned the division for the full year in 2010, as compared to the prior period when the division was acquired on December 7, 2009. The increase was partially offset by cash interest payments under our term loan credit facility and the bridge and senior subordinated notes totaling $12.7 million, lower SES revenues and related collections and decreased profitability in our HER division.

Cash flows used for investing activities from continuing operations during the years ended December 31, 2011, 2010 and 2009 were $9.7 million, $17.0 million and $178.6 million, respectively. Expenditures for furniture, fixtures and equipment were $0.7 million, $2.7 million and $0.9 million in 2011, 2010 and 2009, respectively. These expenditures were higher during 2010, primarily due to site improvements and investments made in new telecommunications and other equipment after the acquisition of Penn Foster. We also invested $8.8 million, $13.4 million and $8.4 million in 2011, 2010 and 2009, respectively, in the development of internal use software and content to improve our ERP and customer support technology and expand our online offerings. Our multi-year company-wide effort to replace legacy system infrastructure and integrate it with Penn Foster’s financial system was completed in the third quarter of 2011. During 2010, we also paid $0.5 million relating to the final settlement of the Penn Foster post-closing working capital adjustments and earn out payments of $0.6 million relating to previously acquired HER franchises. During 2009, $169.4 million of cash was expended for the acquisition of Penn Foster (net of cash acquired).

Cash flows provided by financing activities during the years ended December 31, 2011, 2010 and 2009 were $2.9 million, $26.6 million and $167.7 million, respectively. Cash provided by financing activities in 2011 primarily consists of net borrowings under our revolving credit facility of $11.0 million, partially offset by $6.0 million in scheduled principal payments under our term loan credit facility, amendment fees of $1.9 million paid to lenders for debt amendments made in March, November and December 2011 and $0.2 million of cash paid for capital lease and note payable obligations.

Cash provided by financing activities in 2010 primarily consisted of $20.3 million in net proceeds from incremental term loan borrowings under our refinanced credit facility in August 2010, $44.3 million in net proceeds from the issuance of 16.1 million shares of common stock in April 2010 and $9.5 million in net proceeds from the issuance of Series E Preferred Stock in March 2010, offset by the $40.8 million repayment of the bridge notes in April 2010, $5.0 million in scheduled principal payments under our original and amended term loan credit facilities, $1.0 million of cash paid for debt issuance costs and $0.6 million of cash paid for capital lease and note payable obligations.

Cash provided by financing activities in 2009 primarily related to the Penn Foster financings on December 7, 2009. The net proceeds received, after deducting fees paid to lenders and investors, were (i) $36.6 million under the credit agreement entered into with General Electric Capital Corporation (ii) $49.6 million under the senior subordinated note purchase agreement entered into with Sankaty and Falcon, (iii) $24.8 million under the securities purchase agreement entered into with Sankaty and Falcon, (iv) $39.7 million under the bridge note purchase agreement entered into with Sankaty, and (v) $38.4 million from the issuance of 40,000 shares of Series E Preferred Stock. In addition to fees paid to lenders and investors, the Company expended $1.5 million for debt issuance costs relating to legal, accounting and transaction advisory fees associated with the new debt facilities. Refer below for additional information on the Penn Foster financings. During 2009, we also received $4.5 million of proceeds from borrowings under our Wells Fargo revolving line of credit to fund short term working capital needs. With $7.1 million of proceeds from the Penn Foster financings, $9.5 million of proceeds from the sale of our K-12 Services division (a discontinued operation), $0.2 million of additional proceeds from the sale of stock in a private investment that occurred in September 2008, and $6.7 million of cash from operations, we repaid all outstanding term and revolving obligations under our Wells Fargo credit facility. On December 7, 2009, we terminated the Wells Fargo credit facility.

Cash flows used for discontinued operations were $6.9 million and $11.5 million for the years ended December 31, 2011 and 2010, respectively, as compared to cash provided by discontinued operations for the year ended December 31, 2009 of $8.4 million. Cash used in the operations of our discontinued businesses was $2.9 million, $4.6 million and $1.4 million in 2011, 2010 and 2009, respectively, and related primarily to the startup and pre-termination operation of our former CEP businesses, including the strategic ventures with NLC and BCC during 2011 and 2010, and to the pre-sale operation of our former K-12 Services division in 2009. Also included in 2011 and 2010 operating cash outflows are rent and real estate tax payments (net of sublease payments) on the former K-12 Services facility in New York City.

Cash used for investing activities of our discontinued businesses was $4.0 million and $6.9 million in 2011 and 2010, respectively, as compared to cash provided by investing activities of $9.8 million in 2009. Cash used for investing activities in 2011 include a $5.8 million payment to NLC under our former obligation for the acquisition the NLC license and $1.3 million of pre-sale capital expenditure activity, primarily relating to a facility build-out under our former BCC collaboration. These payments were offset by $3.0 million of net cash proceeds from the sale of our Community College Partnerships business in May 2011. Cash used for investing activities in 2010 included a $5.0 million payment to NLC under our former obligation for the acquisition the NLC license and $1.9 million of capital expenditure activity, primarily relating to the facility build-out under our former BCC collaboration. Cash provided by investing activities in 2009 included $10.1 million of net cash proceeds from the sale of the K-12 Services division in March 2009, partially offset by $0.4 million of pre-sale capital expenditure activity.

On December 7, 2009, we acquired Penn Foster for an aggregate purchase price in cash of $170.0 million plus a working capital payment of approximately $6.2 million paid at closing, and $0.5 million paid in March 2010. To finance the acquisition, we (i) borrowed $40.0 million through a term loan under a credit agreement

entered into with GE Capital (ii) borrowed $51.0 million under a senior subordinated note purchase agreement entered into with Sankaty Credit Opportunities IV, LP (“Sankaty”) and Falcon Mezzanine Partners II (and certain of its affiliates) (“Falcon”), (iii) borrowed $25.5 million in junior subordinated debt under a securities purchase agreement entered into with Sankaty and Falcon, (iv) borrowed $40.8 million under a bridge note purchase agreement entered into with Sankaty, and (v) issued an aggregate of 98,275 shares of Series E Non-Convertible Preferred Stock (“Series E Preferred Stock”) with a stated value of $1,000 per share, including 54,000 shares of Series E Preferred Stock in exchange for all outstanding Series C Convertible Preferred Stock.

The terms of these financings and subsequent amendments are described in greater detail below.

On December 7, 2009, concurrent with the Penn Foster acquisition, the Company entered into a credit agreement with GE Capital, as administrative agent, and any financial institution who thereafter becomes a Lender (as defined therein) (the “Original Credit Facility”), pursuant to which GE Capital agreed to provide the Company with senior secured credit facilities consisting of a five year $40.0 million senior secured term loan and a $10.0 million senior secured revolving credit facility. At closing, the Company drew down the full amount of the term loan and used the net proceeds of $36.6 million (after deducting lender fees) to fund a portion of the Penn Foster acquisition and to prepay indebtedness under the Company’s previous credit facility.

On August 6, 2010, the Company refinanced the Original Credit Facility with GE Capital by entering into an amended and restated credit agreement with GE Capital, as administrative agent, and any financial institution who becomes a Lender (as defined therein) (the “Credit Agreement”), pursuant to which the Lenders agreed to provide the Company with senior secured credit facilities (the “Senior Credit Facilities”) consisting of a $60.0 million senior secured term loan and a $12.5 million senior secured revolving credit facility. The Senior Credit Facilities provided the Company with more favorable interest rates and greater flexibility with respect to financial maintenance covenants than those under the Original Credit Facility. The Company accounted for the August 6, 2010 refinancing as a loan modification and, accordingly, lender fees paid at closing of $1.7 million were recorded as additional credit facility discount and will be amortized, along with the preexisting discount and unamortized debt issuance costs, to interest expense over the remaining life of the Senior Credit Facilities. Approximately $0.2 million of fees paid to third parties relating to the refinancing were expensed as incurred and recorded in other (expense) income, net in the accompanying 2010 consolidated statement of operations. The net proceeds received from the refinancing of $20.3 million (after deducting lender fees) were used to invest in strategic initiatives and for general working capital purposes.

During the year ended December 31, 2011, the Company borrowed $20.0 million and repaid $9.0 million under the revolving credit facility. The Company did not borrow under the revolving credit facility during 2010. Three letters of credit totaling approximately $0.4 million were issued under the revolving credit facility during 2010 and were outstanding as of December 31, 2011 and 2010. The Company had accessible borrowing availability under the revolving credit facility of approximately $1.1 million and $8.9 million as of December 31, 2011 and 2010, respectively.

Borrowings under the Senior Credit Facilities bear interest through the five-year maturity at a variable rate based upon, at the Company’s option, either LIBOR or the base rate (which is the highest of (i) the prime rate, (ii) 3.0% plus the overnight federal funds rate, and (iii) 1.0% in excess of the three-month LIBOR rate), plus in each case, an applicable margin. The applicable margin for LIBOR loans is 5.0% to 5.5% per annum (5.5% to 6.0% under the Original Credit Facility), based on the total leverage ratio (as defined), with a LIBOR floor of 1.5% (2.0% under the Original Credit Facility). The applicable margin for base rate loans is 4.0% to 4.5% per annum (4.5% to 5.0% under the Original Credit Facility), based on the total leverage ratio (as defined). The Company is required to pay a commitment fee equal to 0.75% per annum on the undrawn portion available under the revolving loan facility and variable per annum fees in respect of outstanding letters of credit. The overall weighted average interest rate in effect under the term loan and revolving credit facility for the years ended

December 31, 2011 and 2010 and for the period from December 7, 2009 to December 31, 2009 was 7.01%, 7.46% and 8.25%, respectively. The effective interest rate on the term loan when factoring in the lender fee discounts as of December 31, 2011 and 2010 was approximately 10.0% and 9.0%, respectively.

The Credit Agreement provides for quarterly installment payments under the term loan facility of $1.5 million through December 20, 2011, $2.3 million from March 20, 2012 through December 20, 2012, $3.0 million from March 20, 2013 through September 20, 2014, and a $21.0 million balloon payment at maturity on December 7, 2014. The Company is also required to make mandatory prepayments of the Senior Credit Facilities, subject to specified exceptions, from excess cash flow, and with the proceeds of asset sales, debt and specified equity issuances. During the years ended December 31, 2011 and 2010, the Company repaid $6.0 million and $5.0 million of the senior secured term loan.

The Company’s obligations under the Senior Credit Facilities are guaranteed by all of the Company’s direct and indirect domestic subsidiaries. In addition, the obligations under the Senior Credit Facilities and the guarantees are secured by a lien on substantially all of the Company’s tangible and intangible property, by a pledge of all of the equity interests of the Company’s direct and indirect domestic subsidiaries, and by a pledge of 66% of the equity interests of the Company’s direct foreign subsidiaries, subject to limited exceptions.

In addition to other covenants, the Credit Agreement places limits on the Company and its subsidiaries’ ability to declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, make capital expenditures, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Credit Agreement also contains events of default, including cross defaults under other debt obligations of the Company, and affirmative covenants, including financial maintenance covenants. The financial maintenance covenants include maximum ratios of total debt (as defined) to adjusted EBITDA (as defined), that decrease with the passage of time, and minimum ratios of adjusted cash flows (as defined) to fixed charges (as defined), that increase with the passage of time. A maximum capital expenditures covenant limits the Company’s annual capital expenditures to not more than $15.0 million, excluding certain capital expenditures related to strategic ventures (as defined). Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the Credit Agreement to declare all amounts borrowed under the Credit Agreement, together with accrued interest and fees, to be immediately due and payable.

To provide greater flexibility in maintaining covenant compliance, the Company entered into first and second amendments to the Credit Agreement in March 2011 and November 2011, respectively. In addition to adjusting the leverage and fixed charge coverage ratio covenants, the first amendment in March 2011 increased the interest rate under the Credit Agreement by 0.25% and added a minimum liquidity covenant that requires the Company to maintain a minimum level of cash on hand, including accessible borrowing availability under the revolving credit facility (as defined). The second amendment in November 2011 lowered the minimum liquidity covenant requirement through maturity, waived maximum leverage ratio covenants through March 2012 (and increased limits through the remainder of 2012) and waived minimum fixed charge coverage ratios through December 2012. In addition, this amendment requires the Company to maintain minimum adjusted EBITDA levels (as defined) and in June 2012, the Company will be required to maintain minimum ratios of adjusted EBITDA (as defined) to cash interest expense (as defined). The amendments also eliminate the Company’s ability to make future acquisitions and investments in strategic ventures. As of December 31, 2011, the Company was in compliance with all of its debt covenants.

These amendments were accounted for as loan modifications and accordingly, lender fees paid at closing ($0.6 million and $0.7 million in March and November 2011, respectively) were recorded as additional credit facility discount and will be amortized, along with the preexisting discount and unamortized debt issuance costs, to interest expense over the remaining life of the Senior Credit Facilities. Approximately $0.1 million of fees paid to third parties relating to the amendments were expensed as incurred and recorded in other expense, net in the accompanying 2011 consolidated statement of operations.

If by March 31, 2012 the Company does not have commitments from new institutions, investors or other third parties that result in at least a $25.0 million repayment of the GE Senior Credit Facilities, the Company will be obligated to pay GE Capital an additional amendment fee of approximately $0.6 million. If such commitments are not obtained by June 30, 2012, the Company will be obligated to pay an additional amendment fee of approximately $1.8 million. The additional amendment fees, if incurred, are due and payable on April 1, 2013. On March 26, 2012 the Company entered into an agreement to sell the HER division for $33.0 million in cash, subject to a working capital adjustment, and expects to use the net proceeds from the sale to repay at least $25.0 million under the GE Senior Credit Facilities. Accordingly, the Company does not expect to incur these additional amendment fees.

On December 7, 2009, the Company entered into a senior subordinated note purchase agreement (the “Senior Note Purchase Agreement”) which the aggregate principal amount of approximately $51.0 million senior subordinated notes of the Company (the “Term B Notes”) were purchased. The Company used the net proceeds of $49.6 million (after deducting original issue discount and lender fees) to fund the Penn Foster acquisition.

In August 2010, and again in March, November and December 2011, the Company entered into amendments to the Senior Note Purchase Agreement that provided the Company with, among other things, greater flexibility in maintaining covenant compliance. The amendments in November and December 2011 also increased the Company’s short-term liquidity by adjusting the interest terms on the Term B Notes (described below) and by providing the Company with a second lien delayed draw facility (the “Term A Notes”, and collectively with the Term B Notes, the “Senior Subordinated Notes”) whereby the Company may borrow up to $5.0 million at any time through June 30, 2012. Once utilized, the delayed draw facility will bear interest at 17.5%, payable in cash on a quarterly basis. The Term A Notes mature on March 7, 2015. If the Company prepays any outstanding advances under the Term A Notes prior to maturity, the Company would be obligated to pay a prepayment premium ranging from 2.0% to 10.0%, depending on the timing and amount of the prepayment. The Company paid a $0.1 million fee for the Term A Notes facility in November 2011 which it recorded as deferred debt issuance costs in other long term assets in the accompanying 2011 consolidated balance sheet and which is being amortized to interest expense over the life of the facility. No amounts were outstanding under the Term A Notes as of December 31, 2011.

The Term B Notes mature on June 7, 2015, unless otherwise prepaid or accelerated. The Term B Notes bear interest at 17.5% per annum, of which 13.0% is payable quarterly in cash and 4.5% is payable quarterly in kind or, at the Company’s option, in cash. The amendments in November and December 2011 increased the Company’s short-term liquidity by temporarily converting the 13.0% cash component to a payable in kind feature. Specifically, the existing interest rate under the Term B Notes of 17.5% per annum, was amended to 18.5% per annum, all of which is payable quarterly in kind from October 1, 2011 through March 31, 2013. At that time, the interest rate will resort back to 17.5% per annum, with the quarterly 13.0% cash and 4.5% payable in kind features resuming. The Term B Notes are subject to a default interest rate of an additional 2% upon the occurrence of an event of default. The effective interest rate on the Term B Notes when factoring in discounts was 19.5% as of December 31, 2011.

The Senior Note Purchase Agreement contains various provisions which require the Company to make mandatory prepayments on the Term B Notes, subject to specified exceptions, with the proceeds of asset sales, debt and specified equity issuances and changes of control. In the event of a prepayment upon a change of control occurring after the 24 month anniversary of the closing date, the change of control premium is equal to 101% of the principal amount outstanding. In the event of a prepayment upon an asset sale or debt and specified equity issuances prior to the 30 month anniversary of the closing date, the prepayment premium is equal to all interest and fees that would have been due from the date of the prepayment through the 30 month anniversary of the closing date, discounted at a rate equal to the Treasury rate in effect plus 0.50% plus 102% of the principal amount outstanding. In the event of a prepayment upon an asset sale or debt and specified equity issuances after the 30 month anniversary of the closing date and on or before the 42 month anniversary of the closing date, the prepayment premium will be equal to 2% of the principal balance then outstanding. In the event of a prepayment

upon an asset sale or debt and specified equity issuances after the 42 month anniversary of the closing date and on or before the 54 month anniversary of the closing date, the prepayment premium will be equal to 1% of the principal balance then outstanding. There is no prepayment premium due in the event of a prepayment upon an asset sale or debt and specified equity issuances after the 54 month anniversary of the closing date.

The provisions requiring mandatory prepayments due upon a change of control, an asset sale and debt and specified equity issuances constitute a compound embedded derivative that is being accounted for separately. The Company determined that the fair value of this embedded derivative upon the issuance of the Term B Notes was $0.5 million which was subtracted from the original carrying amount of the Term B Notes and reflected as a debt discount, and also increased long-term liabilities by $0.5 million. The debt discount is amortized as interest expense using the effective interest method. In subsequent fiscal quarter-end periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) in the consolidated statement of operations. As of December 31, 2011 and 2010, the fair value of the embedded derivative was $0.2 million and $0.2 million, respectively, and the Company recorded gains of $0.01 million, $0.3 and $0.04 million in other expense, net in the accompanying consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company’s obligations under the Senior Subordinated Notes are guaranteed by all of the Company’s direct and indirect domestic subsidiaries. The Senior Note Purchase Agreement also grants the holders of the Senior Subordinated Notes rights of first offer with respect to certain debt issuances which may be undertaken by the Company in the future.

In addition to other covenants, the Senior Subordinated Notes place limits on the Company and its subsidiaries’ ability to declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make loans and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, make capital expenditures, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Senior Notes also contain events of default, including cross defaults under other debt obligations of the Company, and affirmative covenants, including financial maintenance covenants. The financial maintenance covenants include maximum ratios of total debt (as defined) to adjusted EBITDA (as defined), that decrease with the passage of time, and minimum ratios of adjusted cash flows (as defined) to fixed charges (as defined), that increase with the passage of time. A maximum capital expenditures covenant limits the Company’s annual capital expenditures to not more than $17.3 million, excluding certain capital expenditures related to strategic ventures (as defined). Failure to comply with these covenants, or the occurrence of an event of default, could permit the holders of the Senior Notes to declare all amounts, together with accrued interest and fees, to be immediately due and payable.

As mentioned above, the Company entered into amendments to the Senior Note Purchase Agreement in August 2010, and again in March, November and December 2011 to provide, among other things, greater flexibility in maintaining covenant compliance. In addition to adjusting the leverage and fixed charge coverage ratio covenants, the March 2011 amendment added a minimum liquidity covenant that requires the Company to maintain a minimum level of cash on hand. The amendment in November 2011 lowered the minimum liquidity covenant requirement through maturity, waived maximum leverage ratio covenants through March 2012 (and increased limits through the remainder of 2012) and waived minimum fixed charge coverage ratios through December 2012. In addition, this amendment requires the Company to maintain minimum adjusted EBITDA levels (as defined). The amendments also eliminate the Company’s ability to make future acquisitions and investments in strategic ventures. As of December 31, 2011, the Company was in compliance with all of its debt covenants.

The November 2011 amendment was accounted for as a loan modification and accordingly, lender fees of $0.4 million paid in November 2011 were recorded as additional debt discount and will be amortized, along with the preexisting discount and unamortized debt issuance costs, to interest expense over the remaining life of the Term B Notes. No significant fees were paid to lenders for any of the other amendments in 2010 or 2011.

On December 7, 2009, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) in which the aggregate principal amount of approximately $25.5 million of junior subordinated notes of the Company (the “Junior Notes”) were purchased. The holders of the Junior Notes received an aggregate of 4,275 shares of Series E Non-Convertible Preferred Stock of the Company (the “Series E Preferred Stock”). The terms of the Series E Preferred Stock are more fully described below. The Company used the net proceeds of $24.8 million (after deducting original issue discount and lender fees) to fund the Penn Foster acquisition.

The gross offering proceeds of $25.5 million were allocated between the Junior Notes ($21.2 million) and the Series E Preferred Stock ($4.3 million) based on their relative fair values. The value ascribed to the Series E Preferred Stock is reflected as a discount to the Junior Notes in the accompanying December 31, 2009 balance sheet and is being amortized to interest expense utilizing the effective interest method over the applicable term of 6.5 years. The Junior Notes mature on June 7, 2016, unless otherwise prepaid or accelerated pursuant to the terms thereof. The Junior Notes bear interest at 17.5% per annum, all of which is payable quarterly in kind. The interest rate applicable to the Junior Notes will increase to 18.5% per annum upon an event of default under the Senior Notes that remains uncured for 45 days. In addition, the Junior Notes are subject to a default interest rate of an additional 2% upon the occurrence of an event of default, which may be increased by 0.5% for each 6 month period that such event of default shall remain uncured. The effective interest rate on the Junior Notes when factoring in discounts is 21.4%.

The Company may not prepay the Junior Notes prior to June 6, 2011. The Company has the option to prepay the Junior Notes at a redemption price of 1.9 times the outstanding principal amount from June 7, 2011 to December 6, 2012, a redemption price of 2.4 times the outstanding principal amount from December 7, 2012 to December 6, 2013, and thereafter at a redemption price of 102% of the principal plus all accrued interest on the Junior Notes.

The Company is required to redeem the Junior Notes upon the election of a majority of the holders of the Junior Notes (i) if the ratio of consolidated total debt to consolidated adjusted EBITDA exceeds 6.00 to 1 at any time after the Senior Notes cease to be outstanding or (ii) upon a change of control or other liquidation event of the Company. The redemption price for a mandatory redemption is equal to the outstanding principal amount plus accrued interest on the Junior Notes, except that, in the case of a redemption for a change of control or other liquidation event of the Company within 18 months of the closing, the redemption price would have been 1.9 times the original aggregate amount of the Junior Notes. The provision for prepayment due upon the holders’ election to redeem the Junior Notes constitutes an embedded derivative and has been accounted for separately. The Company determined that the fair value of the embedded derivative upon the issuance of the Junior Notes was $1.0 million and was subtracted from the original carrying amount of the Junior Notes and reflected as a debt discount, and also increased long-term liabilities by $1.0 million. The debt discount is amortized as interest expense using the effective interest method. In subsequent fiscal quarter-end periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) in the statement of operations. As of December 31, 2011 and 2010, the fair value of the embedded derivative was $0.2 million and $0.5 million, respectively and the Company recorded gains of $0.3 million, $0.4 million and $0.05 million in other (expense) income, net in the accompanying consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company’s obligations under the Junior Notes are guaranteed by all of the Company’s direct and indirect domestic subsidiaries. The Securities Purchase Agreement also grants the holders of the Junior Notes rights of first offer with respect to certain debt issuances which may be undertaken by the Company in the future.

In addition to other covenants, the Junior Notes place limits on the Company and its subsidiaries’ ability to, declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make loans, incur additional indebtedness, amend or otherwise alter debt and other material agreements, make capital expenditures, engage in mergers, acquisitions and asset sales, transact with

affiliates and alter its business. The Junior Notes also contain events of default, including cross defaults under other debt obligations of the Company, and affirmative covenants, including a financial covenant requiring the Company to maintain a ratio of consolidated total debt to consolidated adjusted EBITDA ratio of less than 6.00 to 1 at any time after the Senior Notes cease to be outstanding. Failure to comply with these covenants, or the occurrence of an event of default, could permit the holders of the Junior Notes to declare all amounts thereunder, together with accrued interest and fees, to be immediately due and payable.

On December 7, 2009, the Company entered into a bridge note purchase agreement (the “Bridge Note Purchase Agreement”) in which the aggregate principal amount of approximately $40.8 million of Bridge Notes were purchased. The Company used the net proceeds of $39.7 million (after deducting original issue discount and lender fees) to fund the Penn Foster acquisition.

On April 21, 2010, the Company used $35.0 million of the net proceeds from the sale of common stock to repay a portion of the Bridge Notes. On April 29, 2010, the Company repaid the remaining balance of $5.8 million under the Bridge Notes with proceeds from the over-allotment option of the common stock offering. In conjunction with the repayments, the Company recorded charges of $1.0 million in the second quarter of 2010 related to fees and the write-off of unamortized debt issuance costs, discounts and an associated embedded derivative, which are reflected in other expense, net in the accompanying 2010 consolidated statement of operations.

The Bridge Notes bore interest at 15.5% per annum for the first 12 months and 17.5% per annum thereafter, all of which was payable in cash on a quarterly basis beginning on March 31, 2010, or upon prepayment if earlier. The Bridge Notes were subject to a default interest rate of an additional 2% upon the occurrence of an event of default. The effective interest rate on the Bridge Notes when factoring in discounts was 18.4%.

On April 21, 2010, the Company shareholders approved the conversion of 108,275 shares of Series E Non-Convertible Preferred Stock (the “Series E Preferred Stock”) into 111,503 shares of Series D Convertible Preferred Stock (the “Series D Preferred Stock”). The conversion was mandatory, with the shares of Series E Preferred Stock converting into shares of Series D Preferred Stock at a conversion rate per share equal to (i) $1,000 plus the accumulating rate of return thereon divided by (ii) $1,000 per share. The Series D Preferred Stock is convertible into shares of common stock of the Company at any time at the option of the holder thereof at an initial conversion rate equal to a common stock equivalent price of $4.75 per share. As of December 31, 2011 and 2010, the Series D Preferred Stock was convertible into approximately 26,760,000 and 24,781,000 shares, respectively, of common stock. Dividends on the Series D Preferred Stock accrue and are cumulative at the rate of 8.0% per year, compounded annually until December 7, 2014, and will terminate thereafter. Dividends on the Series D Preferred Stock will not be paid in cash except in connection with certain events of liquidation, change of control or redemption. The Series D Preferred Stock is redeemable at the Company’s option if the Company’s common stock trades at or above certain values for certain periods of time, at the option of the holders thereof upon a change of control of the Company, and at the option of holders of at least 10% of the outstanding shares thereof on or after December 7, 2017.

The excess of the carrying amount of the Series E Preferred Stock on April 21, 2010 ($112.6 million, exclusive of unamortized Preferred Stock issuance costs) over the conversion value of the Series D Preferred Stock ($111.5 million) was recognized in the second quarter of 2010 as earnings available to common shareholders in the accompanying 2010 consolidated statement of operations. The unamortized Preferred Stock issuance costs will continue to be accreted to additional paid-in capital through December 7, 2014.

things, (i) creating or issuing any equity securities or securities convertible into equity securities with equal or superior rights, preferences or privileges to those of the Series D Preferred Stock or Series E Preferred Stock; (ii) altering, amending or waiving the Certificate of Incorporation or By-laws in a manner that affects the rights, preferences or powers of the Series D Preferred Stock or Series E Preferred Stock; (iii) increasing or decreasing the number of authorized shares of Series D Preferred Stock or Series E Preferred Stock; (iv) declaring or paying any dividends on, or making any redemption of any capital stock, except for certain exceptions; (v) issuing any debt securities which are convertible into capital stock; (vi) except as set forth in the applicable Certificate of Designation, merging with or into or consolidating with any other person, except for mergers or consolidations involving the issuance of shares of capital stock or cash not exceeding the thresholds specified in the applicable Certificate of Designation, or engage in any change of control transaction or (vii) hiring, terminating or replacing the Company’s Chief Executive Officer.

On December 7, 2009, the Company entered into a Series E Preferred Stock Purchase Agreement (the “Series E Purchase Agreement”) with Bain Capital Venture Fund 2007, L.P., BCVI-TPR Integral L.P. and their affiliates, Prides Capital Fund I LP, RGIP, LLC and Falcon and its affiliates (collectively, the “Series E Purchasers”), providing for the conversion of all of the outstanding shares of Series C Convertible Preferred Stock (60,000 shares) of the Company (the “Series C Preferred Stock”) into 54,000 shares of Series E Preferred Stock of the Company and the issuance and sale of an additional $40.0 million of Series E Preferred Stock (40,000 shares) at a purchase price of $1,000 per share. The Company completed the issuance of the Series E Preferred Stock simultaneously with the execution of the transaction documents. Immediately following the closing of the issuance of the Series E Preferred Stock, the Company filed a Certificate of Elimination eliminating the Series C Preferred Stock.

The excess of the carrying amount of the Series C Preferred Stock on December 7, 2009 ($67.3 million) over the fair value of the Series E Preferred Stock received in the conversion ($54.0 million) was recognized as earnings available to common shareholders in the accompanying consolidated statement of operations for the year ended December 31, 2009. The Company used the net cash proceeds from the issuance and sale of 40,000 shares of Series E Preferred stock ($38.4 million after deducting issuance costs) to fund the Penn Foster acquisition.

The holders of the Junior Notes received an aggregate of 4,275 shares of Series E Preferred Stock for no additional consideration. The Junior Notes gross offering proceeds of $25.5 million were allocated between the Junior Notes ($21.2 million) and the Series E Preferred Stock ($4.3 million) based on their relative fair values.

On March 12, 2010, the Company issued an additional $10.0 million of Series E Preferred Stock to Camden Partners Strategic Fund IV, L.P. and Camden Partners Strategic Fund IV-A, L.P. (together, “Camden”) at a purchase price of $1,000 per share on the same terms and conditions as the existing Series E Purchasers pursuant to the Series E Purchase Agreement among the Company and the original Series E Purchasers. In connection with this purchase, Camden also became a party to the Amended and Restated Investor Rights Agreement, dated December 7, 2009, with Camden, the existing Series E Purchasers and certain other parties pursuant to which the Company granted Camden demand registration rights, information rights and preemptive rights with respect to certain issuances which may be undertaken by the Company in the future identical to the rights granted to the existing Series E Purchasers upon the initial sale of Series E Preferred Stock on December 7, 2009. The net proceeds of this issuance ($9.5 million after deducting issuance costs and fees) have and will be used to fund contribution obligations under the Contribution Agreement with the National Labor College and for general working capital purposes.

Conversion. As described above, on April 21, 2010 the Company shareholders approved the conversion of shares of Series E Preferred Stock into shares of Series D Preferred Stock. The conversion was mandatory, with the shares of Series E Preferred Stock converting into shares of Series D Preferred Stock at a conversion rate per share equal to (i) $1,000 plus the accumulating rate of return thereon divided by (ii) $1,000 per share.

Accumulating Rate of Return. The holders of Series E Preferred Stock were entitled to receive an accumulating rate of return of 8% during the first year, and 12% per year thereafter.

Liquidation Preference. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series E Preferred Stock would have been paid out of the assets of the Company available for distribution to stockholders before any payment shall be paid to the holders of common stock (and pari passu with any shares of Series D Preferred Stock), an amount described in the Certificate of Designation.

Change in Control Redemption. Upon a change of control of the Company, each holder of Series E Preferred Stock could have required the Company to redeem all or a portion of such holder’s Series E Preferred Stock.

Voting Rights. The Series E Preferred Stock did not have any voting rights except as provided by law or as set forth in the Certificate of Designation for the Series E Preferred Stock.

On December 7, 2009, the Company entered into an Amended and Restated Investor Rights Agreement, by and among the Company, the Series E Purchasers, Sankaty Credit Opportunities IV, L.P. (“Sankaty”) and Mr. Michael J. Perik, pursuant to which the Company granted the Purchasers, Sankaty and Mr. Perik demand registration rights for the registration of the resale of the shares of common stock issued or issuable upon conversion of Series D Preferred Stock. The Amended and Restated Investor Rights Agreements amends and restates the Investor Rights Agreement dated July 23, 2007, by and among the Company and the holders of the Company’s Series C Preferred Stock. Any demand for registration must be made for at least 12.5% of the total shares of such common stock then outstanding, provided, however, that the aggregate offering price shall not be less than $2.5 million. The Amended and Restated Investor Rights Agreement also grants the Series E Purchasers and Sankaty information rights and preemptive rights with respect to certain issuances which may be undertaken by the Company in the future.

As of December 31, 2011, our principal contractual obligations and commercial commitments consist of long-term debt obligations, capital lease obligations for office equipment, long-term office and classroom leases and minimum purchase obligations for customized textbooks.

The following table summarizes our contractual obligations and other commercial commitments set forth therein as of December 31, 2011.

Long-term debt obligations primarily consist of the GE Capital credit facility term and revolving loans, the Senior Term B Notes and the Junior Notes described above under “Liquidity and Capital Resources”. The obligations under the GE Capital credit facility bear interest at a variable rate based upon, at our option, either LIBOR or a base rate, plus an applicable margin (as defined). For projections of our cash interest related to the GE Capital credit facility, we assumed an interest rate of 7.02% for our term loan and 7.75% for our revolving loans through the maturity date of December 7, 2014.

The contractual obligations table above does not include $3.0 million of net unrecognized tax benefits at December 31, 2011 as the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective tax authorities. The table above also does not include obligations under our information technology services agreement as we can terminate the agreement with six months written notice and the payment of a termination fee ranging from $0.6 million to $0.9 million if terminated in 2012, plus other ancillary equipment costs.

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued updated amendments to goodwill impairment testing. The amendments revised the steps required to test for goodwill impairment. Under prior guidance, a two-step process was followed, the first step being to determine and compare the estimated current fair value of each reporting unit to its carrying value. If the estimated fair value was less than the carrying value, then step two was performed to determine the amount, if any, of the goodwill impairment. The revised guidance allows a company to first make a qualitative determination regarding the likelihood of impairment before performing these two steps. If impairment is not determined to be “more likely than not”, then the two-step test does not need to be conducted. This update is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this guidance during the fourth quarter of 2011. Refer to Note 5 in the accompanying consolidated financial statements.

In June 2011, the FASB issued a new accounting standard that eliminates the option to present other comprehensive income (“OCI”) in the statement of stockholders’ equity and instead requires net income, the components of OCI, and total comprehensive income to be presented in either one continuous statement or in two separate, but consecutive, statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. This guidance is effective for periods beginning after December 15, 2011 and while early adoption is permitted, we do not plan to adopt this guidance early. The adoption of this standard will not have an impact on our financial condition, results of operations or cash flows.

In December 2010, the FASB issued an amendment to goodwill impairment testing that modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have an impact on the Company since we do not have any reporting units with zero or negative carrying amounts at December 31, 2011.

In December 2010, the FASB issued an amendment to the disclosure of supplementary pro forma information for business combinations. The amendment specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments were effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted this guidance and will incorporate the new disclosures in the event we consummate a business acquisition in the future.

In September 2009, the Emerging Issues Task Force (the “EITF”) reached final consensus on the issue related to revenue arrangements with multiple deliverables. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue was effective for the Company’s revenue arrangements entered into or materially modified on or after January 1, 2011. We adopted this guidance and it did not have a material impact on our financial statements.

In January 2010, the FASB issued an accounting standard update that improves disclosures about fair value measurements, including adding new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 rollforward. The update also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, and are effective for the Company on January 1, 2010, except for the requirement to present the Level 3 rollforward on a gross basis, which is effective for fiscal years beginning after December 15, 2010, and is effective for the Company on January 1, 2011. We adopted this accounting standard, including the deferred portion relating to the Level 3 rollforward on January 1, 2010, resulting in additional footnote disclosures regarding certain financial assets and liabilities held by us as described in Note 17 to the accompanying consolidated financial statements.

In June 2009, the FASB issued authoritative guidance to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity (“VIE”). The new approach focused on identifying which enterprise has the power to direct the activities of the variable interest entity that most significantly impacts the entity’s economic performance. Further, the new accounting standard requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise is required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. The pronouncement became effective for the Company on January 1, 2010 and we applied the provisions in connection with the strategic venture entered into with National Labor College in April 2010, as described in Note 3 to the accompanying consolidated financial statements. With the exception of this strategic venture, the adoption of this accounting standard did not change any of our previous conclusions regarding our VIEs and thus did not have an effect on our financial position, results of operations or liquidity.

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures. We evaluate our policies and estimates on an ongoing basis, including those related to the collectability of our accounts receivable balances, which impacts bad debt write-offs; recoverability of goodwill, which impacts goodwill impairment expense; assessment of recoverability of long-lived assets, which primarily impacts operating expense when we record the impairment of assets or accelerate their depreciation; recognition and measurement of current and deferred income tax assets and liabilities, which impacts our tax provision; revenue recognition requirements, which impacts how and when we recognize revenue from our goods and services and the estimates we use to record stock-based compensation expense. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following policies as critical to an understanding of our results of operations and financial condition. This is not a comprehensive list of our accounting policies. We also have other policies that we consider to be key accounting policies. However, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective. For a discussion of our other accounting policies, see Note 1 to our consolidated financial statements included in this Form 10-K.

We maintain allowances for doubtful accounts for losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for uncollectible accounts may be required. We review our receivables on a regular basis to determine if past due balances are likely to be collected. This review includes discussions with our customers and their account representatives, assessment of the customers’ payment history and other factors. Based on these reviews we may increase or decrease our allowance for uncollectible accounts if we determine there is a change in the collectability of our accounts receivable.

Goodwill represents the excess purchase price of acquired businesses over the estimated fair value of net assets acquired. At the time of an acquisition, we allocate goodwill and related assets and liabilities to our respective reporting units. We identify reporting units by assessing whether the components of operating segments constitute businesses and for which discrete financial information is available and segment management regularly reviews the operating results of those components. Indefinite-lived intangible assets are recorded at fair market value on their acquisition date and include territorial marketing rights and trade names, assets that we believe have the continued ability to generate cash flows indefinitely and which have no legal, regulatory, contractual, competitive, economic or other factors limiting the useful life to the Company. Goodwill, territorial marketing rights and trade names are not amortized but instead are assessed for impairment at least annually, on October 1 of each year, or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

In accordance with updated guidance to goodwill impairment testing issued by the Financial Accounting Standards Board (the “FASB”) in September 2011, we initially assess qualitative factors regarding the likelihood of impairment before applying a two-step impairment test on goodwill. These qualitative factors include the evaluation of events and circumstances involving adverse developments in economic conditions, industry and market environments, financial performance and other factors. If impairment is not determined to be “more likely than not”, then we do not conduct the two-step test. If it is determined that an impairment is more likely than not, we apply a two-step test at the reporting unit level. In the first step, the fair value of the reporting unit is compared to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and there is no need to apply the second step of testing. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, we perform a second step which involves using a hypothetical purchase price allocation to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill.

To determine the fair value of our reporting units, we rely on two valuation methods, combining income-based and market-based approaches and applying relatively even weightings to the results. The income-based approach incorporates projected cash flows, as well as a terminal value, and discounts such cash flows by a risk adjusted rate of return. This risk adjusted discount rate is based on a weighted average cost of capital , which represents the average rate a business must pay its providers of debt and equity. The market-based approach incorporates information from comparable transactions in the market and publicly traded companies with similar operating and investment characteristics of the reporting unit to develop a multiple which is then applied to the operating performance of the reporting unit to determine value. The assumptions used in these approaches require significant judgment, and changes in assumptions or estimates could materially affect the determination

of fair value of our reporting units. Management believes the most critical assumptions and estimates in determining the estimated fair value of our reporting units, include, but are not limited to, the amounts and timing of expected future cash flows for each reporting unit, the discount rate applied to those cash flows, long-term growth rates and the selection of comparable market multiples. The assumptions used in determining our expected future cash flows consider various factors such as anticipated operating trends particularly in student enrollment and pricing, planned capital investments, anticipated economic and regulatory conditions and planned business and operating strategies over a long-term horizon. Management believes its assumptions and cash flow projections are reasonably achievable given current market conditions and planned business and operating strategies.

During the third quarter of 2011, we continued to experience lower than expected profitability in the HER and Penn Foster businesses and accordingly, prepared a revised plan for fiscal 2011 and beyond. This plan incorporated updated estimates of future demand for product offerings and projected cash flows from the implementation of new initiatives and operating strategies. As a result of these events, management determined that it was appropriate to perform interim period tests for impairment in its HER and Penn Foster reporting segments as of September 30, 2011.

We reviewed our long-lived assets, excluding goodwill, territorial marketing rights and trade names, by performing recoverability tests that compared the carrying amount of the HER and Penn Foster long-lived asset groups, to their respective undiscounted cash flows expected to result from the use and eventual disposition of these asset groups. Management concluded from the results of the recoverability tests that neither the HER nor Penn Foster long-lived asset groups were impaired.

We performed an impairment test on our indefinite-lived intangible assets that involved a comparison of the estimated fair value of the intangible assets with their respective carrying values. To determine the fair value of the HER territorial marketing rights intangible asset, we used a discounted cash flow valuation approach, based on estimated royalty income generated from our product sales. Management concluded that there was no impairment to the HER territorial marketing rights intangible asset. To determine the fair value of the Penn Foster trade name intangible asset, we used the relief-from-royalty method. This method estimates the benefit of owning the intangible asset rather than paying royalties for the right to use a comparable asset. This method incorporates the use of significant judgments in determining both the projected revenues attributable to the asset, as well as the appropriate discount rate and royalty rates applied to those revenues to determine fair value. Management concluded that the carrying value of the Penn Foster trade name intangible asset exceeded its fair value, and recorded a $6.8 million impairment loss in the third quarter of 2011 in the amount equal to that excess. This impairment was primarily the result of lower projected revenues for the Penn Foster division.

We tested for goodwill impairment at the reporting unit level by applying the two-step test described above. Our findings from the step-one test on the HER division indicated that the carrying value of its assets exceeded the estimated fair value of the division, and accordingly, we performed the second step test which determined that the carrying value of the goodwill exceeded the implied fair value of the goodwill, and recorded an impairment loss of $76.7 million in the third quarter of 2011 in the amount equal to that excess. Management believes that changes in cash flow assumptions, particularly around student enrollments and pricing, are the primary drivers leading to this impairment charge.

Our findings from the step-one test on the Penn Foster division indicated that the estimated fair value of the division exceeded the carrying value of its assets by approximately 9%, and therefore $100.5 million of goodwill allocated to our Penn Foster was not impaired. Given that Penn Foster was acquired in December 2009, management expects the estimated fair value of Penn Foster to reasonably approximate and exceed the division’s carrying value. Should the Penn Foster division’s revenue, profitability or financial performance be adversely affected in the future, the goodwill allocated to this division could become impaired.

On March 26, 2012, we entered into an agreement to sell the HER division for $33.0 million in cash, subject to a purchase price adjustment for changes in working capital of the HER division. In addition, we concluded that there is doubt as to our ability to continue as a going concern. As a result of these events, management determined that it was appropriate to perform additional tests for impairment in its HER and Penn Foster reporting segments as of December 31, 2011.

The review of our long-lived assets, excluding goodwill, territorial marketing rights and trade names, determined that the carrying amount of the HER long-lived asset group exceeded the undiscounted cash flows expected to result from the use and anticipated disposition of the HER division. As a result, we recorded an impairment loss of $8.4 million in the fourth quarter of 2011. Approximately $4.5 million of this loss was allocated to the HER division’s franchise cost intangible asset and $3.9 million was allocated to the HER division’s internally developed software. The Penn Foster long-lived asset group was not impaired.

We performed an impairment test for our indefinite-lived intangible assets and determined that neither the HER territorial marketing rights intangible asset nor the Penn Foster trade name intangible asset were impaired.

We tested for goodwill impairment at the reporting unit level by applying the two-step test, similar to the process followed during the third quarter of 2011. Our findings determined that the HER division’s goodwill was fully impaired and as a result an impairment charge of $8.0 million was recorded during the fourth quarter of 2011 to write-off the remaining HER goodwill. The findings from our step-one test on the Penn Foster division indicated that the estimated fair value of the division exceeded the carrying value of its assets by approximately 12%, and therefore $100.5 million of goodwill allocated to our Penn Foster division was not impaired.

We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in our use of the assets. We assess recoverability of assets that will continue to be used in our operations by comparing the carrying amount of the asset grouping to the related total projected undiscounted net cash flows. If an asset grouping’s carrying value is not recoverable through those cash flows, the asset grouping is considered to be impaired. The impairment is measured by the difference between the assets’ carrying amount and their fair value, based on the best information available, including market prices or discounted cash flow analysis. We also review the carrying value of assets held for sale for impairment based upon management’s best estimate of the anticipated net proceeds expected to be received upon final disposition. We record any impairment charges or estimated losses on disposal in the period in which we identify such impairment or loss.

Enrollments in fall 2011 programs that drove fees earned by our former NLC strategic venture were less than anticipated and accordingly, in the third quarter of 2011 management performed a recoverability test on the CEP long-lived assets, primarily consisting of the NLC license intangible, and determined that it was impaired. In determining fair value, management considered the settlement value realized from the termination of the strategic venture in November 2011. We recorded an impairment loss of $8.4 million in the third quarter of 2011 for the excess of the NLC license carrying value over its estimated fair value. This impairment loss is included in loss from discontinued operations in the accompanying consolidated 2011 statement of operations. Upon termination of the NLC strategic venture in November 2011, the Company disposed of the remaining carrying value of the NLC license.

As discussed under Goodwill and Indefinite-Lived Intangible Assets above, we recorded an impairment loss related to our HER division’s long-lived assets of $8.4 million in the fourth quarter of 2011.

Companies are required to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We assess the likelihood that we will realize our deferred tax assets and if recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.

We record a valuation allowance against our deferred tax asset net of deferred tax liabilities that are scheduled to reverse in the foreseeable future as we believe it is more likely than not that the future tax benefits from accumulated net operating losses and deferred taxes will not be realized. If, in the future, an appropriate level and consistency of profitability is attained, we would reduce the valuation allowance, which could have a significant impact on our consolidated financial statements.

We are required to make estimates or judgments that are difficult or subjective primarily for HER institutional contracts that require us to provide more than one product or service and accordingly record revenue in accordance with an accounting standard that provides guidance for revenue arrangements with multiple deliverables. In accounting for multiple-element arrangements, we must estimate the accounting value attributable to the different contractual elements and determine the timing for recognition of each element. Revenue is allocated to each element based on our assessment of the selling price of that element to the aggregate selling price of all elements. The selling price must be reliable, verifiable and objectively determinable. When available, such determination is based principally on the pricing of similar arrangements with unrelated parties that are not part of a multiple-element arrangement.

In our Penn Foster division we record revenue from sales to individual students as exams are completed at the expected rate per exam based on the division’s historical experience over a large homogenous population. The majority of students pay for tuition under periodic payment plans. The division has historically experienced significant non-payment issues related to the payment plans and accordingly, the division believes collectability under such arrangements is not reasonably assured, therefore revenue is not recognized until services are provided and cash is received (provided all other revenue recognition criteria have been met). Payments received prior to delivery of services are initially recorded as deferred revenue, and revenue is then recognized as exams are completed.

Our facilities related expenses and liabilities under all of our restructuring plans included estimates of the remaining rental obligations, net of estimated sublease income, for facilities we no longer occupy. We review our estimates and assumptions on a regular basis until the outcome is finalized and make whatever modifications we believe necessary, based on our best judgment, to reflect any changed circumstances. It is possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be material.

We record stock based compensation in accordance with an accounting standard that requires the measurement and recognition of compensation expense for all shared based payment awards made to employees and directors, including stock options, restricted stock and restricted stock units. The standard requires companies to recognize stock-based compensation awards granted to employees as compensation expense on a fair value method. Under the fair value recognition provisions of the standard, stock based compensation cost is measured at the accounting measurement date based on the fair value of the award and is recognized as expense over the service period, which generally represents the vesting period. The expense recognized over the service period is required to include an estimate of the awards that will be forfeited. The fair value of a stock option is

determined using a Black-Scholes option-pricing model that takes into account the stock price at the accounting measurement date, the exercise price, the expected life of the option, the volatility of the underlying stock and its expected dividends, and the risk-free interest rate over the expected life of the option. These assumptions are highly subjective and changes in them could significantly impact the value of the option and hence compensation expense.

We experience, and we expect to continue to experience, seasonal fluctuations in our revenue, results of operations and cash flows 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 HER revenue in the third quarter. Penn Foster’s revenue is typically generated more evenly throughout the year but marketing and promotional expenses are seasonally higher in the first quarter. SES revenue was typically concentrated in the first and fourth quarters to more closely reflect the after school programs’ greatest activity during the school year.

We are exposed to interest rate risk as a result of the outstanding debt under our Senior Credit Facilities, which bears interest, at the Company’s option, at either LIBOR or a defined base rate plus an applicable margin. At December 31, 2011, our total outstanding term and revolving loan balances under the Senior Credit Facilities exposed to variable interest rates was $62.0 million. A 10% increase in the interest rate on this balance would increase annual interest expense by $0.4 million. We do not carry any other variable interest rate debt.

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ (deficit) equity and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of The Princeton Review, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under item 9(A). Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The accompanying notes are an integral part of the consolidated financial statements.

Consolidated Statements of Stockholders’ (Deficit) Equity and Comprehensive Loss

The accompanying notes are an integral part of the consolidated financial statements.

As described in Note 18, on March 26, 2012, we entered into an Asset Purchase Agreement (the “Agreement”) with an affiliate of Charlesbank Capital Partners (“Buyer”) pursuant to which, upon the terms and subject to the conditions set forth in the Agreement, we will sell, and Buyer will buy, substantially all of the assets of our Higher Education Readiness (“HER”) division, including the name and brand of The Princeton Review. The consideration for the sale of the HER division will be $33.0 million in cash plus the assumption of $12.0 million in net working capital liabilities. The purchase price will be adjusted to account for any variance from the target working capital level. We expect to use the net proceeds from the sale to repay obligations outstanding under our senior credit facilities with General Electric Capital Corporation. Upon consummation of the transaction, we will serve as a holding company for the Penn Foster division, will cease to be known as The Princeton Review and will formally adopt a new, to be determined, corporate name.

The information presented below describes our business as it existed on and prior to December 31, 2011.

The Princeton Review, Inc. and its consolidated subsidiaries (together, the “Company” or “Princeton Review”), provide in-person, online and print products and services targeting the high school and post-secondary markets. Through November 2011, the business operated through three segments: The Higher Education Readiness (“HER”) division (formerly referred to as the Test Preparation Services division), the Penn Foster division (through the wholly owned subsidiary, Penn Foster Group, Inc.) and the Career Education Partnerships (“CEP”) division. The HER division provides in-person and online test preparation courses, including classroom-based and small group instruction and individual tutoring in test preparation and academic subjects. Additionally, the division receives royalties from its independent international franchisees that provide test preparation courses under the Princeton Review brand as well as from the sale of more than 185 print and software titles on test preparation, academic admissions and related topics under the Princeton Review brand sold primarily through Random House, Inc. The Penn Foster division, acquired in December 2009, is the oldest and one of the largest distance career schools in the world, generating over 125,000 new enrollments annually. This division provides regionally and nationally accredited, career-focused, online degree and vocational programs in the United States, Canada and over 150 countries around the world. Until November 2011, the CEP division provided services through strategic relationships with institutions of higher education to expand enrollment capacities, develop, market and launch new educational programs, and support various technical, operational and financial activities associated with the educational initiatives. During 2011, in conjunction with the termination of strategic ventures with Bristol Community College and the National Labor College, the Company ceased all activities relating to strategic venture partnerships and discontinued its CEP division. In March 2009, the Company sold substantially all of the assets and liabilities of its K-12 Services division. Accordingly, the results of operations and cash flows relating to the former CEP and K-12 Services divisions are presented as discontinued operations in the accompanying consolidated statements of operations and consolidated statements of cash flows. Refer to Note 3.

Through the end of the 2009-2010 school year ending in June 2010, the Supplemental Educational Services (“SES”) division provided tutoring and supplemental educational services under the No Child Left Behind Act of 2001 to students in schools and school districts in the United States. The Company exited the SES business after completing its SES programs at the end of the 2009-2010 school year.

As of December 31, 2011, the Company operates through its two remaining divisions: HER and Penn Foster.

As of December 31, 2011, the Company was in compliance with its debt covenants. On March 26, 2012, the Company entered into an asset purchase agreement to sell its HER division as disclosed in Note 18. Upon the closing of the sale, which is expected to occur within the next 30 to 60 days (the “Sale Closing”), the Company will report the HER division as a discontinued operation beginning in the first quarter of 2012 (the “HER Discontinued Operation”). As a result of the HER Discontinued Operation, the Company will no longer be able to include the division’s current and prior earnings for the purposes of determining compliance with the Company’s existing debt covenants. The Company is currently discussing with its lenders a debt covenant waiver or amendment that accounts for the HER Discontinued Operation impact, but there are no assurances that the Company will be able to comply with its future covenants without such a waiver or an amendment.

In addition, the Company continues to operate with limited liquidity. Total liquidity as of December 31, 2011 was $11.7 million, comprised of $5.6 million of cash and cash equivalents, $1.1 million of accessible borrowing availability under our $12.5 million revolving credit facility and $5.0 million of borrowing availability under a new facility obtained from our senior subordinated note holders in November 2011 (refer to Note 7). While, upon the Sale Closing, the Company expects to receive cash proceeds in excess of $25.0 million, the Company’s senior secured debt agreements require the sale proceeds to be used to reduce its existing debt. The Company is currently discussing with its senior secured lenders an amendment or refinancing to improve the liquidity position of the Company, but there are no assurances that the Company will be able to secure such an amendment or refinancing.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses from continuing operations and has a net working capital deficit and a stockholders’ deficit. These conditions, including the limited liquidity described above raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management continues to take actions to increase profitability and liquidity by improving operating efficiencies and sales execution. In addition, management continues to aggressively pursue opportunities to address its capital structure in the near term by evaluating and/or pursuing various alternatives including, but not limited to, raising capital through issuances of new securities, swapping debt for equity, securing additional debt financing from new or existing investors and/or raising capital through the sale of assets, including the aforementioned agreement to sell the HER division. As part of these efforts, the Company has engaged legal and financial restructuring advisors, and is in discussions with its senior credit facility lenders, subordinated note holders and preferred stockholders regarding the terms of a restructuring. While there is no assurance that the Company will be able to successfully restructure its debt, the Company anticipates that a restructuring to significantly deleverage its balance sheet will entail significant dilution to the Company’s existing stockholders that results in the stockholders owning, at most, a very small percentage of the Company’s outstanding common stock.

The accompanying consolidated audited financial statements include the accounts of The Princeton Review, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with generally accepted accounting principles (“GAAP”) and pursuant to rules and regulations of the Securities and Exchange Commission. All intercompany accounts and transactions have been eliminated. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant accounting estimates used include estimates for revenue, uncollectible accounts receivable, deferred

tax valuation allowances, impairment write downs, amortization lives assigned to intangible assets, fair values of assets and liabilities and stock-based compensation. Actual results could differ from those estimates, and such differences could be material to the accompanying consolidated financial statements.

Certain prior period amounts relating to discontinued businesses have been reclassified in the accompanying consolidated statements of operations and statements of cash flows to conform to the current year presentation. Refer to Note 3.

Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less. The Company’s cash deposits on hand at one financial institution often exceed federally insured limits.

The Company classifies as restricted cash all cash pledged as collateral to secure obligations and all cash whose use is otherwise limited by contractual provisions. Restricted cash includes funds held as collateral for security with one of the HER division’s credit card service providers and funds that are held as collateral to a letter of credit agreement between the Penn Foster division and the Pennsylvania Department of Education.

The Company provides credit to its customers in the normal course of business. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. The Company maintains an allowance for doubtful customer accounts for estimated losses that may result from the inability of the Company’s customers to make required payments. That estimate is based on a variety of factors, including historical collection experience, current economic and market conditions, and a review of the current status of each customer’s trade accounts receivable.

The Company charges bad debt expense when establishing this allowance and writes off account balances against the allowance when it is probable the receivable will not be recovered. The Company wrote off account balances of approximately $0.2 million, $0.6 million and $0.6 million during the years ended December 31, 2011, 2010 and 2009, respectively.

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

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets principally ranging from three to seven years. Buildings are depreciated over thirty years. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or its estimated economic useful life. Lease terms used are based upon the initial lease agreement and do not consider potential renewals or extensions until such time that the renewals or extensions are contracted. Upon sale or disposal, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in income.

During the first quarter of 2010, the Company changed the estimated useful lives for certain fixed assets under a revised depreciation policy. This change in estimated useful lives resulted in additional depreciation and amortization expense in the first quarter of 2010 of $1.6 million.

The Company capitalizes certain direct development costs associated with internal-use software and web site development. These capitalized costs are amortized on a straight-line basis over a period not to exceed 3 years beginning when the assets are substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred. For the years ended December 31, 2011 and 2010, the Company capitalized approximately $6.1 million and $12.5 million, respectively, in internal-use software and web site development costs. These amounts include development relating to the Company’s multi-year company-wide effort to replace legacy system infrastructure and integrate it with Penn Foster’s financial system. The Company completed the development under this project in the third quarter of 2011.

For the years ended December 31, 2011, 2010 and 2009, the Company recorded related amortization expense of approximately $2.8 million, $6.9 million and $2.0 million, respectively. The amortization expense for 2010 includes the impact of revising our depreciation policy for internal-use software and web site development costs as well as the impact of accelerating amortization on our former legacy ERP system, as the Company took actions to cease use of the legacy system and to utilize and enhance Penn Foster’s ERP system prospectively. As of December 31, 2011 and 2010, the net book value of capitalized internal-use software and web site development costs (excluding development in process) was $16.1 million and $0.7 million, respectively.

Goodwill represents the excess purchase price of acquired businesses over the estimated fair value of net assets acquired. At the time of an acquisition, the Company allocates goodwill and related assets and liabilities to its respective reporting units. The Company identifies reporting units by assessing whether the components of operating segments constitute businesses and for which discrete financial information is available and segment management regularly reviews the operating results of those components. Indefinite-lived intangible assets are recorded at fair market value on their acquisition date and include territorial marketing rights and trade names, assets that the Company believes have the continued ability to generate cash flows indefinitely and which have no legal, regulatory, contractual, competitive, economic or other factors limiting the useful life to the Company. Goodwill, territorial marketing rights and trade names are not amortized but instead are assessed for impairment at least annually, on October 1 of each year, or more frequently if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

In accordance with updated guidance to goodwill impairment testing issued by the Financial Accounting Standards Board (the “FASB”) in September 2011, the Company initially assesses qualitative factors regarding the likelihood of impairment before applying a two-step impairment test on goodwill. These qualitative factors include the evaluation of events and circumstances involving adverse developments in economic conditions, industry and market environments, financial performance and other factors. If impairment is not determined to be “more likely than not”, then the Company does not conduct the two-step test. If it is determined that an impairment is more likely than not, the Company applies a two-step test at the reporting unit level. In the first step, the fair value of the reporting unit is compared to the carrying value of its net assets. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and there is no need to apply the second step of testing. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, the Company performs a second step which involves using a hypothetical purchase price allocation to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. An impairment loss is recognized to the extent the implied fair value of the goodwill is less than the carrying amount of the goodwill. During the third and fourth quarter of 2011, the Company recorded losses on impairment of goodwill relating to the HER division. Refer to Note 5.

The impairment test for indefinite-lived intangible assets involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. During the third quarter of 2011, the Company recorded a loss on impairment relating to its Penn Foster trade names. Refer to Note 5.

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

Course content includes the program content acquired from Penn Foster on December 7, 2009 and represents the value of over 109 career programs, 23 degree programs, 138 high school courses and 2,000 industrial training courses that existed as of the acquisition date. This acquired course content is amortized on an accelerated basis over a period of seven years. Course content also includes certain expenditures incurred by the HER and Penn Foster divisions to develop course materials and curriculum. Internally developed course content costs, which primarily consist of amounts paid to consultants and salaries of employees hired to develop the course material and curriculum, are capitalized when a course is first developed or there is a major revision to a course or significant re-write of the course materials or curriculum (for example, when a related test changes). The internally developed course content costs are amortized on a straight-line basis over a period of five years, based upon the average life cycle of the related standardized test or course. Amortization of these capitalized course content costs commences with the realization of course revenues. The cost of minor enhancements or annual updates to the curriculum and materials is expensed as incurred.

Student roster represents the value derived from expected revenue from students who had enrolled in Penn Foster’s programs as of the date of acquisition. Student roster is amortized on an accelerated basis over a period of three years.

Publishing rights primarily consist of amounts paid to certain co-authors to purchase their rights to future royalties on certain books, including Cracking the SAT/PSAT, Cracking the LSAT, Cracking the GRE, Cracking the GMAT, The Best 361 Colleges and Word Smart. These books are primarily current reference materials that are updated every one or two years. Publishing rights are being amortized on a straight-line basis over fifteen to twenty-five years.

Non-compete agreements, trademarks are other intangible assets are amortized using accelerated and straight-line methods over three to twenty years.

Territorial marketing rights represent rights contributed by our independent franchisees to allow the marketing of the Company’s products on a contractually agreed-upon basis within the franchisee territories. Without these rights, the Company would be prohibited from selling its products in these territories due to the exclusivity granted to the franchisees within their territories. Should a franchisee decide not to renew its franchise agreement these rights would remain with the Company. Since no legal, regulatory, contractual, competitive, or other factors limit the useful life of territorial marketing rights, the Company has deemed these intangible assets to have indefinite lives.

Trades names represent the corporate names and brand identities acquired from Penn Foster on December 7, 2009 and are considered indefinite lived intangible assets.

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

The Company reviews its long-lived assets, excluding goodwill, territorial marketing rights and trade names, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that an asset may not be recoverable, an impairment loss is

recognized for the excess of the carrying amount over the fair value of an asset to be held and used or over the fair value less cost to sell an asset to be disposed. During the third quarter of 2011, the Company recorded a loss on impairment relating to its NLC license, which is included in loss from discontinued operations in the accompanying consolidated statement of operations. Refer to Notes 3 and 5. During the fourth quarter, the Company recorded a loss on impairment relating to its internally developed software and franchise costs. Refer to Notes 4 and 5.

The Company consolidates variable interest entity investments for which it is deemed to be the primary beneficiary. See Note 3. Investments in non-wholly owned entities for which the Company can exercise significant influence over the operating and financial decisions of the entity are accounted for using the equity method of accounting. If the Company is not able to exercise significant influence over the operating and financial decisions of the investee, the cost method of accounting is used. As of December 31, 2011 and 2010, the Company did not have any equity or cost method investments.

Deferred revenue for the HER division primarily represents customer deposits and tuition and other fees payable in advance of services. Deferred revenue for the Penn Foster division is recorded for the portion of cash received from students that is refundable under the terms of the contract and for payments received prior to delivery of services.

The Company recognizes revenue for its revenue arrangements when evidence of a customer agreement exists, delivery of the product or services has occurred, the price of such products or services is fixed or determinable, and collection is reasonably assured. The Company recognizes revenue under multiple revenue streams, and the revenue recognition policy related to each material revenue stream is described below.

Course and Tutoring Income. Test preparation tuition and tutoring fees (including SES tutoring fees) are recognized ratably over the period fees are earned, typically the life of the course.

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

Royalty Service Fees. As consideration for the rights and entitlements granted under international franchise agreements, which entitle the franchisees to provide test preparation services utilizing the Princeton Review method in their licensed territories, the franchisees are required to pay to the Company a monthly royalty service fee equal to 8.0% to 9.5% of the franchise’s gross receipts collected during the preceding month. Royalties received from franchisees also include a per student fee for use, by their students, of our on-line supplemental course tools. Under the terms of the franchise agreements, the Company has the right to perform audits of royalty service fees reported by the franchisees. Any differences resulting from an audit, including related interest and penalties, if any, are recorded upon the completion of the audit when such amounts are determinable.

Course Materials and Other Products. The Company recognizes revenue from the sale of course materials and other products upon shipment.

Sales to Individual Students—Penn Foster. The Penn Foster division generates revenue from sales to individual students who enroll in the division’s distance educational programs under the division’s standard tuition agreement. Revenues are recognized as exams are completed at the expected rate per exam based on the division’s historical experience over a large homogenous population. The majority of students pay for tuition under periodic payment plans. The division has historically experienced significant non-payment issues related to payment plans. Accordingly, the division believes collectability under such arrangements is not reasonably assured, therefore revenue is not recognized until services are provided and cash is received (provided all other revenue recognition criteria have been met). Payments received prior to delivery of services are initially recorded as deferred revenue, and revenue is then recognized as exams are completed.

Business and Industry Sales. For custom-designed and standard courses sold to businesses by the Penn Foster division, the Company recognizes revenue once the final product has been shipped to the customer and the Company’s obligation has been substantially fulfilled. If the contract specifies delivery over an extended period of time (generally three to twenty-four months), revenues are recognized ratably over the term of the agreement.

Multiple-deliverable Contracts. Certain of the Company’s customer contracts represent multiple-element arrangements, which may include several of the Company’s products and services. Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if certain criteria are met. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s selling price and the revenue policies described above, or other applicable GAAP, are then applied to each unit of accounting. The Company determines the selling price for elements in multiple-element arrangements based on recent sales of each element on a stand-alone basis.

Other Revenue. Other revenue consists of miscellaneous fees for other services provided to third parties primarily for authoring questions, advertising, mail and telemarketing services, training and professional development fees, which are recognized as the products or services are delivered. Other revenue also includes college marketing fees, such as newsletter or banner ads on the Company website, which are recognized ratably over the period in which the marketing services are provided, which is typically one year.

Many of the leases underlying the Company’s office sites have fixed rent escalators, which provide for periodic increases in the amount of rent payable by the Company over time. The Company calculates straight-line rent expense for these leases based on the fixed non-cancelable term of the underlying lease.

Balance sheet accounts of the Company’s Canadian subsidiaries are translated using period-end exchange rates. Statement of operations accounts are translated at monthly average exchange rates. The resulting translation adjustment is recorded as accumulated other comprehensive income.

Advertising and promotion costs are expensed in the period incurred. Costs related to producing mailers and other pamphlets are expensed when mailed. Total advertising and promotion expense was approximately $32.6 million, $33.6 million, and $7.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011 and 2010, prepaid advertising costs of $0.6 million and $1.4 million, respectively, relating to the Penn Foster division were included in prepaid expenses and other current assets in the accompanying consolidated balance sheet.

Restructuring and other related expenses include legal and financial restructuring advisory fees and other professional fees associated with the Company’s efforts to evaluate and/or pursue various alternatives for

addressing its capital structure, which began in the fourth quarter of 2011. Such fees are expensed as incurred. Restructuring and other related expenses also include the cost of employee severances, non-cancelable lease obligations and other costs associated with initiatives to consolidate or downsize operations, reorganize the Company management structure and/or eliminate duplicative assets and functions. The employee severance costs are expensed on the date we notify the employee, unless the employee must provide future service, in which case the severance costs are recognized ratably over the future service period. Non-cancelable lease obligation costs are recognized at fair value when the Company ceases using the right conveyed by the lease. Any adjustments to previously recorded restructuring charges resulting from a change to the estimated liability are recognized in the period the change occurs. Refer to Note 16.

Acquisition and integration expenses consist of legal, accounting and other advisory fees and transaction costs related to business acquisitions as well as the costs to integrate acquired businesses. Such costs are expensed as incurred.

For financial instruments including cash and cash equivalents, accounts receivable, other receivables and accounts payable, the carrying amount approximates fair value because of their short maturity. Refer to Note 7 for discussion of the fair value of our long-term debt.

From time to time, the Company may enter into financing arrangements where certain terms meet the definition of an embedded derivative and meet the criteria for bifurcation from the host contract. These embedded derivatives are accounted for separately from the host contract. Embedded derivatives are measured at fair value and classified in the accompanying consolidated balance sheets as other long-term liabilities. Changes in the fair value of the embedded derivatives are recognized in earnings. The derivative liabilities are revalued quarterly and changes in their fair value are recorded in other income (expense), net in the accompanying statement of operations. The Company has identified embedded derivatives in certain debt agreements that were entered into in 2009. Refer to Note 7.

Financial instruments that potentially subject the Company to concentration of credit risk include cash and cash equivalents and accounts receivable arising from its normal business activities. The Company places its cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risks with respect to accounts receivable are limited due to the large number of entities and individuals comprising the payor base, and their dispersion across different states. The Company does not require collateral. Included in cash and cash equivalents is $1.8 million (USD) held in Canadian banks in Canadian dollars. A significant portion of the Company’s cash is held in banks in excess of the FDIC Insurance Limits.

The consolidated financial statements reflect provisions for federal, state, local and foreign income taxes. The liability method is used for accounting for income taxes and deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. A change in tax rates is recognized in income in the period of the enactment date. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

Effective January 1, 2007, the Company adopted an accounting standard which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the standard, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The standards also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and accounting for income taxes in interim periods, and requires increased disclosures if material.

Basic earnings (loss) per share is calculated using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for the holders of the Company’s common shares and holders of the Series D Preferred Stock. The Series D Preferred Stock shares contain participation rights in undistributed earnings, but do not share in the losses of the Company. Therefore, in the event of a loss from continuing operations, the Series D Preferred Stock is not considered in the calculation of basic loss per share.

Basic earnings (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, excluding the dilutive effect of common stock equivalents. Net income (loss) attributable to common stockholders excludes accumulated unpaid dividends of preferred stock. To the extent the Company has net income attributable to common stockholders, the undistributed earnings are allocated to the common and preferred stock shareholders. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share, except that the number of shares is increased assuming exercise of dilutive stock options, warrants and convertible securities. The calculation of diluted earnings (loss) per share excludes potential common shares if the effect is anti-dilutive. Refer to Note 15.

Treasury stock is accounted for under the cost method and is included as a component of stockholders’ equity.

The Company accounts for stock-based compensation in accordance with an accounting standard that requires share-based compensation cost to be measured at the grant date based on the fair value of the award. Stock-based compensation is recognized as expense over the applicable vesting period of the stock award (generally four years) using the straight-line method (except for performance-based stock options, which are recognized as expense when it becomes probable performance measures triggering vesting will be met), and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model and the fair value of restricted stock and restricted stock units based on intrinsic value at the grant date.

The accounting standard also requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Because of the Company’s historical net losses, and the uncertainty as to the realizability of its tax benefits, no tax benefits have been recorded.

A business is classified as a discontinued operation when the operations and cash flows of the business can be clearly distinguished and have been or will be eliminated from the Company’s ongoing operations, the

business has either been disposed of or is classified as held for sale, and the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations (as well as the gain or loss on the disposal) are aggregated and separately presented in the Company’s consolidated statements of operations, net of income taxes, and in the consolidated statements of cash flows.

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued updated amendments to goodwill impairment testing. The amendments revised the steps required to test for goodwill impairment. Under prior guidance, a two-step process was followed, the first step being to determine and compare the estimated current fair value of each reporting unit to its carrying value. If the estimated fair value was less than the carrying value, then step two was performed to determine the amount, if any, of the goodwill impairment. The revised guidance allows a company to first make a qualitative determination regarding the likelihood of impairment before performing these two steps. If impairment is not determined to be “more likely than not”, then the two-step test does not need to be conducted. This update is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted this guidance during the fourth quarter of 2011. Refer to Note 5.

In June 2011, the FASB issued a new accounting standard that eliminates the option to present other comprehensive income (“OCI”) in the statement of stockholders’ equity and instead requires net income, the components of OCI, and total comprehensive income to be presented in either one continuous statement or in two separate, but consecutive, statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. This guidance is effective for periods beginning after December 15, 2011 and while early adoption is permitted, the Company does not plan to adopt this guidance early. The adoption of this standard will not have an impact on the Company’s financial condition, results of operations or cash flows.

In December 2010, the FASB issued an amendment to the disclosure of supplementary pro forma information for business combinations. The amendment specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments were effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this guidance and will incorporate the new disclosures in the event it consummates a business acquisition in the future.

arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. This issue was effective for the Company’s revenue arrangements entered into or materially modified on or after January 1, 2011. The Company adopted this guidance and it did not have a material impact on our financial statements.

In January 2010, the FASB issued an accounting standard update that improves disclosures about fair value measurements, including adding new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 rollforward. The update also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, and are effective for the Company on January 1, 2010, except for the requirement to present the Level 3 rollforward on a gross basis, which is effective for fiscal years beginning after December 15, 2010, and is effective for the Company on January 1, 2011. The Company adopted this accounting standard, including the deferred portion relating to the Level 3 rollforward on January 1, 2010, resulting in additional footnote disclosures regarding certain financial assets and liabilities held by the Company as described in Note 17.

In June 2009, the FASB issued authoritative guidance to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity (“VIE”). The new approach focused on identifying which enterprise has the power to direct the activities of the variable interest entity that most significantly impacts the entity’s economic performance. Further, the new accounting standard requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise is required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. The pronouncement became effective for the Company on January 1, 2010 and the Company applied the provisions in connection with the strategic venture entered into with National Labor College in April 2010, as described in Note 3. With the exception of this new strategic venture, the adoption of this accounting standard did not change any of the Company’s previous conclusions regarding our VIEs and thus did not have an effect on our financial position, results of operations or liquidity.

On December 7, 2009 (the “Closing Date”), the Company acquired all of the issued and outstanding shares (the “Shares”) of capital stock of Penn Foster Education Group, Inc. and its subsidiaries (“Penn Foster”). The acquisition was completed pursuant to a Stock Purchase Agreement (the “Acquisition Agreement”) among Penn Foster Holdings, LLC (the “Seller”), certain members of the Seller and Penn Foster. In consideration for the sale of Shares by the Seller, the Company paid to the Seller an aggregate purchase price in cash of $170.0 million plus an estimated working capital payment of $6.2 million on the Closing Date. The Company used funds obtained pursuant to the financing arrangements discussed in Notes 7 and 8 to acquire the Shares. The working capital payment was subject to post-closing adjustments which were finalized and settled on March 23, 2010, resulting in an additional cash payment of $0.5 million which was recorded as an increase in goodwill in the first quarter of 2010.

For the years ended December 31, 2011 and 2010, Penn Foster contributed revenues of $88.4 million and $96.4 million, respectively, and losses from continuing operations of $23.5 million and $12.2 million, respectively. For the period from December 7, 2009 to December 31, 2009, Penn Foster contributed revenues of $5.5 million and a loss from continuing operations of $0.6 million. The following unaudited pro forma summary

presents consolidated information of the Company for the year ended December 31, 2009 as if the acquisition of Penn Foster had occurred on January 1, 2008:

These amounts have been calculated to reflect the additional depreciation, amortization, interest and earnings (loss) attributable to common shareholders that would have been charged assuming the fair value adjustments to fixed and intangible assets and our new capital structure had been applied from January 1, 2008, together with the consequential tax effects.

The Company incurred $3.1 million, $5.4 million and $3.0 million of acquisition and integration related costs during the years ended December 31, 2011, 2010 and 2009, respectively. The costs in 2009 were primarily attributed to legal, accounting and advisory fees related to the Penn Foster acquisition transaction, while the costs in 2010 and 2011 primarily related to the integration of legacy systems and operations with Penn Foster. These costs are included in acquisition and integration expenses in the accompanying consolidated statements of operations.

The following table summarizes the consideration transferred to acquire Penn Foster and the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

The goodwill from this transaction arises as a result of the Company’s expected ability to capitalize back office synergies and leverage existing and new marketing opportunities across a larger revenue base. The goodwill has been assigned to the Company’s Penn Foster segment and is not deductible for tax purposes.

The fair value of the assets acquired include accounts receivables of $1.1 million. The gross amount due under contracts was $1.4 million, of which $0.3 million was expected to be uncollectible.

The acquired intangible assets with indefinite lives consist of trade names of $31.3 million. Approximately $48.1 million of acquired intangible assets with definitive lives consist of course content, student roster and sales lead conversions, all of which will be amortized on an accelerated basis based on the estimated period that economic benefits will be realized, ranging from three to seven years. Refer to Note 5.

Penn Foster has an indemnification agreement with the former owners of Penn Foster which provides for reimbursement to Penn Foster for payments made in satisfaction of certain tax and other liabilities that arose prior to the acquisition date. This tax indemnification survives until shortly after the expiration of the statute of limitations relating to the tax matters. Included in other current and long-term assets acquired is approximate $4.1 million of receivables due under this indemnification arrangement.

In 2008 the Company completed its ongoing efforts to consolidate operations by repurchasing all of its domestic franchises. This included the acquisition of Test Services, Inc. (“TSI”), the owner of ten Princeton Review franchises, in March 2008, through an Agreement and Plan of Merger with TSI and Alta Colleges, Inc., the parent corporation of TSI (the “TSI Merger Agreement”). As consideration to Alta Colleges, Inc. (“Alta”) for the acquisition, the Company paid $5.2 million in cash and transaction costs and issued 4,225,000 shares of common stock (the “Alta Shares”), which were valued at $35.4 million based on the average trading price of the Company’s common stock during the period from two days before and through two days after the transaction was announced.

On March 31, 2010, the Company became obligated under the TSI Merger Agreement to provide additional consideration to Alta of $9.9 million (the “Additional Consideration”) by April 13, 2010, representing the maximum amount of Additional Consideration in the event that the aggregate value of the Alta Shares, plus $4.6 million, was less than $36.0 million as of March 31, 2010. The Company was permitted to pay the Additional Consideration in either shares of common stock or cash, provided, however, that the Company could not issue more than 1,437,000 shares of common stock (the “Cap Shares”) as Additional Consideration. Pursuant to a letter agreement with Alta entered into on March 31, 2010 (the “Alta Letter Agreement”), the post-closing payment provisions under the TSI Merger Agreement were amended and the Company issued the Cap Shares to Alta which satisfied $5.6 million of the Additional Consideration obligation. The Company agreed to pay the balance of the Additional Consideration of $4.3 million (the “Remaining Additional Consideration”) in shares of common stock, subject to stockholder approval. The Company’s stockholders approved the issuance of common stock to Alta at the June 22, 2010 annual meeting, and on August 30, 2010 the Company issued 2,049,309 shares of common stock in full settlement of the $4.3 million Remaining Additional Consideration. Because the Additional Consideration was contingent upon the Company maintaining a certain price of its common stock, the issuance of additional common stock to Alta did not affect the overall acquisition cost of TSI. The Company recorded the fair value of the Additional Consideration shares of $9.9 million as an increase to common stock and additional paid-in-capital, and simultaneously reduced the value of the original Alta Shares that were issued at the date of acquisition for the same amount.

The CEP division was established in 2010 to provide services through strategic partnerships that assisted educational institutions in expanding enrollment capacities, developing, marketing and launching new educational programs, and supporting various technical, operational and financial activities associated with the

educational initiatives. The CEP division included a strategic relationship with the National Labor College (“NLC”) that was established in April 2010 and a collaboration agreement with Bristol Community College (“BCC”) that was created in September 2010. Due to less than anticipated enrollments in the underlying programs and a renewed commitment by management to focus on the core HER and Penn Foster businesses, in 2011 the Company terminated the strategic ventures with NLC and BCC, ceased all activities relating to strategic venture partnerships and discontinued the CEP division.

The NLC strategic relationship was formed in April 2010 through the creation of NLC-TPR Services, LLC (“Services LLC”), a limited liability company owned 49% by the Company and 51% by NLC. Services LLC was formed in order to provide various services to NLC to support the development and launch of new programs, including a broad range of marketing and enrollment support, technical support for development of online courses, technical support for faculty and students, and student billing and related services. The Company concluded under the accounting guidance for variable interest entities that it was the primary beneficiary of Services LLC and therefore was required to consolidate the financial results of Services LLC for financial reporting purposes.

Services LLC was governed and initially funded under the terms of a Limited Liability Company Agreement (the “LLC Agreement”) and a Contribution Agreement (the “Contribution Agreement”) between Services LLC, the Company and NLC. These agreements required the Company to provide substantially all of the initial working capital contributions, up to an aggregate amount of $12.3 million, and to the extent of those contributions absorb all of the losses of Services LLC. The Company made working capital contributions to Services LLC of $1.1 million and $1.2 million during the years ended December 31, 2011 and 2010, respectively.

Under the Contribution Agreement, which was amended in October 2010, NLC contributed a ten-year license to Services LLC to use NLC and AFL-CIO trademarks and membership lists in support of the administration, marketing and servicing of the NLC educational programs. In exchange for this license, the Company was required to contribute an aggregate of $20.8 million in cash payments to Services LLC (the “Capital Contribution”), to be distributed immediately upon receipt to NLC as a return of capital. The Company paid $5.0 million of the Capital Contribution during the second and third quarters of 2010 and an additional $5.8 million in the first quarter of 2011. Provided that NLC obtained future specified regulatory approvals, when and if necessary, and maintained its education regulatory status and certain other conditions, the Company was obligated to pay $5.0 million of the Capital Contribution in January 2012 and $5.0 million in January 2013. In accordance with the accounting guidance for variable interest entities and consolidations, the Company accounted for the Capital Contribution as the acquisition of a $20.8 million license from NLC. Accordingly, the Company recorded this license in other intangible assets in the accompanying 2010 consolidated balance sheet and began amortizing the asset on a straight-line basis over a ten year life. The Company also recorded its remaining obligation for the Capital Contribution as deferred acquisition payments ($5.8 million current, $10.0 million long term) in the accompanying 2010 consolidated balance sheet.

In November 2011, the Company and NLC terminated the NLC strategic relationship, whereby the Company transferred its 49% ownership interest in Services LLC to NLC and was relieved of all future funding obligations to Services LLC and NLC, including the remaining $10.0 million Capital Contribution obligation for deferred acquisition payments. Under the terms of the settlement agreement, the Company made a final working capital payment of $0.5 million at closing. Based on this net settlement value of $9.5 million, the Company recorded an impairment loss of $8.4 million against the NLC license intangible asset in the third quarter of 2011. Refer to Note 5. Because of the third quarter impairment charge, the carrying amount of the net assets disposed of on the closing date (primarily the NLC license intangible asset) essentially agreed to the net settlement value of $9.5 million, and therefore no gain or loss was recognized from the termination transaction in the fourth quarter of 2011. The Company reported the NLC license impairment loss, along with the operating results of the CEP division as discontinued operations in the accompanying consolidated statements of operations and consolidated statements of cash flows.

The carrying amount of Services LLC’s assets and liabilities that were included in the consolidated balance sheet as of December 31, 2010 were as follows:

The Community College Partnerships business was established when the Company entered into an agreement with BCC in September 2010 to collaborate on education, training and degree-granting programs for healthcare professionals by expanding the number of students admitted to BCC’s healthcare professional degree-granting programs. Through the collaboration, the Company funded all capital and operating expenditures of the collaboration including the lease, build-out and management of a new facility in New Bedford, Massachusetts, marketing programs promoting the educational programs of the collaboration and expenses incurred by BCC in the administration and operation of the collaboration course programs. In exchange for these services, BCC compensated the Company through reimbursement of all costs incurred in connection with the collaboration plus a services fee, to the extent of revenues collected for the collaboration course programs.

In March 2011, the Company committed to a plan to dispose of its Community College Partnerships business and in May 2011, completed the sale of substantially all of the assets and liabilities of its Community College Partnerships business to Higher Education Partners, LLC (the “Buyer”), a company that is partially owned by the Company’s former Chief Executive Officer. The aggregate consideration received consisted of $3.0 million in cash that included the value of certain closing adjustments and certain liabilities assumed by the Buyer. The carrying amounts of assets and liabilities sold on the closing date were $3.2 million and $1.6 million, respectively, and the Company recorded a gain on the sale of these assets and liabilities of $1.4 million within discontinued operations in the consolidated statement of operations.

In September 2008, the Company committed to a plan to dispose of the K-12 Services division and in March 2009, completed the sale of substantially all of the assets and liabilities of the K-12 Services division to CORE Education and Consulting Solutions, Inc. (“CORE”), a subsidiary of CORE Projects and Technologies Limited, an education technology company. The aggregate consideration for the sale consisted of (i) $9.5 million in cash paid on the closing date and (ii) additional cash consideration of $2.3 million, which represented the net working capital of the K-12 Services division as of the closing date, which was finalized and paid in October 2009. As a result of this sale, a $3.2 million gain was recognized in 2009 and recorded as gain from disposal of discontinued operations in the accompanying statement of operations.

In March 2010, the Company subleased its former K-12 Services facility located in New York City for the remaining term of the original lease, which expires in July 2014. The Company recorded a liability of $1.3 million in 2010 based on the estimated fair value of the remaining contractual lease rentals, reduced by the sublease rentals expected to be received under the sublease agreement. It is expected that the net cash outflows related to this obligation will continue through July 2014. The charge for the liability was recorded in discontinued operations in the consolidated statement of operations in 2010.

The CEP division and K-12 Services division both had operations and cash flows that were clearly distinguished for operational and financial reporting purposes. Additionally, after their respective dispositions, the operations and cash flows of these divisions were eliminated from the Company’s ongoing operations and the Company ceased any ongoing involvement with the disposed divisions. Accordingly, the results of operations and cash flows for these divisions are presented within discontinued operations in the accompanying consolidated statements of operations and cash flows.

The following table summarizes the CEP and K-12 Services divisions’ operating results, which are reflected as discontinued operations for the periods presented:

Aggregate depreciation and amortization expense for these assets was $6.9 million, $13.8 million and $5.1 million for the years ended December 31, 2011, 2010 and 2009, respectively. Interest capitalized in conjunction with the development of the Company’s internally developed software was $0.9 million, $0.7 million and $0.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.

As discussed in Note 5, the Company allocated $3.9 million of HER division long-lived asset impairment charges to internally developed software during the fourth quarter of 2011.

The following table summarizes the components of goodwill and intangible assets which are not subject to amortization:

The addition to goodwill in 2010 was the result of the Penn Foster working capital adjustment payment as discussed in Note 2. The purchase accounting adjustments in 2010 were attributed to corrections to opening tax liabilities that were ultimately settled by the Seller of Penn Foster and opening deferred taxes attributed to Penn Foster’s trade names. The Company evaluated these corrections and does not believe that these amounts are material to the consolidated financial statements as of December 31, 2011 and 2010. Territorial marketing rights and trade names are recorded within “Other intangibles, net” within the consolidated balance sheets.

During the third quarter of 2011, the Company continued to experience lower than expected profitability in the HER and Penn Foster businesses and accordingly, prepared a revised plan for fiscal 2011 and beyond. This plan incorporated updated estimates of future demand for product offerings and projected cash flows from the implementation of new initiatives and operating strategies. The Company normally assesses goodwill and indefinite-lived intangible assets at least annually, on October 1 of each year. However, as a result of the above events, management determined that it was appropriate to perform interim period tests for impairment in its HER and Penn Foster reporting segments as of September 30, 2011.

The Company reviewed its long-lived assets, excluding goodwill, territorial marketing rights and trade names, by performing recoverability tests that compared the carrying amount of its HER and Penn Foster long-lived asset groups, to their respective undiscounted cash flows expected to result from the use and eventual disposition of these asset groups. Management concluded from the results of the recoverability tests that neither the HER nor Penn Foster long-lived asset groups were impaired.

The Company performed an impairment test for its indefinite-lived intangible assets that involved a comparison of the estimated fair value of the intangible assets with their respective carrying values. To determine the fair value of the HER territorial marketing rights intangible asset, the Company used a discounted cash flow valuation approach, based on estimated royalty income generated from its product sales. Management concluded that there was no impairment to the HER territorial marketing rights intangible asset. To determine the fair value of the Penn Foster trade name intangible asset, the Company used the relief-from-royalty method. This method estimates the benefit of owning the intangible asset rather than paying royalties for the right to use a comparable asset. This method incorporates the use of significant judgments in determining both the projected revenues

attributable to the asset, as well as the appropriate discount rate and royalty rates applied to those revenues to determine fair value. Management concluded that the carrying value of the Penn Foster trade name intangible asset exceeded its fair value, and recorded a $6.8 million impairment loss in the third quarter of 2011 in the amount equal to that excess. This impairment was primarily the result of lower projected revenues for the Penn Foster division.

The Company tested for goodwill impairment at the reporting unit level by applying a two-step test. The Company does not aggregate operating segments within the HER and Penn Foster reporting segments and therefore each of these segments was considered a separate reporting unit for purposes of applying the two-step test. In the first step, the fair value of the HER and Penn Foster reporting units were compared to the carrying value of their respective net assets. If the fair value of the reporting unit exceeded the carrying value of the net assets of the reporting unit, goodwill was not impaired and there was no need to apply the second step of testing. If the carrying value of the net assets of the reporting unit exceeded the fair value of the reporting unit, the Company performed a second step which involves using a hypothetical purchase price allocation to determine the implied fair value of the goodwill and compared it to the carrying value of the goodwill. An impairment loss was recognized to the extent the implied fair value of the goodwill was less than the carrying amount of the goodwill.

To determine the fair value of the Penn Foster and HER reporting units, the Company relied on two valuation methods, combining income-based and market-based approaches and applying relatively even weightings to the results. The income-based approach incorporates projected cash flows, as well as a terminal value, and discounts such cash flows by a risk adjusted rate of return. This risk adjusted discount rate is based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity. The market-based approach incorporates information from comparable transactions in the market and publicly traded companies with similar operating and investment characteristics of the reporting unit to develop a multiple which is then applied to the operating performance of the reporting unit to determine value. The assumptions used in these approaches require significant judgment, and changes in assumptions or estimates could materially affect the determination of fair value of our reporting units. Management believes the most critical assumptions and estimates in determining the estimated fair value of our reporting units, include, but are not limited to, the amounts and timing of expected future cash flows for each reporting unit, the discount rate applied to those cash flows, long-term growth rates and the selection of comparable market multiples. The assumptions used in determining our expected future cash flows consider various factors such as anticipated operating trends particularly in student enrollment and pricing, planned capital investments, anticipated economic and regulatory conditions and planned business and operating strategies over a long-term horizon. Management believes its assumptions and cash flow projections are reasonably achievable given current market conditions and planned business and operating strategies.

The Company’s findings from its step-one test on the HER division indicated that the carrying value of its assets exceeded the estimated fair value of the division, and accordingly, the Company performed the second step test which determined that the carrying value of the goodwill exceeded the implied fair value of the goodwill, and recorded an impairment loss of $76.7 million in the third quarter of 2011 in the amount equal to that excess. Management believes that changes in cash flow assumptions, particularly around student enrollments and pricing, are the primary drivers leading to this impairment charge.

The Company’s findings from its step-one test on the Penn Foster division indicated that the estimated fair value of the division exceeded the carrying value of its assets by approximately 9%, and therefore $100.5 million of goodwill allocated to our Penn Foster division was not impaired. Given that Penn Foster was acquired in December 2009, management expects the estimated fair value of Penn Foster to reasonably approximate and exceed the division’s carrying value. Should the Penn Foster division’s revenue, profitability or financial performance be adversely affected in the future, the goodwill allocated to this division could become impaired.

As described in Notes 1 and 18, on March 26, 2012 the Company entered into an agreement to sell the HER division for $33.0 million in cash, subject to a purchase price adjustment for changes in working capital of the

HER division. In addition, the Company concluded that there is doubt as to its ability to continue as a going concern. As a result of these events, management determined that it was appropriate to perform additional tests for impairment in its HER and Penn Foster reporting segments as of December 31, 2011.

The Company’s review of its long-lived assets, excluding goodwill, territorial marketing rights and trade names, determined that the carrying amount of its HER long-lived asset group exceeded the undiscounted cash flows expected to result from the use and anticipated disposition of the HER division. As a result, the Company recorded an impairment loss of $8.4 million in the fourth quarter of 2011. Approximately $4.5 million of this loss was allocated to the HER division’s franchise cost intangible asset and $3.9 million was allocated to the HER division’s internally developed software. The Penn Foster long-lived asset group was not impaired.

The Company performed an impairment test for its indefinite-lived intangible assets and determined that neither the HER territorial marketing rights intangible asset nor the Penn Foster trade name intangible asset were impaired.

The Company tested for goodwill impairment at the reporting unit level by applying the two-step test, similar to the process followed during the third quarter of 2011. The Company’s findings determined that the HER division’s goodwill was fully impaired and as a result an impairment charge of $8.0 million was recorded during the fourth quarter of 2011 to write-off the remaining HER goodwill. The Company’s findings from its step-one test on the Penn Foster division indicated that the estimated fair value of the division exceeded the carrying value of its assets by approximately 12%, and therefore $100.5 million of goodwill allocated to our Penn Foster division was not impaired.

The following table summarizes the changes in the carrying amount of goodwill by reporting unit during the year ended December 31, 2011 (in thousands):

Aggregate amortization expense was $12.8 million, $20.3 million and $3.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. Estimated aggregate amortization is $9.5 million, $7.0 million, $5.1 million, $3.6 million, $2.1 million and $15.8 million for the years ending December 31, 2012, 2013, 2014, 2015, 2016 and thereafter, respectively.

Enrollments in fall 2011 programs that drove fees earned by the NLC strategic venture were less than anticipated and accordingly, in the third quarter of 2011 management performed a recoverability test on the CEP long-lived assets, primarily consisting of the NLC license intangible, and determined that it was impaired. In determining fair value, management considered the settlement value realized from the termination of the strategic venture as discussed in Note 3. The Company recorded an impairment loss of $8.4 million in the third quarter of 2011 for the excess of the NLC license carrying value over its estimated fair value. This impairment loss is included in loss from discontinued operations in the accompanying consolidated 2011 statement of operations. Upon termination of the NLC strategic venture in November 2011, the Company disposed of the remaining carrying value of the NLC license.

The following table summarizes the change in the carrying amount of the NLC license during the year ended December 31, 2011 (in thousands):

As discussed in Fourth Quarter 2011 Impairment Charges above, the Company allocated $4.5 million of HER division long-lived asset impairment charges to the franchise costs intangible asset.

The following table summarizes the Company’s accrued expenses as of December 31, 2011 and 2010:

Outstanding amounts under the Company’s long-term debt arrangements consist of the following:

The outstanding amounts above are presented net of unamortized discounts relating to original issue discounts, fees paid to lenders and discounts from embedded derivatives. The estimated fair value of our long-term debt approximated $136.3 million and $140.3 million as of December 31, 2011 and 2010, respectively. The credit facility loans bear interest at variable rates and therefore it is assumed that the face value of our credit facility debt approximates fair value. The fair values for the senior notes and junior notes were estimated using discounted cash flow analysis. Our notes payable and capital lease obligations are not traded and the fair values of these instruments are assumed to approximate their carrying values.

The Company is in compliance with all covenants under the debt agreements described below as of December 31, 2011. However, based on current business conditions discussed under Liquidity Risk and Management Plans in Note 1, there can be no assurance that the Company will be in compliance with its covenants as of March 31, 2012 or thereafter.

On April 2, 2012, the Company filed a Notification of Late Filing on Form 12b-25 with the Securities and Exchange Commission which provided the Company with an extension to file our Annual Report on Form 10-K no later than April 16, 2012. However, the Company’s debt agreements include an annual reporting covenant that requires the Company to provide audited financial statements within 90 days following its fiscal year end. In light of the fact that the Company has filed its Annual Report on Form 10-K with its lenders beyond the 90-day filing period, on April 16, 2012, the Company obtained consents from its lenders that waive the technical breach of this debt agreement filing requirement.

On December 7, 2009, concurrent with the Penn Foster acquisition described in Note 2, the Company entered into a credit agreement with General Electric Capital Corporation, as administrative agent (“GE Capital”) and any financial institution who thereafter becomes a Lender (as defined therein) (the “Original Credit Facility”), pursuant to which GE Capital agreed to provide the Company with senior secured credit facilities consisting of a five year $40.0 million senior secured term loan and a $10.0 million senior secured revolving credit facility. At closing, the Company drew down the full amount of the term loan and used the net proceeds of $36.6 million (after deducting lender fees) to fund a portion of the Penn Foster acquisition and to prepay indebtedness under the Company’s previous credit facility (described below).

These amendments were accounted for as loan modifications and accordingly, lender fees paid at closing ($0.6 million and $0.7 million in March and November 2011, respectively) were recorded as additional credit facility discount and will be amortized, along with the preexisting discount and unamortized debt issuance costs, to interest expense over the remaining life of the Senior Credit Facilities. Approximately $0.1 million of fees paid to third parties relating to the amendments were expensed as incurred and recorded in other (expense) income, net in the accompanying 2011 consolidated statement of operations.

If by March 31, 2012 the Company does not have commitments from new institutions, investors or other third parties that result in at least a $25.0 million repayment of the GE Senior Credit Facilities, the Company will be obligated to pay GE Capital an additional amendment fee of approximately $0.6 million. If such commitments are not obtained by June 30, 2012, the Company will be obligated to pay an additional amendment fee of approximately $1.8 million. The additional amendment fees, if incurred, are due and payable on April 1, 2013. As described in Note 18, on March 26, 2012 the Company entered into an agreement to sell the HER division for $33.0 million in cash, subject to a working capital adjustment, and expects to use the net proceeds from the sale to repay at least $25.0 million under the GE Senior Credit Facilities. Accordingly, the Company does not expect to incur these additional amendment fees.

In August 2010, and again in March, November and December 2011, the Company entered into amendments to the Senior Note Purchase Agreement that provided the Company with, among other things, greater flexibility in maintaining covenant compliance. The amendments in November and December 2011 also increased the Company’s short-term liquidity by adjusting the interest terms on the Term B Notes (described below) and by providing the Company with a second lien delayed draw facility (the “Term A Notes”, and collectively with the Term B Notes, the “Senior Subordinated Notes”) whereby the Company may borrow up to $5.0 million at any time through June 30, 2012. Once utilized, the delayed draw facility will bear interest at 17.5%, payable in cash on a quarterly basis. The Term A Notes mature on March 7, 2015. If the Company prepays any outstanding advances under the Term A Notes prior to maturity, the Company would be obligated to pay a prepayment premium ranging from 2.0% to 10.0%, depending on the timing and amount of the prepayment. The Company paid a $0.1 million fee for the Term A Notes facility in November 2011 which it recorded as deferred debt issuance costs in other long term assets in the accompanying consolidated balance sheet and which is being amortized to interest expense over the life of the facility. No amounts were outstanding under the Term A Notes as of December 31, 2011.

The provisions requiring mandatory prepayments due upon a change of control, an asset sale and debt and specified equity issuances constitute a compound embedded derivative that is being accounted for separately. The Company determined that the fair value of this embedded derivative upon the issuance of the Term B Notes was $0.5 million which was subtracted from the original carrying amount of the Term B Notes and reflected as a debt discount, and also increased long-term liabilities by $0.5 million. The debt discount is amortized as interest expense using the effective interest method. In subsequent fiscal quarter-end periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) in the consolidated statement of operations. As of December 31, 2011 and 2010, the fair value of the embedded derivative was $0.2 million and $0.2 million, respectively, and the Company recorded gains of $0.01 million, $0.3 and $0.04 million in other expense, net in the accompanying statement of operations for the years ended December 31, 2011, 2010 and 2009, respectively.

On December 7, 2009, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) in which the aggregate principal amount of approximately $25.5 million of junior subordinated notes of the Company (the “Junior Notes”) were purchased. The holders of the Junior Notes received an aggregate of 4,275 shares of Series E Non-Convertible Preferred Stock of the Company (the “Series E Preferred Stock”). The terms of the Series E Preferred Stock are more fully described in Note 8. The Company used the net proceeds of $24.8 million (after deducting original issue discount and lender fees) to fund the Penn Foster acquisition.

The Junior Notes mature on June 7, 2016, unless otherwise prepaid or accelerated pursuant to the terms thereof. The Junior Notes bear interest at 17.5% per annum, all of which is payable quarterly in kind. The interest rate applicable to the Junior Notes will increase to 18.5% per annum upon an event of default under the Senior

Notes that remains uncured for 45 days. In addition, the Junior Notes are subject to a default interest rate of an additional 2% upon the occurrence of an event of default, which may be increased by 0.5% for each 6 month period that such event of default shall remain uncured. The effective interest rate on the Junior Notes when factoring in discounts is 21.4%.

The Company is required to redeem the Junior Notes upon the election of a majority of the holders of the Junior Notes (i) if the ratio of consolidated total debt to consolidated adjusted EBITDA exceeds 6.00 to 1 at any time after the Senior Notes cease to be outstanding or (ii) upon a change of control or other liquidation event of the Company. The redemption price for a mandatory redemption is equal to the outstanding principal amount plus accrued interest on the Junior Notes, except that, in the case of a redemption for a change of control or other liquidation event of the Company within 18 months of the closing, the redemption price would have been 1.9 times the original aggregate amount of the Junior Notes. The provision for prepayment due upon the holders’ election to redeem the Junior Notes constitutes an embedded derivative and has been accounted for separately. The Company determined that the fair value of the embedded derivative upon the issuance of the Junior Notes was $1.0 million and was subtracted from the original carrying amount of the Junior Notes and reflected as a debt discount, and also increased long-term liabilities by $1.0 million. The debt discount is amortized as interest expense using the effective interest method. In subsequent fiscal quarter-end periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) in the statement of operations. As of December 31, 2011 and 2010, the fair value of the embedded derivative was $0.2 million and $0.5 million, respectively and the Company recorded gains of $0.3 million, $0.4 million and $0.05 million in other expense, net in the accompanying statement of operations for the years ended December 31, 2011, 2010 and 2009, respectively.

In addition to other covenants, the Junior Notes place limits on the Company and its subsidiaries’ ability to declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make loans, incur additional indebtedness, amend or otherwise alter debt and other material agreements, make capital expenditures, engage in mergers, acquisitions and asset sales, transact with affiliates and alter its business. The Junior Notes also contain events of default, including cross defaults under other debt obligations of the Company, and affirmative covenants, including a financial covenant requiring the Company to maintain a ratio of consolidated total debt to consolidated adjusted EBITDA ratio of less than 6.00 to 1 at any time after the Senior Notes cease to be outstanding. Failure to comply with these covenants, or the occurrence of an event of default, could permit the holders of the Junior Notes to declare all amounts thereunder, together with accrued interest and fees, to be immediately due and payable.

conjunction with the repayments, the Company recorded charges of $1.0 million in the second quarter of 2010 related to fees and the write-off of unamortized debt issuance costs, discounts and an associated embedded derivative, which are reflected in other (expense) income, net in the accompanying 2010 consolidated statement of operations.

On December 7, 2009, the Company repaid approximately $7.4 million, including interest, to Wells Fargo Foothill, LLC (“Wells Fargo”) in satisfaction of its obligations pursuant to a July 2008 Credit Agreement and as a result, terminated the July 2008 Credit Agreement and obtained a release of the related security interest held by Wells Fargo. The Company recorded charges of $0.9 million related to a prepayment premium fee and the write-off of debt issuance costs, which are reflected in other (expense) income, net in the accompanying 2009 consolidated statement of operations.

In October 2008, the Company completed its acquisition of the Princeton Review of Pittsburgh, Inc. The Company financed part of this acquisition with a note to the seller. The promissory note of $0.3 million is payable in equal annual installments through October 2011 and bears an interest rate of 2.9% per year, payable on the annual anniversary date. At December 31, 2010, $0.1 million was outstanding and the balance was paid in full during 2011.

In 2003, the Company acquired Princeton Review of North Carolina, Inc. The Company financed part of this acquisition with notes, which included imputed interest at 5% per year. These notes were payable in annual installments, including interest of approximately $0.1 million per year in the years 2007 through 2010. At December 31, 2009, $0.1 million was outstanding and the balance was paid in full during 2010.

In 2001, the Company completed its acquisition of Princeton Review of New Jersey, Inc. and Princeton Review of Boston, Inc. The Company financed part of these acquisitions with notes to the sellers. The remaining note matured on January 1, 2010 and bore interest at the rate of 8.25% per year, payable quarterly. At December 31, 2009, $0.2 million was outstanding and the balance was paid in full during 2010.

The annual maturities of long-term debt, excluding capital leases, for the next five years and thereafter are estimated to be as follows:

The Company leases copier equipment under capital leases, all of which are included in property, equipment and internal use software, net in the accompanying consolidated balance sheets. Future minimum payments under capital leases in effect at December 31, 2011 are as follows:

On April 20, 2010, the Company sold 14.0 million shares of its common stock at a price to the public of $3.00 per share, and on April 28, 2010 sold an additional 2.1 million shares upon the underwriter’s exercise of its over-allotment option. The net proceeds of this issuance ($44.3 million after deducting underwriting discounts of $0.15 per share, commissions and other offering expenses) were used to repay the Bridge Notes, fund contribution obligations under the Contribution Agreement with the National Labor College as described in Note 3, and for general working capital purposes.

The excess of the carrying amount of the Series E Preferred Stock on April 21, 2010 ($112.6 million, exclusive of unamortized Preferred Stock issuance costs) over the conversion value of the Series D Preferred Stock ($111.5 million) was recognized in the second quarter of 2010 as earnings available to common shareholders in the accompanying consolidated statement of operations. The unamortized Preferred Stock issuance costs will continue to be accreted to additional paid-in capital through December 7, 2014.

The terms of the Series D Preferred Stock (and Series E Preferred Stock prior to its conversion to Series D Preferred Stock) contain certain restrictive provisions that are substantially the same as the restrictive provisions for the prior Series C Preferred Stock. These restrictive provisions prohibit the Company from, among other things, (i) creating or issuing any equity securities or securities convertible into equity securities with equal or superior rights, preferences or privileges to those of the Series D Preferred Stock or Series E Preferred Stock;

(ii) altering, amending or waiving the Certificate of Incorporation or By-laws in a manner that affects the rights, preferences or powers of the Series D Preferred Stock or Series E Preferred Stock; (iii) increasing or decreasing the number of authorized shares of Series D Preferred Stock or Series E Preferred Stock; (iv) declaring or paying any dividends on, or making any redemption of any capital stock, except for certain exceptions; (v) issuing any debt securities which are convertible into capital stock; (vi) except as set forth in the applicable Certificate of Designation, merging with or into or consolidating with any other person, except for mergers or consolidations involving the issuance of shares of capital stock or cash not exceeding the thresholds specified in the applicable Certificate of Designation, or engage in any change of control transaction or (vii) hiring, terminating or replacing the Company’s Chief Executive Officer.

On December 7, 2009, the Company entered into a Series E Preferred Stock Purchase Agreement (the “Series E Purchase Agreement”) with Bain Capital Venture Fund 2007, L.P., BCVI-TPR Integral L.P. and their affiliates, Prides Capital Fund I LP, RGIP, LLC and Falcon and its affiliates (collectively, the “Series E Purchasers”), providing for the conversion of all of the outstanding shares of Series C Convertible Preferred Stock (60,000 shares) of the Company (the “Series C Preferred Stock”) into 54,000 shares of Series E Preferred Stock and the issuance and sale of an additional $40.0 million of Series E Preferred Stock (40,000 shares) at a purchase price of $1,000 per share. The Company completed the issuance of the Series E Preferred Stock simultaneously with the execution of the transaction documents. Immediately following the closing of the issuance of the Series E Preferred Stock, the Company filed a Certificate of Elimination eliminating the Series C Preferred Stock.

The excess of the carrying amount of the Series C Preferred Stock on December 7, 2009 ($67.3 million) over the fair value of the Series E Preferred Stock received in the conversion ($54.0 million) was recognized as earnings available to common shareholders in the accompanying statement of operations for the year ended December 31, 2009. The Company used the net cash proceeds from the issuance and sale of 40,000 shares of Series E Preferred stock ($38.4 million after deducting issuance costs) to fund the Penn Foster acquisition.

As discussed in Note 7, the holders of the Junior Notes received an aggregate of 4,275 shares of Series E Preferred Stock for no additional consideration. The Junior Notes gross offering proceeds of $25.5 million were allocated between the Junior Notes ($21.2 million) and the Series E Preferred Stock ($4.3 million) based on their relative fair values.

On March 12, 2010, the Company issued an additional $10.0 million of Series E Preferred Stock to Camden Partners Strategic Fund IV, L.P. and Camden Partners Strategic Fund IV-A, L.P. (together, “Camden”) at a purchase price of $1,000 per share on the same terms and conditions as the existing Series E Purchasers pursuant to the Series E Purchase Agreement among the Company and the original Series E Purchasers. In connection with this purchase, Camden also became a party to the Amended and Restated Investor Rights Agreement, dated December 7, 2009, with Camden, the existing Series E Purchasers and certain other parties pursuant to which the Company granted Camden demand registration rights, information rights and preemptive rights with respect to certain issuances which may be undertaken by the Company in the future identical to the rights granted to the existing Series E Purchasers upon the initial sale of Series E Preferred Stock on December 7, 2009. The net proceeds of this issuance ($9.5 million after deducting issuance costs and fees) were used to fund contribution obligations under the Contribution Agreement with the National Labor College as described in Note 3, and for general working capital purposes.

Conversion. As described above, on April 21, 2010 the Company shareholders approved the conversion of shares of Series E Preferred Stock into shares of Series D Preferred Stock. The conversion was mandatory, with the shares of Series E Preferred Stock converting into shares of Series D Preferred Stock at a conversion rate per share equal to (i) $1,000 plus the accumulating rate of return thereon divided by (ii) $1,000 per share.

Accumulating Rate of Return. The holders of Series E Preferred Stock were entitled to receive an accumulating rate of return of 8% during the first year, and 12% per year thereafter.

Voting Rights. The Series E Preferred Stock did not have any voting rights except as provided by law or as set forth in the Certificate of Designation for the Series E Preferred Stock.

As noted above, immediately following the closing of the issuance of the Series E Preferred Stock on December 7, 2009, the Company filed a Certificate of Elimination eliminating the Series C Preferred Stock.

On July 23, 2007, the Company entered into a Series C Preferred Stock Purchase Agreement (the “Purchase Agreement”) with Bain Capital Venture Fund 2007, L.P., and its affiliates, Prides Capital Fund I, L.P. (“Prides”) and RGIP, LLC (collectively, the “Purchasers”), providing for the issuance and sale of $60.0 million of the Company’s Series C Preferred Stock (60,000 shares) at a purchase price of $1,000 per share. Each share of Series C Preferred Stock was convertible into shares of the Company’s common stock at an initial conversion price of $6.00 per share, subject to adjustment. The Series C Preferred Stock contained a compounding, cumulative 6% per annum dividend payable upon conversion of the Series C Preferred Stock. Following the fourth anniversary of the issuance of the Series C Preferred Stock the dividend would no longer accrue unless declared by the Board of Directors of the Company (the “Board”). Additionally, on or at any time after the eighth anniversary of the Issue Date, if requested by the holders of at least 10% of the then outstanding Series C Preferred Stock, each holder of Series C Preferred Stock would have the right to require the Company to redeem all of such holders’ Series C Preferred Stock, for cash, at a redemption price equal to the Original Purchase Price plus accrued and unpaid dividends. The Company also had the right to redeem the then outstanding Series C Preferred Stock following the eighth anniversary of the issue date, for cash, at a redemption price equal to the Original Purchase Price plus accrued and unpaid dividends.

The Purchase Agreement allowed the holders of the Series C Preferred Stock to elect two directors to the Board who were elected on July 23, 2007.

In addition, the Company entered into an Investor Rights Agreement dated July 23, 2007, by and among the Company and the Purchasers, pursuant to which the Company granted the Purchasers and Michael J. Perik, the Company’s Chief Executive Officer, demand registration rights for the registration of the resale of the shares of

common stock issued or issuable upon conversion of Series C Preferred Stock. Any demand for registration must be made for at least 20% of the total shares of such common stock then outstanding, provided, however, that the aggregate offering price shall not be less than $2.5 million. The Investor Rights Agreement also grants the Purchasers preemptive rights with respect to certain issuances which may be undertaken by the Company in the future.

The Company records accrued unpaid dividends and accretion of issuance costs related to the Series D, Series E and Series C Preferred Stock in the accompanying statements of operations below net loss and above loss attributed to common stockholders.

The Company leases office space, equipment and classroom site locations under operating leases that expire over various terms. Escalation clauses present in operating leases, excluding those tied to CPI or other inflation-based indices, are recognized on a straight-line basis over the non-cancelable term of the lease. Future minimum rental commitments under non-cancelable operating leases in effect at December 31, 2011 are as follows:

Aggregate rent expense (including the effect of straight-line rent expense) under operating leases for the years ended December 31, 2011, 2010 and 2009 was approximately $16.2 million, $17.1 million, and $17.1 million, respectively. These amounts include rent expense for the rental of space on a month-to-month basis, as well as those amounts incurred under operating leases for longer periods. Certain leases provide for early termination without penalty.

On July 29, 2011, Washtenaw County Employees’ Retirement System filed a securities class action complaint in the United States District Court for the District of Massachusetts against the Company, certain of its current and former officers and directors, and the underwriters in the Company’s April 2010 public offering. The complaint, as amended, alleged material misstatements and omissions in the Company’s April 2010 public offering materials. On March 6, 2012, the Court granted the defendants’ motions to dismiss this action with prejudice, and entered judgment for defendants that same day.

through March 11, 2011. On September 28, 2011, the Court ordered the Golden action stayed pending a final decision on any motion to dismiss the Washtenaw action. On April 9, 2012, the parties in the Golden action jointly moved for an order granting Plaintiffs’ request to voluntarily dismiss this action without prejudice. On April 11, 2012, the Court granted the motion for dismissal, dismissing the action without prejudice and with all parties bearing their own costs.

Further, On November 14, 2011, Calvin Di Nicolo filed a shareholder derivative complaint in the United States District Court for the District of Massachusetts against certain of the Company’s current and former officers and directors. The complaint alleges, among other theories, that the defendants breached their fiduciary duties by causing or allowing the Company to make material misstatements and omissions in connection with its public filings and statements during the period from March 12, 2009 through March 8, 2011. On January 12, 2012, the Court ordered the Di Nicolo action stayed pending a final decision on any motion to dismiss the Washtenaw action. On April 9, 2012, the parties in the Di Nicolo action jointly moved for an order granting Plaintiffs’ request to voluntarily dismiss this action without prejudice. On April 11, 2012, the Court granted the motion for dismissal, dismissing the action without prejudice and with all parties bearing their own costs.

On January 21, 2011, the Company received a Civil Investigative Demand from the U.S. Attorney’s Office for the Southern District of New York, seeking documents and information relating to the Supplemental Education Services provided by the Princeton Review in New York City during 2002-2010. The Company is cooperating with the U.S. Attorney’s Office in providing the requested documents and information. Anticipated losses associated with this matter are subject to a range that is not currently estimable. However, management has accrued approximately $0.2 million for this matter as of December 31, 2011.

In connection with its publishing agreements, the Company has entered into various co-authorship agreements for the preparation of manuscripts. These agreements require payment of nonrecourse advances for services rendered at various established milestones. The Company did not have any future contractual commitments under the co-authorship agreements for manuscripts not yet delivered for the years ended December 31, 2011, 2010, and 2009. In addition, the co-authors are entitled to a percentage of the future royalties earned by the Company, which are first to be offset against such advances. The total costs incurred under these co-authorship agreements by the Company for royalties were approximately $1.1 million, $0.7 million and $0.7 million the years ended December 31, 2011, 2010, and 2009, respectively.

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

The Penn Foster division has commitments with certain book publishers to purchase minimum quantities of customized textbooks over the next two years. These minimum purchase commitments total $2.3 million and $1.0 million for 2012 and 2013, respectively.

The owner of Penn Foster prior to the Seller (the “Previous Owner”), filed a petition with the IRS proposing to amend tax returns for periods prior to the date of acquisition to recognize additional taxable income of $33.0 million. Due to certain factors, the Internal Revenue Service (the “IRS”) must approve the petition before the Previous Owner is permitted to amend the prior tax returns. If the IRS were to reject the petition of the Previous Owner, the Company could potentially be liable for the payment of taxes on the additional taxable

income of $33.0 million. Under the Acquisition Agreement between the Company and the Seller, the Seller and certain members of the Seller have represented that Penn Foster is entitled to be indemnified by the Previous Owner for unpaid and undisclosed tax obligations that arose from events occurring prior to the Company’s acquisition of Penn Foster. Therefore, in the event that the Company were to become liable for any taxes due on the additional taxable income of $33.0 million, the Company believes that it would have a right to recover such amounts from the Previous Owner or, secondarily, the Seller. The Company currently believes that it is probable that the IRS will accept the petition of the previous owners and that it will not be obligated to pay any taxes that may become due on the additional taxable income of $33.0 million. Accordingly, no provision for income taxes related to this matter has been recorded in the accompanying financial statements as of December 31, 2011.

As part of (loss) income from discontinued operations, the Company recorded an income tax provision of $1.0 million for the year ended December 31, 2009. No income tax provision for discontinued operations was recorded for the years ended December 31, 2011 and 2010.

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

Under established accounting standards, deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. A valuation allowance has been recorded for $93.8 million and $63.1 million for the years ended December 31, 2011 and 2010, respectively.

In accordance with established accounting standards, the excess of book value over tax basis of the Company’s goodwill balance represents a taxable temporary difference for which a deferred tax liability should be recognized since the reversal of the liability is indefinite and predicated on a goodwill impairment which may never occur or occur after the Company’s net operating loss carry-over period expires. The Company also has historically recorded a deferred tax liability related to intangible assets with indefinite lives. During the third and fourth quarters of 2011, the Company recorded $84.7 million in goodwill impairment charges which reversed the previously recorded deferred tax liability related to goodwill and concurrently resulted in the recording of a $8.2 million deferred tax asset for future deductible temporary differences related to goodwill. Because of the uncertainty of realizing the future benefit of this deferred tax asset, the Company recorded a full valuation allowance against the deferred tax asset created by the goodwill impairment charge. During the third quarter of 2011, the Company also recorded a $6.2 million impairment charge against the United States trade name. This impairment charge decreased the deferred tax liability related to this asset. Concurrent with these impairment charges, the Company recorded an $8.5 million tax benefit, which resulted from the full reversal of the deferred tax liability related to goodwill and the decrease in the deferred tax liability related to the United States trade name.

The Company has federal net operating loss carryforwards totaling approximately $191.3 million which expire in the years 2019 through 2031, state net operating loss carryforwards totaling approximately $174.4 million which expire in the years 2012 through 2031 and other temporary differences which will be available to offset regular taxable income during the carryforward period. Net operating losses are subject to certain limitations of Internal Revenue Code Section 382 (“Section 382”) due to ownership changes. These limitations do not significantly impact the income tax provision for the year ended December 31, 2011.

A reconciliation setting forth the differences between the effective tax rates of the Company for the years ended December 31, 2011, 2010 and 2009 and the U.S. federal statutory tax rate is as follows:

Based on the Company’s evaluation through the year ended December 31, 2011, it concluded that there were no additional uncertain tax positions other than those recorded by Penn Foster prior to the acquisition. The tax years ended December 31, 2008 and later remain subject to examination by major tax jurisdictions as of December 31, 2011. A reconciliation of the gross amount of unrecognized tax benefits excluding accrued interest and penalties from January 1, 2009 through December 31, 2011 is as follows:

During 2011, the unrecognized tax benefits decreased due to the expiration of the statute of limitation for assessment for certain uncertain tax positions. At December 31, 2011, the Company had $2.8 million of net unrecognized tax benefits, none of which if recognized, would reduce the Company’s effective tax rate. Over the next 12 months, we expect that the unrecognized tax benefit will decrease by $0.8 million due to the expiration of the statute of limitation for assessment for certain uncertain tax positions.

The Company reports penalties and tax-related interest expense as a component of the provision for income taxes in the accompanying consolidated statement of operations. As of December 31, 2011 and 2010 the Company had $0.3 million and $0.3 million of accrued interest and penalties, respectively, in accrued expenses in the accompanying consolidated balance sheets.

The Company files income tax returns in the United States (“U.S.”) on a federal basis, various U.S. states, and in Canada. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The 2008 and later tax years remain subject to examination by the applicable taxing authorities.

At December 31, 2011, unrepatriated earnings of non-U.S. subsidiaries totaled $1.9 million. No provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely. If these earnings were distributed to the United States in the form of dividends or otherwise, it would be included in the Company’s U.S. taxable income. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

The Company has an indemnification agreement with the former owners of Penn Foster which provides for reimbursement to the Company for payments made in satisfaction of tax liabilities from prior to December 7, 2009. As the unrecognized tax benefits decrease due to the expiration of the statute of limitations for assessment, a reduction to the indemnification receivable is recorded with a corresponding adjustment to other expense, net in the accompanying consolidated statements of operations. As of December 31, 2011 the balance of this receivable included in other long term assets is $3.0 million.

The Company’s 2000 Stock Incentive Plan, as amended (the “Stock Incentive Plan”) provides for the authorization and issuance of an aggregate of 9,032,588 shares of common stock. The Stock Incentive Plan provides for the granting of incentive stock options, non-qualified stock options, restricted stock units, restricted stock and deferred stock to eligible participants. Options granted under the Stock Incentive Plan are for periods not to exceed ten years and generally vest quarterly over four years. Awards of restricted stock units are granted to officers and certain employees and generally vest quarterly over four years. Awards of restricted stock to directors are generally granted in June of each year and vest in January of the following year. As of December 31, 2011, there were approximately 574,000 shares available for grant under the Stock Incentive Plan.

Accounting standards require the application of an estimated forfeiture rate to current period expense to recognize stock-based compensation expense only for those awards expected to vest. The Company estimates forfeitures based upon historical data, adjusted to exclude periods in which forfeiture rates are impacted by non-recurring events, and will adjust its estimate of forfeitures if actual forfeitures differ, or are expected to differ from such estimates. Subsequent changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense in future periods.

Total stock-based compensation expense recorded for the years ended December 31, 2011, 2010 and 2009 was $2.4 million, $3.5 million and $3.0 million, respectively. Stock-based compensation is recorded within selling, general and administrative expense in the accompanying consolidated statements of operations.

The Company utilizes the Black-Scholes option valuation model to determine the fair value of its stock option grants. The Company estimates expected volatility based on historical volatility over a period equivalent to the estimated expected life of the option. The Company uses historical data to estimate option exercise and employee termination behavior, adjusted for known trends, to arrive at the estimated expected life of an option. The Company updates these assumptions on a quarterly basis to reflect recent historical data. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The following table summarizes the weighted-average assumptions the Company used in its fair value calculations at the date of grant:

The Company has never declared cash dividends on any of its capital stock and does not expect to do so in the foreseeable future.

In connection with the hiring of certain executive officers, the Company has granted options outside of the Stock Incentive Plan, for periods not to exceed ten years, and which typically vest quarterly over four years. During 2009, the Company granted an aggregate of 600,000 options outside of the Stock Incentive Plan to the president of the Higher Education Readiness division and the former president of the Penn Foster division. During 2010, the Company granted 1,150,000 options outside of the Stock Incentive Plan to the Company’s new Chief Financial Officer.

Information concerning all stock option activity for the year ended December 31, 2011 is summarized as follows:

The weighted-average grant-date fair value per share of options granted during 2011, 2010 and 2009 was $0.17, $0.90 and $1.67, respectively. There was no aggregate intrinsic value for stock options outstanding and exercisable as of December 31, 2011 and 2010 and $0.1 million of aggregate intrinsic value for stock options outstanding and exercisable as of December 31, 2009.

As of December 31, 2011, the total unrecognized compensation cost related to non-vested stock option awards amounted to approximately $3.5 million, net of estimated forfeitures, which will be recognized over the weighted-average remaining requisite service period of approximately 2.7 years.

Information concerning all non-vested shares of restricted stock units and restricted stock for the year ended December 31, 2011 is summarized as follows:

Included in the above table are 597,332 shares of restricted stock granted and vested on March 14, 2011 to certain employees as bonus compensation for 2010 performance targets that were achieved. The grant date fair value of these restricted stock awards was approximately $0.2 million, which was recognized as stock based

compensation expense during the year ended December 31, 2010. The above table also includes 1,943,880 shares of restricted stock units having an aggregate grant date fair value of $0.8 million that were granted to the Company’s interim Chief Executive Officer. These awards to the interim Chief Executive Officer typically vest one month after the date of grant and 120,193 shares remain unvested as of December 31, 2011. The table also includes 15,000 shares of restricted stock awards to certain non-employee directors that were granted in June 2011 and vested on January 30, 2012. The weighted-average grant-date fair value per share of awards granted during 2011, 2010 and 2009 was $0.39, $2.56 and $3.83, respectively.

During the years ended December 31, 2010 and 2009, the Board of Directors granted 25,000 shares and 545,000 shares, respectively, of restricted stock units to certain officers and senior management of the Company having a grant date fair value of approximately $0.1 million and $2.1 million, respectively. In addition, during the year ended December 31, 2009, the Board of Directors granted 400,000 shares of restricted stock units having a grant date fair value of $1.5 million outside of the Stock Incentive Plan to the new president of the Higher Education Readiness division and the former president of the Penn Foster division. These restricted stock units vest quarterly over a four year period. On the date that restricted stock unit shares vest, the Company withholds the number of vested shares based on the common stock closing price on such vesting date equal to the required tax withholdings of the employee. Such shares are reflected as treasury stock and during the years ended December 31, 2011 and 2010, the Company withheld 30,032 and 64,156 shares, respectively of treasury stock to cover employee tax withholdings.

As of December 31, 2011, the total remaining unrecognized compensation cost related to non-vested restricted stock awards and units amounted to approximately $0.6 million, which will be recognized over the weighted-average remaining requisite service period of approximately 1.1 years.

Performance based stock awards are recognized as expense when it becomes probable performance measures triggering vesting will be met. There were no performance based stock awards outstanding as of December 31, 2011.

The Company has a retirement savings plan (the “Plan”) under Section 401(k) of the Internal Revenue Code which provides that eligible employees may make contributions subject to Internal Revenue Code limitations. The Plan covers substantially all employees of the Company who meet the minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pre-tax basis. Upon completion of one year of service, employees receive matching contributions from the Company of 100% up to the first 4% of eligible pay that the employee contributes.

On December 7, 2009, the Company assumed the retirement savings plan of Penn Foster. This plan was established under Section 401(k) of the Internal Revenue Code and covers substantially all employees of Penn Foster who meet the minimum age and service requirements. Penn Foster’s matching contribution is 100% of the first 2% and 50% of the next 5% of contributed salary if the employee’s employment is governed under the terms of a collective bargaining agreement, and 50% of the first 6% of contributed salary if the employee’s employment is not governed by a collective bargaining agreement.

The Company’s aggregate contributions to both plans, including Penn Foster’s since December 7, 2009, were $0.7 million, $0.8 million, and $0.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

On March 8, 2011, the Company appointed John M. Connolly as Interim President and Chief Executive Officer. Mr. Connolly has served as an operating partner of Bain Capital Ventures since 2009 and as a managing director since January 2010. Bain Capital Ventures is an affiliate of certain of the Series D Preferred Stock owners. Pursuant to a letter agreement between Mr. Connolly and the Company, as amended for extensions, during 2011 Mr. Connolly was awarded 1,943,880 restricted stock units having an aggregate grant date fair value of $0.8 million. These awards typically vest one month after the individual grant date and 120,193 shares remain unvested as of December 31, 2011. Mr. Connolly will be awarded 120,192 restricted stock units per month from January 8, 2012 to April 7, 2012. Mr. Connolly was also paid a monthly salary of $0.1 million from July 8, 2011 to November 7, 2011, and is paid $0.05 million per month from December 8, 2011 to June 30, 2012 when his current employment extension period expires. Pursuant to Mr. Connolly’s arrangement with Bain Capital Ventures, Mr. Connolly is obligated to transfer his salary and the value of his restricted stock unit awards to Bain Capital Ventures.

On September 27, 2011, the Company entered into an employment agreement with Frank F. Britt (the “Interim Employment Agreement”) under which Mr. Britt was appointed to serve as the interim President of Penn Foster, Inc., the Company’s wholly-owned subsidiary. Further, on January 1, 2012, the Company entered into an Executive Employment Agreement with Mr. Britt (the “Executive Employment Agreement”) pursuant to which Mr. Britt serves as the Chief Executive Officer of Penn Foster. Since 2011, Mr. Britt has served as an Executive-in-Residence at Bain Capital Ventures. Per the Interim Employment Agreement, the Company compensated Mr. Britt $0.14 million in 2011, consisting of base salary compensation in the amount of $0.09 million and a bonus payment of $0.05 million.

Also during 2011, the Company reimbursed Bain Capital Ventures approximately $0.1 million for out-of-pocket expenses, which are included in selling, general and administrative expenses in the accompanying 2011 consolidated statement of operations. Bain Capital Ventures also assisted the Company with business strategy consulting services. For these services, Bain Capital Ventures charged fees of approximately $0.15 million, which are included in restructuring and other related expenses in the accompanying 2011 consolidated statement of operations. As of December 31, 2011, approximately $0.2 million of these expenses and fees are unpaid and included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

During 2008, the Company entered into agreements with Bain Capital LLC, another affiliate of certain of the Series D Preferred Stock owners, to provide live and online GMAT instruction and business school tutoring services to a limited number of Bain Capital LLC employees. For the years ended December 31, 2011, 2010 and 2009, the Company recognized revenue of approximately $0.06 million, $0.04 million and $0.01 million, respectively, from these agreements.

Michael J. Perik, the Company’s former President and Chief Executive Officer who resigned on March 8, 2011, has a controlling ownership interest in US Skills, LLC (“US Skills”). During 2008 and 2009, the Company, through its former K-12 Services division, developed and licensed certain K-12 assessment platform software to US Skills and received a $0.4 million development fee and $0.7 million of license fees through December 31, 2009. The Company also received sublicensing fees from US Skills of $0.2 million in 2009. These fees are included in loss from discontinued operations in the accompanying 2009 consolidated statement of operations.

On December 30, 2009, the Company entered into a software license agreement with US Skills whereby the Company agreed to provide its online SAT and ACT preparation software, third party software and hardware to US Skills. The Company received $0.8 million in consideration of this agreement during 2010.

Additionally, the Company assumed responsibility for certain project management and administrative functions on behalf of US Skills for which the Company was reimbursed by US Skills. At the end of 2009, the project management agreement was terminated and the Company entered into a reimbursement agreement under which the Company continued to employ certain employees and consultants who provided services to US Skills, for which the Company was reimbursed by US Skills. In 2011, 2010 and 2009, the Company received reimbursement of $0.2 million, $0.2 million and $0.4 million, respectively, under the project management and reimbursement agreements. The reimbursement agreement expired on June 30, 2011.

In accordance with accounting standards established for consolidation of variable interest entities, the Company evaluated at each reporting period whether its interest and relationships with US Skills would require the Company to consolidate US Skills. The Company determined that consolidation of US Skills was not required.

From time to time the Company contracted with Kavanaugh Software Innovations, LLC, (“KSI”) a software development and services company, to perform a variety of software development and internet services. In December 2009 the Company hired a vice president of the former CEP division, who, together with his spouse, is a majority owner of KSI and whose spouse is president of KSI. During the year ended December 31, 2010, the Company paid KSI an aggregate of $0.07 million of internet service fees. This vice president’s employment with the Company terminated in May 2011 and no fees were paid to KSI during the year ended December 31, 2011.

The Company had a loan to one former executive officer in the amount of $0.2 million that accrued interest at 7.3% per year and was secured by 35,662 shares of the Company’s common stock. On March 20, 2009, the Company received the 35,662 shares for full settlement of the loan and returned the shares to authorized, but unissued common stock. In conjunction with the settlement, the Company recognized a loss of $0.05 million which is included in other expense, net in the accompanying consolidated statement of operations for the year ended December 31, 2009. No loans were made to executive officers after February 2002 and no loans are outstanding as of December 31, 2011 and 2010.

The Company currently operates in two reportable segments: Higher Education Readiness (“HER”) and Penn Foster. These operating segments are divisions of the Company for which separate financial information is available and evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. The HER division provides in-person and online test preparation courses, including classroom-based and small group instruction and individual tutoring in test preparation and academic subjects. Additionally, the division receives royalties from its independent international franchisees that provide test preparation courses under the Princeton Review brand as well as from the sale of more than 165 print and software titles on test preparation, academic admissions and related topics under the Princeton Review brand sold primarily through Random House, Inc. The Penn Foster division, acquired in December 2009, provides regionally and nationally accredited, career-focused, online degree and vocational programs in the United States, Canada and over 150 countries around the world. The SES division delivered state-aligned research-based academic tutoring instruction to students in schools in need of improvement in school districts throughout the country. As discussed in Note 16, the Company exited the SES business as of the end of the 2009-2010 school year and therefore does not report under this segment beyond 2010. As discussed in Note 3, in November 2011 the Company ceased all activities relating to strategic venture partnerships and discontinued its Career Education Partnerships (“CEP”) division. The following segment results include the allocation of certain information technology costs, accounting services, executive management costs, legal department costs, office facility expenses, human resource expenses and other shared services.

The segment results include Adjusted EBITDA for the periods indicated. As used in this report, Adjusted EBITDA means loss from continuing operations before income taxes, interest income and expense, depreciation and amortization, restructuring and other related expenses, acquisition and integration expenses, loss on impairment of goodwill and other assets, stock-based compensation and certain non-cash income and expense items. The non-cash items include the purchase accounting impact of acquired deferred revenue, which would have been recognized if not for the purchase accounting treatment, a charge to cost of goods and services sold for the write-off of inventory in conjunction with the decision to exit the SES business, the loss from extinguishment, refinancing and amendment of debt, gains from changes in fair values of embedded derivatives and gains and losses related to certain tax indemnifications for uncertain tax positions from periods prior to the acquisition of Penn Foster. The Company believes that Adjusted EBITDA, a non-GAAP financial measure, represents a useful measure for evaluating its financial performance because it reflects earnings trends without the impact of certain non-recurring, non-cash and non-core related charges or income. The Company’s management uses Adjusted EBITDA to measure the operating profits or losses of the business. Analysts, investors, lenders and rating agencies frequently use Adjusted EBITDA in the evaluation of companies, but the Company’s presentation of Adjusted EBITDA is not necessarily comparable to other similarly titled measures of other companies because of potential inconsistencies in the method of calculation. Adjusted EBITDA is not intended as an alternative to net income (loss) as an indicator of the Company’s operating performance, or as an alternative to any other measure of performance calculated in conformity with GAAP.

A reconciliation of other expense, net to other cash (expense) income is summarized as follows:

The following table presents unaudited statement of operations data for each of the eight quarters in the two-year period ended December 31, 2011. This information has been derived from the Company’s historical consolidated financial statements, as adjusted for the discontinued operations presentation of the Career Education Partnerships division, and should be read in conjunction with the Company’s historical consolidated financial statements and related notes appearing in this Annual Report on Form 10-K.

During the three month interim period ended June 30, 2010, the Company identified errors in reported revenue attributed to prior fiscal periods, the correction of which had the effect of reducing revenue by $0.6 million for the three months ended June 30, 2010.

During the three month interim period ended September 30, 2010, the Company identified errors in reported revenue attributed to prior fiscal periods, the correction of which had the effect of reducing revenue by $1.2 million for the three months ended September 30, 2010.

During the three month interim period ended December 31, 2010, the Company identified errors in its reported revenues and expenses attributed to prior fiscal periods, the correction of which had the effect of reducing revenue by $0.3 million and increasing operating expenses by $0.5 million for the three months ended December 31, 2010.

During the three month interim period ended December 31, 2009, the Company identified errors in its reported revenues attributed to prior fiscal periods, the correction of which had the effect of reducing revenue by $0.7 million for the three months ended December 31, 2009.

The Company evaluated these errors and did not believe that these amounts were material to the consolidated financial statements for the years ended December 31, 2009 and 2010 or any interim periods within 2009 and 2010, and that the correction of those errors was not material to any interim or annual period of the 2009 and 2010 consolidated financial statements.

Earnings (loss) per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in dividends (“participating security”). The Company considers the Series D Preferred Stock a participating security because it includes rights to participate in dividends with the common stock on a one for one basis, with the holders of Series D Preferred Stock deemed to have common stock equivalent shares based on a conversion price of $4.75. In applying the two-class method, earnings are allocated to both common stock shares and Series D Preferred Stock common stock equivalent shares based on their respective weighted-average shares outstanding for the period. Losses are not allocated to Series D Preferred Stock shares.

Diluted earnings per share information may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share:

The following shares were excluded from the computation of diluted earnings (loss) per common share because of their anti-dilutive effect.

Restructuring and other related expenses for the year ended December 31, 2011 include approximately $1.2 million of legal and financial restructuring advisory fees and other professional fees incurred during the fourth quarter of 2011 associated with the Company’s efforts to evaluate and/or pursue various alternatives for addressing its capital structure in the near term. These alternatives include, but are not limited to, raising capital through issuances of new securities, swapping debt for equity, securing additional debt financing from new or existing investors and/or raising capital through the sale of assets, including the agreement to sell the HER division as discussed in Note 18. The Company expects to incur additional fees in the first and second quarters of 2012 as it continues to evaluate alternatives and act on strategies.

Restructuring and other related expenses for the years ended December 31, 2011, 2010 and 2009 also include costs associated with initiatives described below to consolidate and downsize operations, reorganize the Company management structure and eliminate duplicative assets and functions.

The Company announced and commenced a restructuring initiative in the fourth quarter of 2011 to streamline the operations of the HER and Penn Foster divisions and to better align their operations with the Company’s business strategy, refined business model and outlook. This initiative is expected to carry into the first and second quarters of 2012 as management continues to evaluate both divisions’ organizational structures, resource requirements and facility needs. The Company incurred restructuring charges of $0.3 million for this initiative during the year ended December 31, 2011, primarily related to employee severance and termination benefits for HER operational and marketing personnel and Penn Foster finance personnel that were terminated as a result of management’s initial assessments. The following table sets forth the accrual activity relating to this restructuring initiative for the year ended December 31, 2011:

On May 18, 2010, the Company announced its intention to exit the SES business as of the end of the 2009-2010 school year. After completing programs it offered in the 2009-2010 school year, the Company closed certain offices and terminated employees associated with the SES business. All SES employees were notified of their termination and as a result, the Company incurred restructuring charges of $0.8 million related to employee severance and termination benefits during the year ended December 31, 2010. This charge includes a non-cash credit of $0.05 million relating to a negotiated settlement of the Company’s minimum earn-out obligation from

the 2007 acquisition of a western Massachusetts franchise. The seller of the western Massachusetts franchise was an SES employee and this settlement was included as a part of the employee’s severance agreement. The adjusted minimum earn-out obligation of $0.45 million was paid in the third quarter of 2010.

The Company also recorded non-cash charges of $0.9 million relating to the write-off of SES inventory that was not used or sold during the remainder of the 2009-2010 school year. This charge is included in costs of goods and services sold in the accompanying consolidated statements of operations for the year ended December 31, 2010. The Company expects to pay all lease termination costs by the end of February 2013.

The following table sets forth accrual activity relating to the SES restructuring initiative for the years ended December 31, 2010 and 2011:

The Company announced and commenced a restructuring initiative in the first quarter of 2009 related to its decision to outsource its information technology operations, transfer the majority of remaining corporate functions located in New York City to its offices located near Boston, Massachusetts, and simplify its management structure following the sale of the K-12 Services division. The Company incurred restructuring charges of $5.4 million for this initiative during the year ended December 31, 2009, primarily related to employee severance and termination benefits and external transition fees and duplicative costs associated with the transition of information technology operations to a third party. All cash payments associated with this initiative were made by the end of the fourth quarter of 2009. The following table sets forth accrual activity relating to this restructuring initiative for the year ended December 31, 2009:

Following the Company’s acquisition of Penn Foster on December 7, 2009, the Company announced and commenced a restructuring initiative that involved the consolidation of the Company’s real estate portfolio and certain operations, the reorganization of its management structure and the elimination of certain duplicative assets and functions. In conjunction with this initiative, certain members of senior management were terminated and on December 17, 2009 the Company notified certain employees that it intended to close its administrative office in New York City by March 31, 2010. The Company incurred restructuring charges of $2.3 million for this initiative during the year ended December 31, 2009 related to employee severance and termination benefits.

During the first quarter of 2010, the Company notified certain employees that duplicative call center and accounting operations based in Houston, Texas and Framingham, Massachusetts, respectively, would be migrated to the Penn Foster headquarters in Scranton, Pennsylvania over the next several months. During the third quarter of 2010, a member of senior management involved in certain real estate consolidations was terminated as the consolidations were completed. As a result, the Company incurred restructuring charges of $0.4 million related to employee severance and termination benefits during the year ended December 31, 2010.

In addition, by March 31, 2010 the Company closed and ceased use of two-thirds of its administrative office in New York City and by August 31, 2010 ceased use of the remaining space at this facility. The Company recorded a liability based on the estimated fair value of the remaining contractual lease rentals associated with the closed space, reduced by estimated sublease rentals, which the Company was actively seeking at the time. The Company also incurred other restructuring charges associated with the shutdown of the New York City office. As a result, during the year ended December 31, 2010 the Company recorded a restructuring charge of $2.1 million, which included a credit resulting from the elimination of a deferred rent liability of $0.5 million associated with straight-line lease accounting on the same property.

The Company consummated an agreement to terminate the lease for the New York City property, effective as of March 31, 2011. In addition to a broker fee, the Company agreed to pay an aggregate sum of $1.2 million over a period of fourteen months, beginning in April 2011. As a result of this settlement, the Company recorded an additional charge to restructuring expense in 2011 of approximately $0.06 million to adjust its liability for the estimated fair value of the remaining contractual payments under this arrangement.

The following table sets forth accrual activity relating to this restructuring initiative for the years ended December 31, 2009, 2010 and 2011:

Accrued restructuring is included in accrued expenses in the accompanying consolidated balance sheet.

The Company determines the fair market values of its financial instruments based on the fair value hierarchy established by an accounting standard that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value as of December 31, 2011 and 2010 (in thousands):

Money market funds, included in cash and cash equivalents and restricted cash, are valued at quoted market prices in active markets.

Embedded derivatives related to certain mandatory prepayments within the Company’s Senior Notes, Junior Notes and former Bridge Notes as described in Note 7 are valued using a pricing model utilizing unobservable inputs that cannot be corroborated by market data, including the probability of contingent events required to trigger the mandatory prepayments. The fair value of embedded derivatives is included in other long-term liabilities in the accompanying balance sheets and the change in fair value is recognized in other (expense) income, net in the accompanying consolidated statements of operations.

Activity related to our embedded financial derivatives for the years ended December 31, 2009, 2010 and 2011was as follows (in thousands):

Nonfinancial assets such as goodwill and other intangible assets are measured at fair value when there is an indicator of impairment and are recorded at fair value only when impairment is recognized. Refer to Note 5.

On March 26, 2012, the Company and certain of its subsidiaries entered into an Asset Purchase Agreement (the “Agreement”) with an affiliate of Charlesbank Capital Partners (“Buyer”) pursuant to which, upon the terms and subject to the conditions set forth in the Agreement, the Company and its subsidiaries will sell, and Buyer will buy, substantially all of the assets of the Company’s HER division, including the name and brand of The Princeton Review. The Agreement also provides for the assumption by Buyer of certain liabilities relating to the HER division as well as for the execution of a Non-Competition, Non-Solicitation and Confidentiality Agreement and a Transition Services Agreement by the parties.

The consideration for the sale of the HER division will be $33.0 million in cash plus the assumption of $12.0 million in net working capital liabilities. The purchase price will be adjusted to account for any variance from the target working capital level. At closing, $1.5 million of the purchase price will be placed in escrow pending post-closing settlement of any such working capital adjustment. The Company has made customary representations, warranties and covenants with respect to the assets sold. The Company and Buyer have each agreed to indemnify the other from and against, among other things, various claims, damages and liabilities that may be incurred as a result of breaches of representations or warranties under the Agreement, subject to limitations set forth therein. The Company has also agreed to change its name in connection with the transaction.

Consummation of the transaction is subject to customary conditions, including the release of encumbrances on the purchased assets. The Agreement also contains certain termination rights of the parties. The Company expects to use the net proceeds from the sale to repay obligations outstanding under the GE Senior Credit Facilities.

On March 23, 2012, the Company received notification from The NASDAQ Stock Market LLC (“NASDAQ”) stating that the Company’s common stock would be delisted from The NASDAQ Capital Market effective at the open of the market on April 3, 2012, unless the Company appeals NASDAQ’s determination. The Company has decided not to appeal this determination. The delisting of the Company’s common stock is a result of the Company’s failure to comply with NASDAQ Listing Rule 5550(a)(2) by evidencing a minimum bid price for its common stock of $1.00 per share and NASDAQ Listing Rule 5550(b) by failing to maintain a minimum of $2.5 million in stockholders’ equity. The Company’s common stock is now quoted on the OTCQB tier of the Over-the-Counter-Markets under the symbol “REVU”.

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”), as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuers management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. This evaluation was done under the supervision and with the participation of management, including our CEO and CFO.

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

As a result of this evaluation, our CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) were effective as of December 31, 2011.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal

control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

The Company’s management, with the participation of our CEO and CFO, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework.

Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011 based on criteria in Internal Control—Integrated Framework issued by COSO. The Company’s assessment of and conclusion on the effectiveness of internal control over financial reporting included the internal controls of Penn Foster which was acquired by the Company in a purchase business combination on December 7, 2009.

The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this annual report on Form 10-K.

During the third quarter of 2011, the Company completed its multi-year company-wide effort to replace HER system infrastructure and integrate it with Penn Foster’s financial system. Other than this, there have not been any changes in our internal control over financial reporting during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our Board of Directors consists of the following seven directors: Jeffrey R. Crisan, Richard Katzman, Michael A. Krupka, David Lowenstein, John S. Schnabel, Linda Whitlock and David L. Warnock. Our Board of Directors believes that there should be a majority of independent directors on the Board of Directors. Although each of our current board members is an independent director, we expect that, consistent with our historical practice and upon our hiring of a permanent Chief Executive Officer, our Chief Executive Officer will be appointed as a member of our Board of Directors. Our Board of Directors believes that it is useful and appropriate to have members of management as directors.

The Board of Directors has determined that each of its members qualifies as “independent” per the director independence standards of The NASDAQ Stock Market, Inc. Although our common stock is currently traded on the OTCQB tier of the OTC Markets, we choose to apply the current listing requirements of The NASDAQ Stock Market for purposes of determining director independence. The NASDAQ independence definitions include a series of objective tests, including that the director is not an employee of the company and has not been engaged in various types of business relationships with the company.

The Board of Directors has three standing committees: the Audit Committee, the Compensation Committee and the Nominating Committee. During 2011, the Audit Committee met 5 times, the Compensation Committee met 5 times and the Nominating Committee met 1 time.

The Audit Committee assists the Board of Directors in its oversight of our financial accounting and reporting processes. Our Board of Directors has adopted an Audit Committee Charter which contains the Audit Committee’s mandate, membership requirements and duties and obligations. A copy of the Audit Committee Charter is posted on our Investor Relations website at http://ir.princetonreview.com. In accordance with the Audit Committee Charter, the Audit Committee has the sole authority for the appointment, replacement, compensation, and oversight of the work of our independent auditor, reviews the scope and results of audits with our independent auditor, reviews with management and our auditors our annual and interim operating results, considers the effectiveness of our internal control over financial reporting and our disclosure controls and procedures, considers our auditors’ independence, and reviews and approves in advance all engagements of any accounting firm (including the fees and terms thereof). The Audit Committee is also responsible for establishing procedures for the receipt, retention and treatment of complaints regarding our accounting, internal control over financial reporting, or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

The Audit Committee consists of David Lowenstein (Chair) and Linda Whitlock. Each member of the Audit Committee is “independent” under the standards established by the SEC and NASDAQ for members of audit committees. Mr. Lowenstein has been determined by our Board of Directors to meet the qualifications of an “audit committee financial expert” in accordance with SEC rules. The designation as audit committee financial expert is a disclosure requirement of the SEC related to Mr. Lowenstein’s experience and understanding of certain accounting and auditing matters.

The Compensation Committee has the sole authority and responsibility for reviewing and determining, or recommending to the Board of Directors for determination, the cash and equity compensation and other matters relating to the compensation of our Chief Executive Officer, all other executive officers and members of our

Board of Directors. The Compensation Committee is also responsible for the administration of The Princeton Review, Inc. 2000 Stock Incentive Plan, as amended (the “Stock Incentive Plan”), including reviewing management recommendations with respect to grants of awards and taking other actions as may be required in connection with our compensation and incentive plans. Our Board of Directors has adopted a Compensation Committee Charter which contains the Compensation Committee’s mandate, membership requirements and duties and obligations. A copy of the Compensation Committee Charter is posted on our Investor Relations website at http://ir.princetonreview.com. In accordance with the Compensation Committee Charter, in addition to its responsibilities relating to compensation of executive officers and members of our Board of Directors, the Compensation Committee also oversees our overall compensation structure, policies and programs, including with respect to incentive- and equity-based plans, and reviews our processes and procedures for the consideration and determination of compensation of executive officers and members of our Board of Directors. In addition, the Compensation Committee has the authority to retain and terminate a consultant or other outside advisor on compensation matters and reviews and discusses with our Board of Directors corporate succession plans for the chief executive officer and other key officers. See the “Compensation Discussion and Analysis” section of this Proxy Statement for additional information regarding our processes and procedures for the consideration and determination of compensation of our named executive officers.

The Compensation Committee consists of David Lowenstein (Chair) and Jeffrey R. Crisan. Although our common stock is currently traded on the OTCQB tier of the OTC Markets, we choose to apply the current listing requirements of The NASDAQ Stock Market for purposes of determining Compensation Committee member independence. Each member of the Compensation Committee is “independent” under the standards established by NASDAQ, an “outside director” within the meaning of Section 162 of the Internal Revenue Code and a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act.

The Nominating Committee has the authority and responsibility to identify, research and recommend to the Board of Directors qualified candidates to serve as directors on our Board of Directors other than directors elected pursuant to the terms of any of our outstanding preferred stock. Our Board of Directors has adopted a Nominating and Governance Charter which contains the Nominating Committee’s mandate, membership requirements and duties and obligations, as well as certain corporate governance principles and procedures described below under “Corporate Governance Guidelines.” A copy of the Nominating and Governance Charter is posted on our Investor Relations website at http://ir.princetonreview.com. In addition to considering candidates suggested by stockholders, the Nominating Committee solicits recommendations from our directors, members of management and others familiar with and experienced in the education services industry. The Nominating Committee establishes criteria for the selection of nominees and reviews the appropriate skills and characteristics required of board members. In evaluating candidates, the Nominating Committee considers issues of independence, diversity and expertise in numerous areas, including experience in the education services industry, finance, marketing, international experience and culture. The Nominating Committee selects individuals of the highest personal and professional integrity who have demonstrated exceptional ability and judgment in their field and who would work effectively with the other directors and nominees to the Board of Directors. The Nominating Committee also monitors and reviews the committee structure of the Board of Directors, and each year it recommends to the Board of Directors for its approval directors to serve as members of each committee. The Nominating Committee conducts an annual review of the adequacy of the Nominating and Governance Charter (described below) and recommends proposed changes.

The Nominating Committee consists of Jeffrey R. Crisan and David Lowenstein. Each member of the Nominating Committee is “independent” under the standards established by NASDAQ. Although our common stock is currently traded on the OTCQB tier of the OTC Markets, we choose to apply the current listing requirements of The NASDAQ Stock Market for purposes of determining director independence.

We have adopted a Code of Business Conduct that applies to all of our directors, officers and employees. This code is publicly available on our website at www.princetonreview.com. Amendments to the Code of Business Conduct or any grant of a waiver from a provision of the code requiring disclosure under applicable SEC and NASDAQ Capital Market rules will be disclosed on our website or, if so required, disclosed in a Current Report on Form 8-K.

FASB Accounting Standards Codification No. 718, Compensation-Stock Compensation. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures relating to service-based vesting conditions. See Note 11 to the consolidated financial statements in this Annual Report on Form 10-K regarding assumptions underlying the valuation of these equity awards.

The following table provides information regarding outstanding option awards and stock awards held by our named executive officers at fiscal year-end.

We currently do not provide any deferred compensation programs that are not tax qualified or pensions to any executive officer, including the named executive officers.

Mr. Perik, who resigned from the Company on March 8, 2011, had entered into an employment agreement with the Company providing that if the Company terminates Mr. Perik’s employment without “cause” (as defined in Mr. Perik’s employment agreement), or Mr. Perik terminates his employment with us for good reason (as defined in Mr. Perik’s employment agreement to include, among other things, a material diminution in his authority, duties or responsibilities), Mr. Perik would be entitled to receive a lump-sum severance payment equal to $500,000, or, if such termination occured within 12 months after a change in control, $1,000,000. In addition, Mr. Perik’s agreement provided that he would receive a pro-rated portion of his annual bonus for the prior calendar year (if any) if he was employed by us for the entire calendar year immediately prior to the calendar year of his termination, or, if he was not employed by us for the entire calendar year immediately prior to the calendar year of his termination, a pro-rated portion of his target bonus of $875,000. Mr. Perik’s employment agreement also included confidentiality, non-competition and non-solicitation provisions. The non-competition and non-solicitation provisions ended on March 8, 2012, the one-year anniversary of Mr. Perik’s resignation date. The agreement is no longer in effect and the parties no longer have any responsibilities or obligations to each other under it.

Under Mr. Kasper’s employment agreement, if we terminate Mr. Kasper’s employment without “cause” (as defined in Mr. Kasper’s employment agreement), or Mr. Kasper terminates his employment with us for good reason (as defined in Mr. Kasper’s employment agreement to include, among other things, a material diminution in his authority, duties or responsibilities), Mr. Kasper is entitled to receive a lump-sum severance payment equal to the sum of (a) 100% of his base salary, plus (b) 100% of his annual bonus for the prior calendar year (if any) if he was employed by us for the entire calendar year immediately prior to the calendar year of the termination, or, if he was not employed by us for the entire calendar year immediately prior to the calendar year of the termination, his target bonus as in effect immediately prior to the termination; provided however, that in the event such termination occurs within 12 months after a change in control, then the percentage of base salary and annual bonus shall be 150%. Mr. Kasper’s employment agreement also includes confidentiality, non-competition and non-solicitation provisions. The non-competition and non-solicitation provisions will be in effect for a period of one year following the termination of Mr. Kasper’s employment.

Under Mr. Kirkpatrick’s employment agreement, if we terminate Mr. Kirkpatrick’s employment without “cause” (as defined in Mr. Kirkpatrick’s employment agreement), or Mr. Kirkpatrick terminates his employment with us for good reason (as defined in Mr. Kirkpatrick’s employment agreement to include, among other things, a material diminution in his authority, duties or responsibilities), Mr. Kirkpatrick is entitled to receive a lump-sum severance payment equal to the sum of (a) 100% of his base salary, plus (b) 100% of his annual bonus for the prior calendar year (if any) if he was employed by us for the entire calendar year immediately prior to the calendar year of the termination, or, if he was not employed by us for the entire calendar year immediately prior to the calendar year of the termination, his target bonus as in effect immediately prior to the termination; provided however, that in the event such termination occurs within 12 months after a change in control, then the percentage of base salary and annual bonus shall be 150%. Mr. Kirkpatrick’s employment agreement also includes confidentiality, non-competition and non-solicitation provisions. The non-competition and non-solicitation provisions will be in effect for a period of one year following the termination of Mr. Kirkpatrick’s employment.

Under our employment agreements with our named executive officers other than Mr. Connolly, if we terminate the executive’s employment without “cause,” we have agreed to either provide benefits or reimburse the executive for a portion of COBRA payments to maintain medical insurance, for a specified amount of time between 12 and 18 months following termination as set forth above in “Executive Compensation—Employment Agreements—Certain Material Terms of Employment Agreements with Named Executive Officers.”

The employment agreements with Messrs. Perik, Kasper and Kirkpatrick provide that, if there is a “change in control,” the unvested portion of any stock options, restricted stock or similar equity awards held by each of Messrs. Perik, Kasper and Kirkpatrick on the date of the change in control shall vest in full and become immediately exercisable, and all restrictions shall lapse on any restricted stock or similar awards held by each of Messrs. Perik, Kasper and Kirkpatrick at such time which were not otherwise vested as of the date of the change in control.

“Change in control” is defined as (a) an acquisition of more than 50% of either (i) the then-outstanding shares of our Common Stock or (ii) the combined voting power of our then-outstanding securities entitled to vote generally in the election of directors; or (b) such time as the majority of the members of our board of directors are replaced during any 12-month period by directors whose appointment or election are not approved by a majority of the members of the board of directors prior to the date of the appointment or election; or (c) a merger or consolidation of our company, unless following the transaction, our former stockholders continue to hold more than 50% of the then-outstanding voting stock of the surviving entity in substantially the same proportions as their ownership, immediately prior to such merger or consolidation; or (d) approval by our stockholders for the complete liquidation or dissolution of our company. The following shall not constitute a change in control: (a) any acquisition of more than 50% of our outstanding stock directly from our company; (b) any acquisition of more than 50% of our outstanding stock by our company; (c) any acquisition of more than 50% of our outstanding stock by any employee benefit plan (or related trust) sponsored or maintained by our company or any other corporation controlled by our company; or (d) any acquisition by some person or entity that already owned more than 50% of our outstanding stock.

The employment agreements with Messrs. Perik, Kasper and Kirkpatrick also provide that we will gross-up each executive for any excise tax, interest or penalties incurred under Internal Revenue Code Section 4999 in connection with any payments or benefits paid or distributed to the executive in connection with a change in control.

We are not obligated to make any severance payments to the named executive officers upon a change in control of our company, except upon termination of their employment in accordance with the provisions described above under “Termination Without Cause or for Good Reason.”

The following table shows, as of March 31, 2012, information with respect to the beneficial ownership of shares of our Common Stock by each of our current directors or nominees, each of our named executive officers, each person known by us to beneficially own more than 5% of our Common Stock, and all of our directors and executive officers as a group. Beneficial ownership is determined under the rules of the SEC and includes voting or investment power with respect to the securities. Unless indicated otherwise below, the address for each listed director and officer is The Princeton Review, Inc., 111 Speen Street, Suite 550, Framingham, Massachusetts 01701. Except as indicated by footnote, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. The number of shares of Common Stock outstanding used in calculating the percentage for each listed person includes the shares of Common Stock underlying convertible securities held by that person that are exercisable within 60 days following March 31, 2012, but excludes shares of Common Stock underlying convertible securities held by any other person. Percentage of beneficial ownership is based on 56,392,010 shares of Common Stock outstanding as of March 31, 2012.

The Audit Committee is charged with the responsibility of reviewing and pre-approving all related party transactions, and reassessing any related party transaction for potential conflicts of interests on an ongoing basis. This responsibility is set forth in our Audit Committee Charter.

Michael J. Perik, the Company’s former President and Chief Executive Officer who resigned from the Company on March 8, 2011, has a controlling ownership interest in US Skills, LLC (“US Skills”). During 2008 and 2009, the Company, through its former K-12 Services division, developed and licensed certain K-12 assessment platform software to US Skills and received a $0.4 million development fee and $0.7 million of license fees through December 31, 2009. The Company also received sublicensing fees from US Skills of $0.2 million in 2009. These fees are included in loss from discontinued operations in the accompanying 2009 consolidated statement of operations.

On March 8, 2011, the Company appointed John M. Connolly as Interim President and Chief Executive Officer. Mr. Connolly has served as an operating partner of Bain Capital Ventures since 2009 and as a managing director since January 2010. Bain Capital Ventures is an affiliate of certain of the Series D Preferred Stock owners. Pursuant to a letter agreement between Mr. Connolly and the Company, as amended for extensions, during 2011 Mr. Connolly was awarded 1,943,880 restricted stock units having an aggregate grant date fair value of $0.8 million. These awards typically vest one month after the individual grant date and 120,193 shares remain unvested as of December 31, 2011. Mr. Connolly was awarded 120,192 restricted stock units per month from January 8, 2012 to April 7, 2012. Mr. Connolly was also paid a monthly salary of $0.1 million from July 8, 2011 to November 7, 2011, and is paid $0.05 million per month from December 8, 2011 to June 30, 2012 when his current employment extension period expires. Pursuant to Mr. Connolly’s arrangement with Bain Capital Ventures, Mr. Connolly is obligated to transfer his salary and the value of his restricted stock unit awards to Bain Capital Ventures.

During 2011, the Company reimbursed Bain Capital Ventures approximately $0.1 million for out-of-pocket expenses, primarily relating to Mr. Connolly’s duties as Interim President and Chief Executive Officer.

On September 27, 2011, the Company entered into an employment agreement with Frank F. Britt (the “Interim Employment Agreement”) under which Mr. Britt was appointed to serve as the interim President of Penn Foster, Inc., the Company’s wholly-owned subsidiary. Further, on January 1, 2012, the Company entered into an Executive Employment Agreement with Mr. Britt (the “Executive Employment Agreement”) pursuant to which Mr. Britt serves as the Chief Executive Officer of Penn Foster. Since 2011, Mr. Britt has served as an Executive-in-Residence at Bain Capital Ventures. Per the Interim Employment Agreement, the Company compensated Mr. Britt $136,538 in 2011, consisting of base salary compensation in the amount of $86,538 and a bonus payment of $50,000.

On December 7, 2009, the Company issued preferred stock in a private placement to a limited group of institutional investors, including Bain Capital LLC (“Bain”), an affiliate of Michael A. Krupka and Jeffrey R. Crisan, two of our directors, to fund a portion of the purchase price for our acquisition of Penn Foster. As part of the private placement, Bain received the newly authorized preferred stock in exchange for an aggregate of 39,600 shares of Series C Convertible Preferred Stock, which, prior to the private placement, represented approximately 18.2% of our outstanding voting power. Bain also purchased 25,000 additional shares of the newly authorized preferred stock for $25,000,000. Bain’s shares of preferred stock acquired in the private placement were, pursuant to the vote of our stockholders at a special meeting held on April 21, 2010, converted into shares of Series D Convertible Preferred Stock and currently represent approximately 18.26% of our outstanding voting power as of March 31, 2012.

In August 2011, the Company engaged Bain to provide the Company business strategy consulting services for a 3-month period, during which the Company paid Bain $50,000 per month, or $150,000 in the aggregate.

a majority owner of KSI and whose spouse is president of KSI. During the year ended December 31, 2010, the Company paid KSI an aggregate of $0.07 million of internet service fees. This vice president’s employment with the Company terminated in May 2011 and no fees were paid to KSI during the year ended December 31, 2011.

The Company made a loan to one former executive officer in the amount of $0.2 million that accrued interest at 7.3% per year and was secured by 35,662 shares of the Company’s common stock. On March 20, 2009, the Company received the 35,662 shares for full settlement of the loan and returned the shares to authorized, but unissued common stock. In conjunction with the settlement, the Company recognized a loss of $0.05 million which is included in other expense, net in the accompanying consolidated statement of operations for the year ended December 31, 2009. No loans were made to executive officers after February 2002 and no loans are outstanding as of December 31, 2011 and 2010.

The following table sets forth the fees that the Company paid or accrued for the audit and other services provided by PricewaterhouseCoopers in fiscal years 2010 and 2011:

This category includes the audit of our annual financial statements, audit of our internal control over financial reporting, reviews of financial statements included in our Quarterly Reports on Form 10-Q, accounting consultations related to the audits or interim reviews and assistance with comment letters and other documents filed with the SEC.

This category consists of other assurance and related services provided by PricewaterhouseCoopers that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include audit and advisory fees related to the acquisition of Penn Foster.

This category consists of professional services provided by PricewaterhouseCoopers for tax compliance, tax advice and tax planning. The services for the fees disclosed under this category include federal, state, local and international tax compliance services and tax planning.

This category consists of other routine professional services provided by PricewaterhouseCoopers that our Audit Committee does not believe would impair the independence of PricewaterhouseCoopers and are not prohibited by SEC rules. The services for the fees disclosed under this category consisted of work related to filings with the SEC and licenses for technical accounting research software.

We have a formal policy that requires that all services to be provided by PricewaterhouseCoopers, including audit services, audit-related services, tax services and other permitted services, must be pre-approved by our Audit Committee. As permitted by SEC rules, the policy permits the Audit Committee to delegate its pre-approval authority to the Chairperson of the Audit Committee. The Chairperson must report, for informational purposes only, any pre-approval decisions to the full Audit Committee at its next scheduled meeting or by email. Proposed services that have not been pre-approved pursuant to the Pre-Approval Policy must be specifically pre-approved by the Audit Committee before they may be provided by PricewaterhouseCoopers. Any pre-approved services exceeding the pre-approved monetary limits require separate approval by the Audit Committee. All audit fees, audit-related fees and all other fees of our principal accounting firm for 2011 were pre-approved by the Audit Committee.

1. Financial Statements—See Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on page 56 of this Annual Report on Form 10-K.

2. Financial Statement Schedules—See Index to Consolidated Financial Statements and Financial Statement Schedule at Item 8 on page 56 of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable or not required.

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 16, 2012.


THE PRINCETON REVIEW, INC.

By:		/s/ JOHN M. CONNOLLY
		John M. Connolly President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)

By:		/s/ CHRISTIAN G. KASPER
		Christian G. Kasper Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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

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


Delaware		22-3727603
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

111 Speen Street Framingham, Massachusetts		01701
(Address of principal executive offices)		(Zip Code)


Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value		The OTC Markets


PART I		3

Item 1.	Business	3
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	23

PART II		24

Item 5.	Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchased Equity Securities	24
Item 6.	Selected Consolidated Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 8.	Financial Statements and Supplementary Data	56
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	112
Item 9A.	Controls and Procedures	112
Item 9B.	Other Information	113

PART III		114

Item 10.	Directors, Executive Officers and Corporate Governance	114
Item 11.	Executive Compensation	116
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	119
Item 13.	Certain Relationships and Related Transactions, and Director Independence	121
Item 14.	Principal Accountant Fees and Services	123

PART IV		125

Item 15.	Exhibits and Financial Statement Schedules	125

SIGNATURES		132


SAT (Scholastic Aptitude Test)		DAT (Dental Admission Test)
GMAT (Graduate Management Admissions Test)		OAT (Optometry Admission Test)
GRE (Graduate Record Examination)		ACT (American College Test)
TOEFL (Test of English as a Foreign Language)		PSAT (Preliminary Scholastic Aptitude Test)
USMLE (United States Medical Licensing Examination)		SAT Subject Tests (Scholastic Aptitude Subject Test)
LSAT (Law School Admissions Test)		SSAT (Secondary School Admission Test)
MCAT (Medical College Admissions Test)		ISEE (Independent School Entrance Exam)
		AP Exams (Advance Placement Exam)


Cracking the SAT	Cracking the AP Calculus	Anatomy Coloring Book
Cracking the GMAT	Cracking the AP Chemistry	Essential SAT Vocabulary Flashcards
Cracking the LSAT	Cracking the AP US History	Essential TOEFL Vocabulary Flashcards
Cracking the GRE	Cracking the AP European History	Cracking the Praxis
WordSmart	Cracking the GED	Cracking the ASVAB
MathSmart	Math Workout for the GMAT	Crash Course for the SAT
GrammarSmart	Verbal Workout for the GMAT	Crash Course for the GRE
MCAT Biology Review	MCAT General Chemistry Review	MCAT Organic Chemistry Review
MCAT Physics and Math Review	MCAT Verbal Reasoning & Review
Cracking the CAHSEE (California)	Math Smart Junior	Word Smart Junior


Medical Coding & Billing	Electrician	Floral Design
Pharmacy Technician	HVAC Technician	Interior Decorator
Medical Transcriptionist	Dental Assistant	Certified Personal Trainer
Veterinary Assistant	Fitness & Nutrition	Child Day Care Management
Medical Administrative Assistant	Physical Therapy Aide


Veterinary Technician	Business Management	Graphic Design
Early Childhood Education	Accounting	PC Maintenance Technology
Medical Assistant	Paralegal	Electrical Engineer
Criminal Justice	Health Information Tech	Computer Information Systems


English Literature	AP Biology	Web Design
Algebra	AP English	Child Day Care
World History	AP Micro Economics	Veterinary Assistant
Chemistry	AP Psychology	Medical Terminology


	2011				2010
Fiscal Quarter	High		Low		High		Low
First	$	1.37	$	0.30	$	4.50	$	3.46
Second		0.48		0.18		4.00		2.13
Third		0.35		0.11		2.51		1.87
Fourth		0.20		0.07		2.04		0.87


	Years Ended December 31,
	2011			2010			2009			2008			2007
	(in thousands, except per share data)
Statement of Operations Data:
Revenue
Higher Education Readiness	$	100,309		$	102,766		$	110,414		$	108,454		$	93,417
Penn Foster		88,445			96,387			5,485			—			—
SES		—			14,676			27,620			30,320			17,197

Total revenue		188,754			213,829			143,519			138,774			110,614
Operating expenses
Cost of goods and services sold (exclusive of items below)		66,311			76,979			55,998			51,147			41,615
Selling, general and administrative		108,683			114,405			78,579			78,899			78,331
Depreciation and amortization		19,755			34,055			8,347			4,665			4,330
Restructuring and other related expenses		1,637			4,327			7,711			2,233			8,853
Acquisition and integration expenses		3,080			5,362			2,984			—			—
Loss on impairment of goodwill and other assets		99,911			—			—			—			—
Impairment of investment		—			—			—			—			1,000

Total operating expenses		299,377			235,128			153,619			136,944			134,129

Operating (loss) income from continuing operations		(110,623	)		(21,299	)		(10,100	)		1,830			(23,515	)
Interest expense		(21,539	)		(21,793	)		(2,565	)		(1,005	)		(1,232	)
Interest income		—			29			36			373			884
Other (expense) income, net		(238	)		(341	)		(517	)		81			(7,558	)
Benefit (provision) for income taxes		8,455			(1,686	)		(756	)		(1,463	)		605

Loss from continuing operations	$	(123,945	)	$	(45,090	)	$	(13,902	)	$	(184	)	$	(30,816	)

Loss per share:
Basic and diluted loss from continuing operations	$	(2.45	)	$	(1.15	)	$	(0.18	)	$	(0.15	)	$	(1.19	)
Basic and diluted weighted average shares used in computing loss from continuing operations		54,687			46,868			33,728			32,409			27,877


	As of December 31,
	2011			2010			2009			2008			2007
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and restricted cash	$	6,172		$	15,287		$	10,701		$	9,468		$	26,186
Total assets		228,353			380,185			389,807			174,496			124,048
Working capital (current assets less current liabilities)		(33,337	)		(18,796	)		(8,338	)		(206	)		15,634
Long-term debt		137,175			124,516			142,072			17,488			1,105
Deferred tax liabilities		10,404			25,561			31,499			5,912			4,385
Preferred stock		125,429			115,614			97,326			62,646			57,951
Stockholders’ (deficit) equity		(110,739	)		32,800			45,259			46,430			12,904


	Years Ended December 31,						Amount of Increase (Decrease)			Percent Increase (Decrease)
	2011			2010			Amount of Increase (Decrease)			Percent Increase (Decrease)
Revenue:
Higher Education Readiness	$	100,309		$	102,766		$	(2,457	)		(2	)%
Penn Foster		88,445			96,387			(7,942	)		(8	)%
SES Services		—			14,676			(14,676	)		(100	)%

Total revenue		188,754			213,829			(25,075	)		(12	)%
Operating expenses:
Cost of goods and services sold (exclusive of items below)		66,311			76,979			(10,668	)		(14	)%
Selling, general and administrative		108,683			114,405			(5,722	)		(5	)%
Depreciation and amortization		19,755			34,055			(14,300	)		(42	)%
Restructuring and other related expenses		1,637			4,327			(2,690	)		(62	)%
Acquisition and integration expenses		3,080			5,362			(2,282	)		(43	)%
Loss on impairment of goodwill and other assets		99,911			—			99,911			100	%

Total operating expenses		299,377			235,128			64,249			27	%
Operating loss from continuing operations		(110,623	)		(21,299	)		89,324			419	%

Interest expense		(21,539	)		(21,793	)		(254	)		(1	)%
Interest income		—			29			(29	)		(100	)%
Other expense, net		(238	)		(341	)		(103	)		(30	)%
Benefit (provision) for income taxes		8,455			(1,686	)		10,141			601	%

Loss from continuing operations	$	(123,945	)	$	(45,090	)	$	78,855			175	%


	Payments due by period ($ in millions)
Contractual Obligations	Total		Less than 1 Year		1 - 3 years		3 - 5 years		More than 5 years
Long-term debt obligations	$	138.5	$	9.0	$	53.0	$	76.5	$	—
Cash interest expense		112.8		4.2		23.0		85.6		—
Capital lease obligations		0.2		0.1		0.1		—		—
Operating lease obligations		30.7		8.6		13.0		5.5		3.6
Minimum purchase commitments		3.3		2.3		1.0		—		—

Total	$	285.5	$	24.2	$	90.1	$	167.6	$	3.6


	Page
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		57
Consolidated Balance Sheets		58
Consolidated Statements of Operations		59
Consolidated Statements of Stockholders’ (Deficit) Equity and Comprehensive Loss		60
Consolidated Statements of Cash Flows		61
Notes to Consolidated Financial Statements		63
Financial Statement Schedule:
Schedule II—Valuation And Qualifying Accounts		112


	December 31,
	2011			2010
ASSETS:
Current assets:
Cash and cash equivalents	$	5,622		$	14,831
Restricted cash		550			456
Accounts receivable, net of allowance of $1,004 and $997, respectively		9,030			9,744
Other receivables, including $71 from related parties as of December 31, 2010		284			1,625
Inventory		8,559			7,488
Prepaid expenses and other current assets		2,177			3,633
Deferred tax assets		271			7,006

Total current assets		26,493			44,783

Property, equipment and internal use software, net		30,973			37,551
Goodwill		100,530			185,237
Other intangibles, net		64,698			106,174
Other assets		5,659			6,440

Total assets	$	228,353		$	380,185


LIABILITIES & STOCKHOLDERS’ (DEFICIT) EQUITY:
Current liabilities:
Accounts payable	$	5,595		$	6,914
Accrued expenses		14,247			14,874
Deferred acquisition payments		—			5,750
Current maturities of long-term debt		9,131			6,258
Deferred revenue		30,857			29,783

Total current liabilities		59,830			63,579


Deferred rent		1,868			1,913
Long-term debt		137,175			124,516
Long-term portion of deferred acquisition payments		—			10,000
Other liabilities		4,386			6,202
Deferred tax liability		10,404			25,561

Total liabilities		213,663			231,771
Series D Preferred Stock, $0.01 par value; 300,000 shares authorized; 111,503 shares issued and outstanding		125,429			115,614
Series E Preferred Stock, $0.01 par value; no shares and 108,275 shares authorized, respectively; no shares issued and outstanding		—			—

Commitments and contingencies (Note 9)
Stockholders’ (deficit) equity
Preferred stock, undesignated, $0.01 par value; 4,700,000 and 4,591,725 shares authorized, respectively; none issued and outstanding		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 56,098,059 and 53,563,915 shares issued and 56,003,871 and 53,499,759 shares outstanding, respectively		561			536
Treasury stock (94,188 and 64,156 shares, respectively; at cost)		(180	)		(168	)
Additional paid-in capital		206,354			213,813
Accumulated deficit		(317,435	)		(181,365	)
Accumulated other comprehensive loss		(39	)		(16	)

Total stockholders’ (deficit) equity		(110,739	)		32,800

Total liabilities and stockholders’ (deficit) equity	$	228,353		$	380,185


	Stockholders’ (Deficit) Equity
	Common Stock					Treasury Stock						Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ (Deficit) Equity
	Shares			Amount		Shares			Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ (Deficit) Equity
Balance at December 31, 2008		33,729		$	337		—			—		$	164,153		$	(117,239	)	$	(821	)	$	46,430
Exercise of stock options		8			—		—			—			18			—			—			18
Vesting of restricted stock		25			—		—			—			—			—			—			—
Stock-based compensation		—			—		—			—			2,979			—			—			2,979
Dividends and accretion of issuance costs on Series C Preferred Stock		—			—		—			—			(4,609	)		—			—			(4,609	)
Exchange of Series C to Series E Preferred Stock		—			—		—			—			13,255			—			—			13,255
Dividends and accretion of issuance costs on Series E Preferred Stock		—			—		—			—			(699	)		—			—			(699	)
Shares received in settlement of note receivable		(35	)		—		—			—			(162	)		—			—			(162	)
Comprehensive loss
Net loss		—			—		—			—			—			(12,386	)		—			(12,386	)
Change in unrealized foreign currency gain (loss)		—			—		—			—			—			—			433			433

Comprehensive loss																						(11,953	)

Balance at December 31, 2009		33,727		$	337		—			—		$	174,935		$	(129,625	)	$	(388	)	$	45,259

Exercise of stock options		35			1		—			—			63			—			—			64
Vesting of restricted stock		216			2		(64	)	$	(168	)		(2	)		—			—			(168	)
Stock-based compensation		—			—		—			—			3,454			—			—			3,454
Dividends and accretion of issuance costs on Series E Preferred Stock		—			—		—			—			(3,535	)		—			—			(3,535	)
Conversion of Series E to Series D Preferred Stock		—			—		—			—			1,128			—			—			1,128
Dividends and accretion of issuance costs on Series D Preferred Stock		—			—		—			—			(6,373	)		—			—			(6,373	)
Shares issued in conjunction with acquisition (Note 2)		3,486			35		—			—			9,908			—			—			9,943
Adjustment to value of acquisition shares issued in 2008 (Note 2)		—			—		—			—			(9,943	)		—			—			(9,943	)
Issuance of common stock		16,100			161		—			—			44,178			—			—			44,339
Comprehensive loss
Net loss		—			—		—			—			—			(51,740	)		—			(51,740	)
Change in unrealized foreign currency gain (loss)		—			—		—			—			—			—			372			372

Comprehensive loss																						(51,368	)

Balance at December 31, 2010		53,564		$	536		(64	)	$	(168	)	$	213,813		$	(181,365	)	$	(16	)	$	32,800

Vesting of restricted stock		1,937			19		(30	)		(12	)		(20	)		—			—			(13	)
Stock-based compensation		597			6		—			—			2,376			—			—			2,382
Dividends and accretion of issuance costs on Series D Preferred Stock		—			—		—			—			(9,815	)		—			—			(9,815	)
Comprehensive loss
Net loss		—			—		—			—			—			(136,070	)		—			(136,070	)
Change in unrealized foreign currency gain (loss)		—			—		—			—			—			—			(23	)		(23	)

Comprehensive loss																						(136,093	)

Balance at December 31, 2011		56,098		$	561		(94	)	$	(180	)	$	206,354		$	(317,435	)	$	(39	)	$	(110,739	)


	Unaudited Pro Forma Year Ended December 31, 2009
	(in thousands)
Revenue	$	233,927
Loss from continuing operations		(36,523	)
Loss attributed to common stockholders	$	(47,578	)


	Penn Foster December 7, 2009
	(in thousands)
Total cash consideration(a)	$	176,761

Cash and cash equivalents		7,064
Accounts receivable		1,142
Other receivables		3,806
Inventories		5,454
Prepaid expenses and other assets		3,542
Deferred tax assets(b)		22,320
Property, equipment and software development		13,749
Intangible assets		79,400
Other long-term assets		3,444
Accounts payable, accrued expenses and other current liabilities(c)		(12,543	)
Deferred revenue		(14,093	)
Other long-term liabilities		(3,540	)
Deferred income taxes		(33,514	)

Net assets acquired		76,231

Goodwill	$	100,530


	December 31, 2010
	(in thousands)
Cash	$	12
Property, equipment and software development, net		382
Other intangibles, net		19,367

Total assets	$	19,761

Accrued expenses ($108 due to NLC for supporting services)		131

Total liabilities	$	131


	Goodwill			HER Territorial Marketing Rights		Penn Foster Trade Names
	(in thousands)
Balance as of December 31, 2009	$	186,518		$	1,481	$	31,300
Addition from Penn Foster working capital payment		497			—		—
Penn Foster purchase accounting adjustments		(1,796	)		—		—
Other		18			—		—

Balance as of December 31, 2010		185,237			1,481		31,300
Impairments		(84,707	)		—		(6,800	)

Balance as of December 31, 2011	$	100,530		$	1,481	$	24,500


	HER			Penn Foster		Total
Balance as of December 31, 2010	$	84,707		$	100,530	$	185,237
Loss on impairment of goodwill		(84,707	)		—		(84,707	)

Balance as of December 31, 2011	$	—		$	100,530	$	100,530


	December 31, 2011						December 31, 2010
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
	(in thousands)
Subject to amortization
Franchise costs	$	22,517	$	4,993	$	17,524	$	26,978	$	3,719	$	23,259
Course content		42,814		22,724		20,090		40,953		13,724		27,229
NLC license		—		—		—		20,750		1,383		19,367
Student roster		11,400		10,675		725		11,400		8,435		2,965
Publishing rights		1,043		708		335		1,043		664		379
Non-compete agreements		1,544		1,542		2		1,544		1,485		59
Other intangible assets		638		597		41		638		503		135

Total subject to amortization		79,956		41,239		38,717		103,306		29,913		73,393

Not subject to amortization
Territorial marketing rights		1,481		—		1,481		1,481		—		1,481
Trade names		24,500		—		24,500		31,300		—		31,300

Total other intangible assets	$	105,937	$	41,239	$	64,698	$	136,087	$	29,913	$	106,174


	NLC License
Balance as of December 31, 2010	$	19,367
Amortization		(1,557	)
Loss on impairment of license		(8,352	)
Disposal of license upon termination of NLC strategic venture		(9,458	)

Balance as of December 31, 2011	$	—


As of December 31,	Amount Maturing
	(In thousands)
2012	$	9,000
2013		12,000
2014		41,000
2015		51,020
2016		25,510
Thereafter		—

Total cash obligations		138,530
Unamortized discounts and accrued in-kind interest, net		7,529
Capital lease obligations		247

Balance as of December 31, 2011	$	146,306


Year ending December 31,	(in thousands)
2012	$	141
2013		104
2014		14

Total		259
Less: amounts representing interest (effective interest rate ranges from 2% to 8%)		12

Present value of capital lease obligations	$	247


Years Ending December 31,	(in thousands)
2012	$	8,628
2013		7,144
2014		5,863
2015		3,613
2016		1,844
Thereafter		3,596

	$	30,688


	(in thousands)
Balance at January 1, 2009	$	—
Additions related to Penn Foster acquisition		3,294

Balance at December 31, 2009		3,294
Additions related to Penn Foster acquisition		49

Balance at December 31, 2010	$	3,343
Decreases related to expiration of statute of limitations		(574	)

Balance at December 31, 2011	$	2,769


	Shares of Common Stock Attributable to Options			Weighted- Average Exercise Price Of Options		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2010		7,279,771		$	3.55
Granted at market price		500,000			0.31
Forfeited and expired		(3,612,914	)		3.63
Exercised		—			—

Outstanding at December 31, 2011		4,166,857		$	3.09		7.85	$	—
Vested or expected to vest at December 31, 2011		4,044,814		$	3.13		7.82	$	—
Exercisable at December 31, 2011		1,715,134		$	4.36		6.68	$	—


	Shares			Weighted- Average Grant Date Fair Value
Non-vested awards outstanding at December 31, 2010		900,812		$	3.05
Granted		2,556,212			0.39
Forfeited		(631,125	)		2.75
Vested		(2,534,144	)		0.55

Non-vested awards outstanding at December 31, 2011		291,755		$	2.13


	Year Ended December 31, 2011 (in thousands)
	HER			Penn Foster			Corporate			Total
Revenue	$	100,309		$	88,445		$	—		$	188,754

Operating expenses		185,699			92,142			21,536			299,377

Operating loss from continuing operations		(85,390	)		(3,697	)		(21,536	)		(110,623	)
Depreciation and amortization		5,287			13,779			689			19,755
Restructuring and other related expenses		—			68			1,569			1,637
Acquisition and integration expenses		—			—			3,080			3,080
Loss on impairment of goodwill and other assets		93,111			6,800			—			99,911
Stock based compensation		—			—			2,382			2,382
Other cash expense (see reconciliation below)		—			—			—			—

Adjusted EBITDA		13,008			16,950			(13,816	)		16,142

Total segment assets		50,179			170,490			7,684			228,353

Segment goodwill		—			100,530			—			100,530

Expenditures for long lived assets	$	7,387		$	1,904		$	217		$	9,508


	Year Ended December 31, 2010 (in thousands)
	HER		Penn Foster			SES		Corporate			Total
Revenue	$	102,766	$	96,387		$	14,676	$	—		$	213,829

Operating expenses		90,730		99,488			13,381		31,529			235,128

Operating income (loss) from continuing operations		12,036		(3,101	)		1,295		(31,529	)		(21,299	)
Depreciation and amortization		3,620		21,451			334		8,650			34,055
Restructuring		—		—			—		4,327			4,327
Acquisition and integration expenses		—		2,286			—		3,076			5,362
Stock based compensation		—		218			—		3,236			3,454
Acquisition related adjustment to revenue		—		877			—		—			877
Inventory write-off to cost of goods and services sold		—		—			942		—			942
Other cash expense (see reconciliation below)		—		—			—		(4	)		(4	)

Adjusted EBITDA		15,656		21,731			2,571		(12,244	)		27,714

Total segment assets (excludes former CEP division assets)		141,874		198,812			—		18,810			359,496

Segment goodwill		84,707		100,530			—		—			185,237

Expenditures for long lived assets	$	10,388	$	4,557		$	—	$	1,149		$	16,094


	Year Ended December 31, 2009 (in thousands)
	HER		Penn Foster			SES		Corporate			Total
Revenue	$	110,414	$	5,485		$	27,620	$	—		$	143,519

Operating expense		94,835		6,100			27,165		25,519			153,619

Operating income (loss) from continuing operations		15,579		(615	)		455		(25,519	)		(10,100	)
Depreciation and amortization		3,791		1,835			175		2,546			8,347
Restructuring		—		—			—		7,711			7,711
Acquisition and integration expenses		—		—			—		2,984			2,984
Stock based compensation		—		—			—		2,979			2,979
Acquisition related adjustment to revenue		—		135			—		—			135
Other cash income (see reconciliation below)		—		—			—		261			261

Adjusted EBITDA		19,370		1,355			630		(9,038	)		12,317

Total segment assets		139,319		231,790			4,050		14,648			389,807

Segment goodwill		84,689		101,829			—		—			186,518

Expenditures for long lived assets	$	4,867	$	93		$	38	$	4,362		$	9,360


	Quarter Ended
	Mar. 31, 2011			June 30, 2011			Sept. 30, 2011			Dec. 31, 2011			Mar. 31, 2010			June 30, 2010			Sept. 30, 2010			Dec. 31, 2010
	(in thousands, except per share data)
Revenue
Higher Education Readiness	$	23,708		$	26,905		$	33,425		$	16,271		$	26,757		$	26,591		$	30,675		$	18,743
Penn Foster		26,011			22,692			20,991			18,751			26,439			24,948			23,357			21,643
SES		—			—			—			—			9,989			4,649			38			—

Total revenue		49,719			49,597			54,416			35,022			63,185			56,188			54,070			40,386

Operating expenses
Costs of goods and services sold (exclusive of items below)		17,219			17,838			17,987			13,267			22,514			21,907			18,298			14,260
Selling, general and administrative		32,301			25,744			25,257			25,381			35,153			28,475			26,831			23,946
Depreciation and amortization		4,474			4,347			5,007			5,927			10,561			8,173			8,204			7,117
Restructuring and other related expenses		63			—			—			1,574			1,031			890			2,082			324
Acquisition and integration expenses		874			1,017			987			202			1,023			1,350			1,311			1,678
Loss on impairment of goodwill and other assets		—			—			83,468			16,443			—			—			—			—

Total operating expenses		54,931			48,946			132,706			62,794			70,282			60,795			56,726			47,325

Operating (loss) income from continuing operations		(5,212	)		651			(78,290	)		(27,772	)		(7,097	)		(4,607	)		(2,656	)		(6,939	)

Loss from continuing operations	$	(11,128	)	$	(4,936	)	$	(73,918	)	$	(33,963	)	$	(14,605	)	$	(11,776	)	$	(7,812	)	$	(10,897	)

Loss per share:
Basic and diluted loss from continuing operations	$	(0.25	)	$	(0.14	)	$	(1.39	)	$	(0.66	)	$	(0.52	)	$	(0.27	)	$	(0.19	)	$	(0.25	)

Weighted average shares used in computing loss from continuing operations
Basic and diluted		53,638			54,415			54,967			55,699			33,772			47,822			52,120			53,485


	Year Ended December 31,
	2011			2010			2009
	(in thousands, except per share data)
Numerator for earnings (loss) per share:
Loss from continuing operations	$	(123,945	)	$	(45,090	)	$	(13,902	)
Earnings to common shareholders from exchange and conversion of preferred stock		—			1,128			13,255
Dividends and accretion on preferred stock		(9,815	)		(9,908	)		(5,308	)

Loss from continuing operations attributed to common stockholders	$	(133,760	)	$	(53,870	)	$	(5,955	)
(Loss) income from discontinued operations		(12,125	)		(6,650	)		1,516

Loss attributed to common stockholders	$	(145,885	)	$	(60,520	)	$	(4,439	)

Denominator for basic and diluted earnings (loss) per share:
Weighted average common shares outstanding		54,687			46,868			33,728

Basic and diluted earnings (loss) per share:
Loss from continuing operations	$	(2.45	)	$	(1.15	)	$	(0.18	)
(Loss) income from discontinued operations		(0.22	)		(0.14	)		0.04

Loss attributed to common shareholders	$	(2.67	)	$	(1.29	)	$	(0.13	)


	Severance and Termination Benefits
	(in thousands)
Restructuring provision in 2011	$	283
Cash paid		(91	)

Accrued restructuring balance at December 31, 2011	$	192


	Severance and Termination Benefits			Lease Termination and Office Shut-down Costs			Total
	(in thousands)
Restructuring provision in 2010	$	820		$	969		$	1,789
Non-cash credits		50			—			50
Cash paid		(807	)		(804	)		(1,611	)

Accrued restructuring balance at December 31, 2010		63			165			228
Restructuring provision adjustments in 2011		—			20			20
Cash paid		(63	)		(130	)		(193	)

Accrued restructuring balance at December 31, 2011	$	—		$	55		$	55