8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): October 30, 2006 (October 27, 2006)

CRC HEALTH CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware	333-135172	73-1650429
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

20400 Stevens Creek Boulevard, Suite 600, Cupertino, California	95014
(Address of Principal Executive Offices)	(Zip code)

(877) 272-8668

(Registrant’s Telephone Number, including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

This current report is neither an offer to sell nor a solicitation of an offer to buy any securities of CRC Health Corporation (the “Company”). The information in this current report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. In addition, this information shall not be deemed to be incorporated by reference into any of the Company’s filings with the Securities and Exchange Commission, except as shall be expressly set forth by specific reference in any such filing.

Item 2.02. Results of Operations and Financial Condition.

On October 27, 2006, the Company reported operating results for the third quarter ended September 30, 2006. A copy of the Company’s press release is furnished herewith as Exhibit 99.1.

Item 7.01. Regulation FD Disclosure.

As previously announced, on September 22, 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) by and among Aspen Education Group, Inc., a California corporation (“Aspen”), Madrid Merger Corporation, a California corporation, and other parties pursuant to which the Company has agreed to acquire all of the outstanding capital stock of Aspen, for a cash purchase price of $291 million, subject to adjustment pursuant to the terms and conditions of the Agreement. Certain of the financial and other information included in this Item 7.01 has been included in a confidential information memorandum prepared by the Company in connection with the syndication of its additional senior secured term loans described below.

Transaction Overview

In connection with the closing of the proposed acquisition of Aspen, the Company intends to borrow an aggregate principal amount of $180 million of additional senior secured term loans (by amending and restating the Company’s existing $244 million senior secured term loan facility) and to receive a capital contribution from its parent company, CRC Health Group, Inc. (“CRC Health Group”) of $145 million. CRC Health Group intends to fund a portion of such capital contribution by entering into a paid-in-kind senior unsecured loan in a principal amount of $100 million (issued at 1% original issue discount for total proceeds of $99 million). The remainder of such capital contribution would be provided from the proceeds of the sale of equity securities of CRC Health Group to certain of its existing equity holders. The proceeds from the Company’s additional senior secured term loans and the capital contribution of CRC Health Group are expected to (i) fund the purchase of Aspen ($291 million purchase price less approximately $8 million of Aspen note obligations), (ii) pay down approximately $30 million of the Company’s existing borrowings under its revolving credit facility and (iii) pay related transaction fees and expenses of approximately $12 million. The Company refers to the merger and the related transactions, including the new borrowings under the Company’s amended and restated senior secured term loan facility and the capital contribution from CRC Health Group as the Merger.

Aspen Overview

The Company believes Aspen is the market leading for-profit provider of therapeutic educational programs to troubled youth. Aspen offers its programs through its Residential Division (boarding schools), Outdoor Division (outdoor education programs) and Healthy Living Division (weight management programs for children and teenagers). The Company believes Aspen is the largest for-profit operator in the private-pay therapeutic education space with 32 programs in 12 states and the United Kingdom. Founded in 1988, Aspen employs approximately 1,730 full time staff and in 2005 assisted over 4,000 students from all 50 U.S. states and 16 foreign countries.

Aspen’s Residential Division consists of boarding schools and therapeutic programs that provide youth (ages 10-22) with development-impeding behavioral and substance abuse problems with the necessary structure and time to internalize positive change. Aspen’s schools provide students with an integrated therapeutic setting with the traditional academic elements of an educational institution. Campus sizes range from 40-160 students and both single gender and co-ed programs are offered. Aspen’s

Residential Division consisted of 16 programs in eight states and enrolled 1,557 new students in 2005. The constellation of programs aim to cover a wide range of specific demand niches (e.g. female-only middle school) and therapeutic intensity requirements (e.g. special needs boarding schools). In 2005, the Residential Division generated revenues of $80 million.

Students in Aspen’s Outdoor Division programs have typically undergone an acute personal crisis and require immediate intervention. Consequently, Outdoor Division programs, which are operated year-round (most heavily in the summer months), are short-term and high-impact, with therapy that is individualized, intense and largely administered by highly qualified masters- or doctoral-level professionals. The programs use experiential learning and take advantage of the therapeutic backdrop of nature as a catalyst for positive change. Aspen’s Outdoor Division operated nine programs in six states and enrolled 2,034 new students in 2005. In 2005, the Outdoor Division generated revenues of $38 million.

Aspen’s Healthy Living Division was launched in 2004 to combat the growing problem of pediatric obesity. The division currently consists of one year-round residential school (Academy of the Sierras) and five scientifically-based summer weight loss camps (Wellspring Camps). The Academy of the Sierras (AOS) is the nation’s first therapeutic boarding school specifically designed by leading researchers for obese adolescents. In 2005, the Healthy Living Division generated revenues of $5 million.

Aspen competes with the troubled youth operations of two national healthcare providers, and it also competes against small, local “mom-and-pop” facilities. In this highly fragmented space, about two-thirds of the revenue in the troubled youth residential market is generated by for-profit operators and the remainder by non-profit organizations.

Acquisition Rationale

Among other benefits, the Aspen acquisition offers multiple revenue and cost synergies. Cost synergies center on the opportunity to reduce insurance and other professional services expenses as well as to streamline support functions. Annual cost savings are estimated at $2 million. The acquisition of Aspen will also further enhance the Company’s private pay mix and business diversification. Pro forma for the Merger, the Company’s private pay mix will be approximately 82%. The Company’s revenues will also be further diversified by division, facility and geography, thereby reducing business risk from any one aspect of the Company’s operations. In addition, the Company is expected to benefit from increased cross-referral opportunities.

Financial Information

Attached hereto as Exhibit 99.2 is certain financial information of the Company and Aspen on a pro forma basis for the Merger. Attached hereto as Exhibits 99.3 and 99.4 are certain audited consolidated financial statements of Aspen and its subsidiaries. Attached hereto as Exhibit 99.5 are certain unaudited condensed consolidated financial statements of Aspen and its subsidiaries, together with a “management’s discussion and analysis.” Such exhibits are incorporated by reference into this Item 7.01.

Cautionary Note Regarding Forward-Looking Statements:

Statements in this current report on Form 8-K regarding the Merger, the expected effects, timing and completion of the Merger and any other statements about the Company’s future expectations, beliefs, goals, plans or prospects constitute forward-looking statements. Any statements that are not statements of historical fact (including statements containing the words “believes,” “plans,” “intends,” “anticipates,” “expects,” “estimates” and similar expressions) should also be considered to be forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including: the ability to consummate the proposed transactions due to the failure to obtain the necessary debt financing arrangements or the failure to satisfy other conditions to the closing of the proposed transactions, the ability to recognize the benefits of the transactions, changes in government regulation, failure to manage the integration of acquired companies and other risks that are described in the Company’s other filings with the Securities and Exchange Commission.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

Exhibit No.	Description
99.1	Press Release dated October 27, 2006 (furnished herewith).
99.2	Certain Pro Forma Financial Information (furnished herewith).
99.3	Consolidated Financial Statements of Aspen Education Group, Inc. and Subsidiaries as of December 31, 2004 and 2003 (furnished herewith).
99.4	Consolidated Financial Statements of Aspen Education Group, Inc. and Subsidiaries as of December 31, 2005 and 2004 (furnished herewith).
99.5	Condensed Consolidated Financial Statements of Aspen Education Group, Inc. and Subsidiaries for the nine months ended September 30, 2006 and 2005 (unaudited), together with a “Management’s Discussion and Analysis” (furnished herewith).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	CRC HEALTH CORPORATION
DATE: October 30, 2006	By:	/S/    PAMELA B. BURKE
		Name: Pamela B. Burke Title: Vice President, General Counsel and Secretary

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release dated October 27, 2006 (furnished herewith).
99.2	Certain Pro Forma Financial Information (furnished herewith).
99.3	Consolidated Financial Statements of Aspen Education Group, Inc. and Subsidiaries as of December 31, 2004 and 2003 (furnished herewith).
99.4	Consolidated Financial Statements of Aspen Education Group, Inc. and Subsidiaries as of December 31, 2005 and 2004 (furnished herewith).
99.5	Condensed Consolidated Financial Statements of Aspen Education Group, Inc. and Subsidiaries for the nine months ended September 30, 2006 and 2005 (unaudited), together with a “Management’s Discussion and Analysis” (furnished herewith).

EX-99.1

Exhibit 99.1

NEWS RELEASE

FOR IMMEDIATE RELEASE: October 27, 2006

Contact: Bob Weiner/Rebecca VanderLinde 301-283-0821 or 202-329-1700

CRC Health Reports Operating Results

for the Quarter Ended September 30, 2006

CUPERTINO, CA, October 27, 2006 – CRC Health Corporation (formerly known as CRC Health Group, Inc.) (“CRC” or the “Company”), the nation’s largest chemical dependency treatment provider, announced its results for the third quarter and nine months ended September 30, 2006, reflecting contributions from its 2006 acquisitions, its acquisition of Sierra Tucson in May 2005 and other acquisitions in 2005, collectively (the “2005-06 acquisitions”), and continued organic growth. CRC completed three acquisitions during the third quarter of 2006.

Bain Capital Partners’ acquisition of CRC

On February 6, 2006, investment funds managed by Bain Capital Partners, LLC (“Bain”) completed the acquisition of CRC for approximately $723 million. As part of the transaction, certain members of the CRC management team partnered with Bain by retaining an equity stake in CRC. The acquisition resulted in several large expenses for merger-related costs in the nine months ended September 30, 2006. CRC’s pro forma results excluding these unusual items can be derived from the reconciliation of non-GAAP “EBITDA from continuing operations” to non-GAAP “Adjusted Pro Forma EBITDA”, presented below. CRC refers to the February 6, 2006 Bain acquisition, the related mergers and related financings as the “Transactions.”

The date of the Bain acquisition was February 6, 2006, but for accounting purposes and to coincide with its normal financial closing, CRC has utilized January 31, 2006 as the effective date of the Bain acquisition. As a result, CRC has reported operating results and financial position for all periods presented prior to January 31, 2006 as those of the Predecessor Company and for all periods from and after February 1, 2006 as those of the Successor Company due to the resulting change in the basis of accounting. CRC’s operating results for the nine months ended September 30, 2006 are presented as the mathematical addition of CRC’s operating results for the one month ended January 31, 2006 to the operating results for the eight months ended September 30, 2006. This approach is not consistent with accounting principles generally accepted in the United States of America (“GAAP”) and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. However, CRC’s management believes that it is a meaningful way to present CRC’s results of operations for the nine months ended September 30, 2006. In addition, due to differences in the basis of accounting, results for

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the nine months ended September 30, 2006 are not comparable to results of the nine months ended September 30, 2005.

Historical Financial Results

Third Quarter and Nine Months Ended September 30, 2006 Financial Results

• Net revenue for the third quarter of 2006 increased by $9.6 million, or 17.2%, to $65.5 million as compared to $55.9 million in the third quarter of 2005. The net revenue growth was driven by net revenue increases of $7.9 million, or 22.9% and $1.7 million, or 8.1%, in CRC’s residential and opiate treatment segments, respectively. The net revenue growth in the residential and opiate treatment segments was mainly driven by same-facility revenue increases of 11.8% and 3.9%, respectively, which was the result of increases in average daily census and net revenue per patient day. In addition, $3.9 million and $0.5 million of the residential and opiate treatment segments’ revenue growth, respectively, is attributable to the 2005-06 acquisitions that were not included in the third quarter of 2005.

• Net revenue for the nine months ended September 30, 2006 increased by $35.0 million, or 23.2%, to $186.1 million as compared to $151.1 million in the nine months ended September 30, 2005. The net revenue growth was driven by net revenue increases of $30.1 million, or 33.9% and $4.6 million, or 7.5%, in CRC’s residential and opiate treatment segments, respectively. The residential treatment segment revenue growth was mainly driven by 2005-06 acquisitions growth of $20.8 million and partially due to the same-facility increase of $9.1 million, which was the result of increases in average daily census and net revenue per patient day. The opiate treatment segment revenue growth was mainly driven by same-facility revenue increase of $3.0 million, which was the result of increases in average daily census and net revenue per patient day.

• CRC’s operating margins declined to 21.2% during the third quarter of 2006 compared to 24.7% in the third quarter of 2005. The decline was due primarily to an increase of $1.2 million in depreciation and amortization expense resulting from an increase in the fair value of CRC’s assets recorded in connection with the Transactions and a non-cash charge of $1.0 million relating to option-based employee compensation expense. On a same-facility basis, CRC’s operating margins increased to 38.4% during the third quarter of 2006, as compared to 36.5% in the third quarter of 2005.

• CRC’s operating margins declined to -1.8% in the nine months ended September 30, 2006 as compared to 23.7% in the same period of 2005. The decline was due primarily to one-time expenses of $43.7 million related to the Transactions, and to a lesser extent, from the increase of $3.9 million in depreciation and amortization expense resulting from an increase in the fair value of CRC’s assets recorded in connection with the Transactions and a non-cash charge of $2.6 million relating to

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option-based employee compensation expense. On a same-facility basis, CRC’s operating margins increased to 35.9% during the nine months ended September 30, 2006, as compared to 35.2% in the same period of 2005.

• Net income for the third quarter of 2006 was $0.4 million compared to $6.0 million in the third quarter of 2005. The net income decline was mainly due to a $5.5 million increase in interest expense resulting from the issuance of new senior and subordinated debt related to the Transactions. In addition, interest and other (expense) income includes a loss of $1.5 million in fair value of interest rate swap agreement compared to a gain of $1.4 million in the third quarter of 2005.

• Net loss for the nine months ended September 30, 2006 was $35.8 million compared to net income of $13.1 million in the nine months ended September 30, 2005. The net loss was mainly due to one-time transaction expenses of $43.7 million incurred in connection with the Transactions and a $25.3 million increase in interest and other financing expense resulting from the issuance of new senior and subordinated debt related to the Transactions. In addition, interest and other income includes a loss of $1.5 million in fair value of interest rate swap agreement compared to a gain of $1.2 million in the nine months ended September 30, 2005.

Pro Forma Financial Results

Adjusted pro forma EBITDA was $18.5 million for the quarter ended September 30, 2006, compared to $16.9 million for the quarter ended September 30, 2005, an increase of $1.6 million, or 9.2%. Adjusted pro forma EBITDA was $55.9 million for the nine months ended September 30, 2006, compared to $49.5 million for the nine months ended September 30, 2005, an increase of $6.4 million, or 13.0%.

In order to supplement its condensed consolidated financial statements presented in accordance with GAAP, CRC is providing a summary to show the computation of earnings before interest, taxes, depreciation and amortization (“EBITDA”), as well as adjusted pro forma EBITDA. Adjusted pro forma EBITDA takes into account certain adjustments which are excluded from EBITDA for purposes of various covenants in the indenture governing CRC’s 10 ³/4% senior subordinated notes due 2016 and its credit agreement dated February 6, 2006. CRC believes that the adjusted pro forma EBITDA information presented provides useful information to both management and investors concerning its ability to meet its future debt service and to comply with certain covenants in its borrowing arrangements that are tied to these measures. CRC also believes that including the effect of these items allows management and investors to better compare CRC’s financial performance from period-to-period, and to better compare CRC’s financial performance with that of its competitors. The presentation of this additional information is not meant to be considered in isolation of, or as a substitute for, results prepared in accordance with GAAP.

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The unaudited adjusted pro forma EBITDA for the periods presented gives effect to the 2005 acquisitions as if they had occurred on January 1, 2005 and 2006 acquisitions as if they had occurred on January 1, 2006. The pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The pro forma adjusted EBITDA is for informational purposes only and does not purport to represent what CRC’s results of operations or financial position would actually be if the 2005-06 acquisitions occurred at any date, nor does such information purport to project the results of operations for any future period.

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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

SEPTEMBER 30, 2006 (SUCCESSOR) AND DECEMBER 31, 2005 (PREDECESSOR)

(In thousands, except share amounts)

	September 30, 2006		December 31, 2005
	(Successor)		(Predecessor)
ASSETS
CURRENT ASSETS:
Cash	$	1,593	$	5,077
Accounts receivable, net of allowance for doubtful accounts of $6,306 in 2006 and $4,459 in 2005		29,071		23,418
Prepaid expenses		4,160		4,510
Other current assets		1,389		2,832
Income taxes receivable		5,200		—
Deferred income taxes		4,271		4,264
Total current assets		45,684		40,101
PROPERTY AND EQUIPMENT—Net		71,506		49,074
GOODWILL		479,823		265,977
OTHER INTANGIBLE ASSETS—Net		294,447		60,008
OTHER ASSETS		22,386		8,994
TOTAL ASSETS	$	913,846	$	424,154
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,012	$	5,348
Accrued liabilities		18,684		14,400
Income taxes payable		—		3,384
Current portion of long-term debt		34,450		11,550
Other current liabilities		6,092		3,135
Total current liabilities		62,238		37,817
LONG-TERM DEBT—Less current portion		438,545		248,381
OTHER LONG-TERM LIABILITIES		393		469
DEFERRED INCOME TAXES		112,418		9,877
Total liabilities		613,594		296,544
Predecessor Company—Mandatorily redeemable stock—324,731,796 shares authorized; 262,399,056 shares issued and outstanding at December 31, 2005		—		115,625
STOCKHOLDER’S EQUITY:
Predecessor Company—Series A common stock, $0.000001 par value—378,090,843 shares authorized; 8,652,429 shares issued and outstanding at December 31, 2005
Successor Company—Common stock, $0.001 par value—1,000 shares authorized; 1,000 shares issued and outstanding at September 30, 2006
Additional paid-in capital		297,061		215
Retained earnings		3,191		11,770
Total stockholder’s equity		300,252		11,985
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	913,846	$	424,154

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CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands) (unaudited)

	Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Eight Months Ended September 30, 2006			One Month Ended January 31, 2006			Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005
	(Successor)			(Predecessor)			(Successor)			(Predecessor)			Combined			(Predecessor)
NET REVENUE:
Net client service revenue	$	64,290		$	54,963		$	163,071		$	19,360		$	182,431		$	149,207
Other revenue		1,210			915			3,163			490			3,653			1,870
Net revenue		65,500			55,878			166,234			19,850			186,084			151,077
OPERATING EXPENSES:
Salaries and benefits		30,397			24,924			77,262			9,265			86,527			70,123
Supplies, facilities and other operating costs		17,731			15,515			44,449			4,562			49,011			40,514
Provision for doubtful accounts		1,176			519			3,295			285			3,580			1,883
Depreciation and amortization		2,320			1,125			6,246			361			6,607			2,688
Acquisition related costs		—			—			—			43,710			43,710			—
Total operating expenses		51,624			42,083			131,252			58,183			189,435			115,208
INCOME (LOSS) FROM OPERATIONS		13,876			13,795			34,982			(38,333	)		(3,351	)		35,869
INTEREST EXPENSE		(11,214	)		(5,712	)		(28,161	)		(2,509	)		(30,670	)		(13,827	)
OTHER FINANCING COSTS		—			—			—			(10,655	)		(10,655	)		(2,185	)
OTHER INCOME		(1,481	)		1,361			64			60			124			1,750
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES		1,181			9,444			6,885			(51,437	)		(44,552	)		21,607
INCOME TAX EXPENSE (BENEFIT)		742			3,434			3,694			(12,444	)		(8,750	)		8,459
NET INCOME (LOSS)	$	439		$	6,010		$	3,191		$	(38,993	)	$	(35,802	)	$	13,148

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Reconciliation of GAAP “Cash flows provided by (used in) operating activities” to non-GAAP “EBITDA from continuing operations” and Reconciliation of non-GAAP “EBITDA from continuing operations” to GAAP “Net income”

(In thousands) (unaudited)

	Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Eight Months Ended September 30, 2006			One Month Ended January 31, 2006			Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005
	(Successor)			(Predecessor)			(Successor)			(Predecessor)			Combined			(Predecessor)
Cash flows provided by (used in) operating activities	$	176		$	5,934		$	(6,347	)	$	1,202		$	(5,145	)	$	17,134
Write-off of debt discount and capitalized financing costs		—			—			—			(10,655	)		(10,655	)		(2,185	)
Acquisition and financing related costs		—			—			—			(24,445	)		(24,445	)		—
Amortization of debt discount and capitalized financing costs		(832	)		(442	)		(1,982	)		(162	)		(2,144	)		(1,082	)
Stock-based compensation		(995	)		—			(2,585	)		(17,666	)		(20,251	)		—
Deferred income taxes		—			(1,207	)		391			—			391			(1,207	)
Net effect of changes in non-current net assets		249			346			39			(1,331	)		(1,292	)		575
Net effect of working capital changes		4,161			2,504			19,921			14,425			34,346			2,601
Interest expense and other financing costs		11,214			5,712			28,161			13,164			41,325			16,012
Income tax expense (benefit)		742			3,434			3,694			(12,444	)		(8,750	)		8,459
EBITDA from continuing operations		14,715			16,281			41,292			(37,912	)		3,380			40,307
Interest expense and other financing costs		(11,214	)		(5,712	)		(28,161	)		(13,164	)		(41,325	)		(16,012	)
Income tax (expense) benefit		(742	)		(3,434	)		(3,694	)		12,444			8,750			(8,459	)
Depreciation and amortization		(2,320	)		(1,125	)		(6,246	)		(361	)		(6,607	)		(2,688	)
Net income (loss)	$	439		$	6,010		$	3,191		$	(38,993	)	$	(35,802	)	$	13,148

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Reconciliation of non-GAAP “EBITDA from continuing operations” to non-GAAP “Adjusted pro forma EBITDA”

(In thousands) (unaudited)

	Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005
	(Successor)			(Predecessor)			(Successor)			(Predecessor)
EBITDA from continuing operations	$	14,715		$	16,281		$	3,380		$	40,307
Pre-acquisition Adjusted EBITDA from Sierra Tucson acquisition		—			—			—			6,150
Pre-acquisition Adjusted EBITDA from other 2005 acquisitions		—			600			—			2,605
Pre-acquisition Adjusted EBITDA from 2006 acquisitions		776			—			3,468			—
Expenses incurred in anticipation of a contemplated public offering		—			824			—			824
Hurricane losses		—			191			—			191
Corporate office relocation expenses		—			—			—			80
Expenses incurred related to the Transactions		(10	)		—			43,739			—
Unrecognized profit on deferred revenue		—			—			1,474			—
Stock-based compensation expense		995			—			2,586			—
Gain on termination of interest rate swap		—			—			—			(585	)
Loss (Gain) on interest rate swap		1,534			(1,404	)		(40	)		(1,189	)
(Gain) loss on fixed asset disposal		(33	)		73			(38	)		72
Management fees to Sponsor		508			330			1,326			990
Write-off of cancelled acquisitions		15			—			15			—
Write-off of intangible assets		—			41			—			41
Adjusted Pro forma EBITDA(1)	$	18,500		$	16,936		$	55,910		$	49,486

(1) The Adjusted Pro forma EBITDA for the three months and nine months ended September 30, 2006 gives effect to the 2006 acquisitions as if they had occurred on January 1, 2006. The preacquisition Adjusted EBITDA for the 2006 acquisitions are not included in the Adjusted Pro forma EBITDA amounts for the three and nine months ended September 30, 2005. Adjusted EBITDA for the 2006 acquisitions (pre and post acquisition by CRC) included in the Adjusted Pro forma EBITDA for the three and nine months ended September 30, 2006 are $1.3 million and $4.1 million, respectively.

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CRC Health Corporation

Selected Statistics

	Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005
	(Successor)			(Predecessor)			(Successor)			(Predecessor)
Residential treatment facilities data
Number of inpatient facilities—end of period		28			21			28			21
Number of outpatient facilities—end of period		18			17			18			17
Available beds—end of period		1,703			1,266			1,703			1,266
Average daily census		1,304			1,107			1,250			1,054
Occupancy rate		85.2	%		86.3	%		85.7	%		86.2	%
Net revenue per patient day	$	352.66		$	338.06		$	348.28		$	308.55
Opiate treatment clinics data
Number of opiate treatment clinics—end of period		57			49			57			49
Average daily census		23,064			21,478			22,246			20,934
Net revenue per patient day	$	11.02		$	10.95		$	11.02		$	10.90

Conference Call

CRC will host a conference call, open to all interested parties, on Monday, November 6, 2006 beginning at 10:00 AM Pacific Time. Call-in information for the conference call, as well as replay information, will be disseminated in a subsequent press release.

Forward-Looking Statements

This press release includes or may include “forward-looking statements.” All statements included herein, other than statements of historical fact, may constitute forward-looking statements. Although CRC believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following factors: changes in government reimbursement for CRC’s services; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; the potentially difficult, unsuccessful or costly integration of recently acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment facilities; the possibility that commercial payors for CRC’s services may undertake future cost containment initiatives; the limited number of national suppliers of methadone used in CRC’s opiate treatment clinics; the failure to maintain established relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural disasters such as hurricanes, earthquakes and floods; competition that limits CRC’s ability to grow; the potentially costly implementation of new information systems

9

to comply with federal and state initiatives relating to patient privacy, security of medical information and electronic transactions; the potentially costly implementation of accounting and other management systems and resources in response to financial reporting and other requirements; the loss of key members of CRC’s management; claims asserted against CRC or lack of adequate available insurance; CRC’s substantial indebtedness; and certain restrictive covenants in CRC’s debt documents.

10

EX-99.2

Exhibit 99.2

Pro Forma Revenue, Net Income and Adjusted EBITDA

	Twelve Months Ended September 30, 2006
	Historical						Adjustments
(Dollars in Thousands)	CRC			Aspen			CRC			Aspen			Pro Forma Adjusted Total
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net revenue.......................................................	$	244,029	(1)	$	143,175	(1)	$	23,878	(2)	$	907	(2)	$	411,989
Net income (loss) from continuing operations..	$	(30,949	)(1)	$	7,870	(1)		—			—		$	(23,079	)
Adjusted EBITDA (3).......................................													$	101,079

(1) In order to facilitate comparisons with twelve-month operating results, the Company has presented certain “twelve months ended September 30, 2006” operating results, a presentation not made in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. For the Company and Aspen, operating results for the twelve months ended September 30, 2006 are presented as the mathematical addition of operating results for the three months ended December 31, 2005 and the nine months ended September 30, 2006. For the Company, its operating results for the nine months ended September 30, 2006 are presented as the mathematical addition of its operating results for the one month ended January 31, 2006 and its operating results for the eight months ended September 30, 2006. This approach is not consistent with U.S. GAAP and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the acquisition of the Company by investment funds managed by Bain Capital Partners, LLC in the first quarter of 2006. However, the Company’s management believes that it is the most meaningful way to present the Company’s results of operations for the nine months ended September 30, 2006. Operating results for the twelve months ended September 30, 2006 are derived from the following, presented in accordance with U.S. GAAP:

(Dollars in Thousands)	Three Months Ended December 31, 2005			One Month Ended January 31, 2006			Eight Months Ended September 30, 2006		Nine Months Ended September 30, 2006			Twelve Months Ended September 30, 2006
	(unaudited)			(unaudited)			(unaudited)		(unaudited)			(unaudited)
CRC:
Net revenue...............................................	$	57,945		$	19,850		$	166,234	$	186,084		$	244,029
Net income (loss) from continuing operations..............................................	$	4,853		$	(38,993	)	$	3,191	$	(35,802	)	$	(30,949	)
Aspen:
Net revenue...............................................	$	31,174							$	112,001		$	143,175
Net income (loss) from continuing operations.............................................	$	(370	)						$	8,240		$	7,870

(2) Reflects pro forma revenue for acquisitions during the twelve months ended September 30, 2006, as if such acquisitions had occurred on October 1, 2005, and unrecognized profit on deferred revenue.

(3) Adjusted EBITDA is not a presentation made in accordance with U.S. GAAP. The Company’s use of the term Adjusted EBITDA may differ from other companies in its industry and these measures should not be considered in isolation of, or as a substitute for, results prepared in accordance with U.S. GAAP. Adjusted EBITDA is being provided to the potential additional lenders under the Company’s senior secured term loan, as proposed to be amended and restated in connection with its acquisition of Aspen. Adjusted EBITDA as presented herein contains similar adjustments that are taken into account in the calculation of “EBITDA,” used in connection with various covenants in the indenture governing the Company’s senior subordinated notes, and “Consolidated EBITDA,” used in components of various covenants in the Company’s senior secured credit facility, as well as certain other adjustments included in the lender presentation regarding the senior secured term loan, as proposed to be amended.

EBITDA from continuing operations and Adjusted EBITDA are reconciled from net income from continuing operations determined under U.S. GAAP as follows:

Unaudited Pro Forma Adjusted EBITDA for the Twelve Months Ended September 30, 2006

(Dollars in Thousands)

	CRC Twelve Months Ended September 30, 2006			Aspen Twelve Months Ended September 30, 2006			Pro Forma Twelve Months Ended September 30, 2006
	(unaudited)			(unaudited)			(unaudited)
Statement of operations data:
Net income (loss) from continuing operations	$	(30,949	)	$	7,870		$	(23,079	)
Interest expense—net		36,657			3,276			39,933
Other financing costs		10,655			—			10,655
Income tax expense (benefits)		(6,293	)		4,964			(1,329	)
Depreciation and amortization		7,769			4,860			12,629
Pro forma sale leaseback rent expense		—			(397	)		(397	)
Pro forma management fee to our Sponsor		(394	)		—			(394	)
EBITDA	$	17,445		$	20,573		$	38,018
Adjustments to EBITDA:
CRC adjustments
Expenses incurred related to the Bain Transaction		45,375			—			45,375
Expense related to forgiveness of loan to Chief Executive Officer		205			—			205
Unrecognized profit on deferred revenue		1,474			—			1,474
Stock-based compensation		2,586			—			2,586
Gain on interest rate swap		(493	)		—			(493	)
Loss (gain) on fixed asset disposals		(18	)		—			(18	)
Management fee to our Sponsor		1,883			—			1,883
Write-off of cancelled acquisitions expenses		15			—			15
Cash rent adjustment (a)		377			—			377
Pre-acquisition Adjusted EBITDA from 2006 acquisitions		5,070			—			5,070
Aspen adjustments
Profit in minority interests (no dividends paid)		—			705			705
Pre-acquisition Adjusted EBITDA from 2005 acquisitions		—			200			200
Stock-based compensation		—			215			215
IPO consulting costs		—			436			436
Acquisition related costs		—			297			297
Cash rent adjustment (a)		—			260			260
Loss (gain) on fixed asset disposals		—			419			419
Loss on extinguishment of debt		—			128			128
Other (income)/expense		—			9			9
Synergies		—			2,000			2,000
Adjusted EBITDA per CRC’s Proposed Amended and Restated Credit Agreement	$	73,919		$	25,242		$	99,161
Additional adjustments for lender presentation
Aspen start-up losses		—			1,644			1,644
Aspen bonus expense		—			274			274
Adjusted EBITDA Presented Herein	$	73,919		$	27,160		$	101,079

(a) Adjustment proposed to be included in amended and restated senior secured credit facility.

EX-99.3

Exhibit 99.3

Aspen Education Group, Inc.

and Subsidiaries

Consolidated Financial Statements

December 31, 2004 and 2003

Aspen Education Group, Inc. and Subsidiaries

Index

December 31, 2004 and 2003

	Page(s)
Report of Independent Auditors	1
Financial Statements
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6-31

Report of Independent Auditors

To the Board of Directors and Shareholders of

Aspen Education Group, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Aspen Education Group, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” effective July 1, 2003.

As discussed in Note 2 to the consolidated financial statements, the Company has restated its consolidated financial statements for the year ended December 31, 2003, including its consolidated shareholders’ equity as of December 31, 2002.

/s/ PRICEWATERHOUSECOOPERS LLP

August 31, 2005

1

Aspen Education Group, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2004 and 2003

(in thousands)				2003 (As Restated – see Note 2)
	2004
Assets
Current assets
Cash and cash equivalents	$	3,420		$	6,084
Accounts receivable, net of allowance for doubtful accounts of $742 and $1,228 in 2004 and 2003, respectively		5,478			5,170
Prepaid expenses and other current assets		3,719			2,048
Income tax receivable		—			878
Assets of discontinued operations		—			8,793
Total current assets		12,617			22,973
Property and equipment, net		31,406			20,969
Deferred tax asset		64			1,428
Other assets		1,486			1,471
Goodwill		52,963			24,410
Intangible assets, net		5,880			902
Assets of discontinued operations		—			6,437
Total assets	$	104,416		$	78,590
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	2,736		$	1,680
Accrued expenses		6,795			4,893
Income tax payable		161			—
Deferred revenue		7,136			4,580
Deferred tax liability		39			—
Other current liabilities		2,602			2,094
Current portion of long-term debt		4,014			3,703
Liabilities of discontinued operations		600			2,907
Total current liabilities		24,083			19,857
Long-term debt, less current portion		38,672			18,748
Subordinated debt		8,523			8,318
Warrant liability		1,226			749
Liabilities of discontinued operations		—			1,544
Total liabilities		72,504			49,216
Minority interest		53			—
Commitments and contingencies (Note 8)
Shareholders’ equity
Convertible preferred stock, series A ($68,285 liquidation value), 20,000 shares authorized; 12,236 and 12,486 shares issued and outstanding at December 31, 2004 and 2003, respectively		33,120			33,859
Convertible preferred stock, series B ($19,364 liquidation value), 10,000 shares authorized; 4,079 shares issued and outstanding		13,576			13,576
Common stock and additional paid-in capital, no par or stated value, 60,000 shares authorized, 19,965 and 18,199 shares issued and outstanding at December 31, 2004 and 2003, respectively		12,197			9,236
Deferred stock compensation		(808	)		(96	)
Preferred stock dividend paid		(28,500	)		(28,500	)
Retained earnings		2,274			1,299
Total shareholders’ equity		31,859			29,374
Total liabilities and shareholders’ equity	$	104,416		$	78,590

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

2

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2004 and 2003

(in thousands)				2003 (As Restated – see Note 2)
	2004
Net revenues	$	90,063		$	71,874
Operating expenses
Salaries, wages and benefits		46,342			36,243
Other operating expenses		25,399			18,772
		71,741			55,015
Operating margin		18,322			16,859
Corporate general and administrative		8,799			7,817
Depreciation and amortization		3,659			3,046
Income from operations		5,864			5,996
Interest expense, net		4,699			3,752
Income from continuing operations before provision for income taxes, minority interest, and cumulative effect of change in accounting principle		1,165			2,244
Provision for income taxes		621			914
Minority interest in loss of subsidiary		(122	)		—
Income before discontinued operations and cumulative effect of change in accounting principle		666			1,330
Income (loss) from discontinued operations, net of tax expense (benefit) of $909 and $(933)		777			(1,827	)
Cumulative effect of change in accounting principle, net of tax benefit of $173		—			(259	)
Net income (loss)	$	1,443		$	(756	)

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

3

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2004 and 2003

	Cumulative Convertible Preferred Stock, Series A					Cumulative Convertible Preferred Stock, Series B			Common Stock and Additional Paid-in Capital					Deferred Stock Compensation			Preferred Stock Dividend Paid			Retained Earnings			Total Shareholders’ Equity
	Shares		Amount			Shares	Amount		Shares		Amount
																				(As Restated – See Note 2)
Balance, December 31, 2002 (as restated)	12,486		$	33,859		4,079	$	13,576	18,020		$	9,229		$	—		$	(28,500	)	$	2,125		$	30,289
Accretion of put warrant value	—			—		—		—	—			70			—			—			(70	)		—
Put warrant reclassification	—			—		—		—	—			(317	)		—			—			—			(317	)
Stock options exercised	—			—		—		—	179			17			—			—			—			17
Deferred stock option compensation	—			—		—		—	—			125			(125	)		—			—			—
Amortization of deferred stock Option compensation	—			—		—		—	—			58			29			—			—			87
Stock compensation	—			—		—		—	—			54			—			—			—			54
Net loss	—			—		—		—	—			—			—			—			(756	)		(756	)
Balance, December 31, 2003 (as restated)	12,486			33,859		4,079		13,576	18,199			9,236			(96	)		(28,500	)		1,299			29,374
Issuance of common stock for acquisition	—			—		—		—	1,780			2,261			—			—			—			2,261
Stock received from sale of assets	(250	)		(1,207	)	—		—	(150	)		(181	)		—			—			—			(1,388	)
Stock options exercised	—			—		—		—	136			19			—			—			—			19
Deferred stock option compensation	—			—		—		—	—			862			(862	)		—			—			—
Amortization of deferred stock option compensation	—			—		—		—	—			—			150			—			—			150
Accretion of preferred stock, series A	—			468		—		—	—			—			—			—			(468	)		—
Net income	—			—		—		—	—			—			—			—			1,443			1,443
Balance, December 31, 2004	12,236		$	33,120		4,079	$	13,576	19,965		$	12,197		$	(808	)	$	(28,500	)	$	2,274		$	31,859

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

4

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2004 and 2003

(in thousands)				2003 (As Restated – see Note 2)
	2004
Cash flows from operating activities
Net income (loss)	$	1,443		$	(756	)
Adjustments to reconcile income to net cash provided by operating activities
Depreciation		3,194			2,720
Amortization of intangibles		467			328
Amortization of deferred financing costs		520			540
Minority interest in loss of affiliate		(122	)		—
Change in putable warrants value		477			432
Paid-in-kind interest expense		169			172
Non-cash stock-based compensation		150			141
Discontinued operations		1,455			(550	)
Loss on sale of fixed asset		—			30
Allowance for doubtful accounts		(486	)		527
Deferred income taxes		1,403			(406	)
Changes in operating assets and liabilities, net of effects of business acquisitions
Accounts receivable, net		681			(561	)
Cash value life insurance		—			1,909
Prepaid expenses and other current assets		(1,583	)		(970	)
Income tax receivable		878			335
Other assets – non-current		(201	)		141
Accounts payable and accrued expenses		3,182			(317	)
Net cash provided by operating activities		11,627			3,715
Cash flows from investing activities
Capital expenditures, net		(12,235	)		(7,661	)
Payments for businesses acquired, net of cash acquired and including other cash payment associated with the acquisitions		(25,671	)		(965	)
Discontinued operations		—			(178	)
Net proceeds from sale of discontinued operations		8,650			—
Net cash used in investing activities		(29,256	)		(8,804	)
Cash flow from financing activities
Stock options exercised		19			17
Investment by minority interest		125			—
Payment of loan fees		(306	)		—
Net payments under debt agreements		(5,023	)		(3,360	)
Net borrowing under debt agreements		20,150			704
Net cash provided by (used in) financing activities		14,965			(2,639	)
Net decrease in cash and cash equivalents		(2,664	)		(7,728	)
Cash and cash equivalents at beginning of period		6,084			13,812
Cash and cash equivalents at end of period	$	3,420		$	6,084
Supplemental disclosures
Interest paid	$	3,651		$	3,353
Income taxes paid		(1,020	)		606
Noncash investing and financing activities
Accretion of series convertible preferred stock Series A		468			—
Stock received from sale of discontinued operations		1,388			—
Liabilities assumed in connection with the acquisitions of businesses		3,291			703
Stock issued in connection with acquisition		2,261			—
Minority interest subscription receivable		50			—
Accretion of put warrant		—			70
Issuance of notes in connection with the acquisitions of businesses		5,043			2,406
Liabilities assumed and issuance of notes related to discontinued operations		—			3,115

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

5

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

1. Description of the Business

Aspen Education Group, Inc. has provided education opportunities for underachieving youth for more than two decades. The residential schools and outdoor programs give young people struggling with academic and emotional issues the time and opportunity to make positive change in their lives.

Aspen Education Group, Inc. owns 100% of Aspen Youth, Inc. Aspen Education Group, Inc. is hereinafter referred to as the “Parent” and Aspen Youth, Inc. and its wholly-owned subsidiaries are hereinafter referred to as the “Company.”

As of December 31, 2004, the Company owned 28 education facilities, which operate schools and educational programs in 11 states for underachieving youth and young adults who have been unsuccessful in traditional public and private school settings.

2. Summary of Significant Accounting Policies

Restatement of Consolidated Financial Statements

The accompanying consolidated financial statements have been restated for the year ended December 31, 2003, including consolidated shareholders’ equity as of December 31, 2002 to properly record separately identifiable intangible assets apart from goodwill, the related amortization expense of such intangible assets previously recorded as goodwill and not subject to amortization, and to properly recognize revenue related to nonrefundable up-front enrollment fees.

In connection with the acquisition of businesses by the Company during the years ended December 31, 2003, 2002, and 2001 the Company had previously recorded the entire excess purchase price over the fair value of net assets acquired to goodwill. However, the Company subsequently determined that an additional approximately $1.2 million of the excess purchase price from these acquisitions should have been allocated to separately identifiable intangible assets and amortized over their estimated useful lives. The fair value assigned to these identifiable intangible assets acquired was based on a number of factors, including an independent appraisal.

In connection with enrollment fees charged by the Company during the years ended December 31, 2003 and 2002, the Company had previously recognized revenue on upfront enrollment fees at the inception of the contract period. However, the Company subsequently determined that enrollment fees should be deferred and recognized systematically over the average student length of stay, generally eleven months, because the payment of such fees does not represent the culmination of a separate earnings process.

The restatement for the year ended December 31, 2003 increased previously reported amortization expense by $133 decreased revenues by $123 and increased net loss by $230. In addition, consolidated retained earnings decreased by $313 at December 31, 2002 to reflect the prior year impact of these items.

6

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Restatement of Consolidated Financial Statements (Continued)

The following table represents the impact of the restatements on balances as previously reported and restated for all periods presented (refer to Note 10 for discussion of discontinued operations):

	As previously reported before discontinued operations			As restated before discontinued operations			As restated, net of discontinued operations
Consolidated Balance Sheet
Goodwill	$	30,379		$	29,162		$	24,410
Other intangible assets, net		471			1,146			902
Total assets		78,898			78,608			78,590
Deferred revenue		6,600			6,851			4,580
Total current liabilities		19,187			19,438			19,857
Retained earnings		1,842			1,299			1,299
Consolidated Statements of Operations
Revenues		94,433			94,310			71,874
Depreciation and amortization		3,306			3,439			3,046
Income from operations		3,835			3,579			5,996
Net loss		(526	)		(756	)		(756	)

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned subsidiary which it controls. All intercompany accounts and transactions have been eliminated.

Concentrations of Credit Risk

Concentrations of credit risk with respect to trade receivables are limited due to a large and diverse customer base. No individual customer represented more than 5% of net sales during the twelve months ended December 31, 2004 and 2003.

The Company estimates its allowance for doubtful accounts based on historical experience, aging of accounts receivable and information regarding the creditworthiness of its customers. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. Accounts receivable are generally due within 30 days. To date, losses have been within the range of management’s expectations.

Revenue Recognition

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured.

7

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Revenue Recognition (Continued)

Revenues consist primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenues and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered.

The Company charges an enrollment fee for new students under its service contracts. Such fees are deferred and recognized over the average student length of stay, which generally approximates eleven months.

Alumni services revenue represent non-refundable upfront fees charged for post graduation student support. Such fees are deferred and recognized systematically over the contracted period of performance, which is three to twelve months.

Operating Expenses and General and Administrative Expenses

Site level operating expenses include direct costs at the Company’s facilities and consist primarily of facility rentals, supplies, materials and salaries, wages and benefits and exclude all depreciation and amortization expense. General and administrative expenses include primarily corporate salaries, wages and benefits, marketing costs, professional fees and corporate office rent.

Cash Equivalents

The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash equivalents.

The Company has bank balances, including cash equivalents, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to significant risk on cash and cash equivalents.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, as follows:

Buildings	30-40 years
Leasehold improvements	Lesser of useful life or lease term
Furniture and fixtures	5-7 years
Equipment	3-5 years
Computer equipment and software	3-5 years
Vehicles	3-5 years

Expenses for repairs and maintenance are charged to expense as incurred, while renewals and betterments are capitalized. Gains or losses on the sale or disposal of property and equipment are reflected in operating income.

8

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Impairment of Long-Lived Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors considered by the Company include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset. To date, the Company has not recognized an impairment charge related to the write-down of long-lived assets.

Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires, among other things, the use of a non-amortization approach for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and intangibles having an indefinite life are not amortized, but instead are reviewed for impairment at least annually or if an event occurs or circumstances indicate that the carrying amount may be impaired. Events or circumstances which could indicate an impairment include: a significant change in the business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy or disposition of a reporting unit or a portion thereof. Goodwill impairment testing is performed at the reporting unit level.

SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

9

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Goodwill (Continued)

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a combination of market earnings multiples and discounted cash flow methodologies. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth of the Company’s business, the useful life over which cash flows will occur and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

In accordance with SFAS No. 142, the Company completed the first step of the transitional goodwill impairment test on January 1, 2002 and determined, based on such tests, that no impairment of goodwill was indicated. The Company selected December 31 as the date on which it will perform its annual goodwill impairment test. Based on the Company’s valuation of goodwill, no impairment charges related to the write-down of goodwill were recognized for the year ended December 31, 2004. In 2003, the Company recorded an impairment charge of $3,584 on the goodwill of two special education schools that were subsequently sold in 2004 (refer to Note 10 for discussion of discontinued operations). The impairment charge is included in the discontinued operations on the consolidated statement of operations.

In connection with its acquisitions subsequent to July 1, 2001, the Company applied the provisions of SFAS No. 141 “Business Combinations,” using the purchase method of accounting. The assets and liabilities assumed were recorded at their estimated fair values. The excess purchase price over those fair values was recorded as goodwill and other intangible assets.

The changes in the carrying amount of goodwill from December 31, 2003 through December 31, 2004 are summarized as follows:

Balance at December 31, 2003, as restated	$	24,410
Additions: acquisitions		28,003
earnouts		550
Balance at December 31, 2004	$	52,963

The additions to goodwill include the excess purchase price over fair value of net assets acquired.

10

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Intangibles

Other intangible assets that have finite useful lives are amortized over their useful lives. These intangible assets are reviewed for impairment in accordance with SFAS No. 142. Accordingly, an impairment loss is recognized when the carrying amount of an intangible asset is not recoverable and when its carrying amount exceeds its fair value. Intangible assets with finite useful lives consist primarily of curriculum, not-to-compete covenants, accreditation, trade names and student contracts and are amortized over the expected period of benefit which ranges from one to twenty years using the straight-line method. Amortization expense related to intangible assets for the years ended December 31, 2004 and 2003 was $467 and $328 (as restated), respectively.

The estimated future amortization expense of intangible assets as of December 31, 2004 is as follows:

Year Ending December 31,
2005	$	1,197
2006		389
2007		344
2008		322
2009		316
Thereafter		3,312
	$	5,880

As of December 31, 2004 and 2003, the gross amounts and accumulated amortization of intangible assets is as follows:

	2004				2003 (as restated) net of discontinued operations
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Curriculum (20 year life)	$	3,448	$	135	$	769	$	96
Accreditation (20 year life)		1,028		7		—		—
Trade name (3 year life)		410		134		105		65
Non-compete agreements (2 to 7 year life)		1,004		498		431		285
Student contracts (1 year life)		1,425		661		533		490
Total intangible assets	$	7,315	$	1,435	$	1,838	$	936

11

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Deferred Financing Costs

Direct costs incurred in connection with debt agreements are capitalized as incurred and amortized on a straight line basis over the term of the related indebtedness, which approximates the effective interest method. At December 31, 2004 and 2003, the Company has deferred financing costs of $2,311 and $2,021, respectively, net of accumulated amortization of $1,377 and $915, respectively, which has been recorded in other assets in the accompanying consolidated balance sheets.

Stock-Based Compensation

The Company accounts for grants of options to purchase its common stock to key personnel in accordance with APB25, “Accounting for Stock Issued to Employees.” In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. The disclosure provisions are required, however, for all companies with stock-based employee compensation, regardless of whether they utilize the fair value method of accounting described in SFAS No. 123 or the intrinsic value method described in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

Effective January 1, 2003, the Company adopted the disclosure requirements of SFAS No. 148. The adoption of this standard did not affect the Company’s financial condition or operating results.

12

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation (Continued)

Had compensation cost for the Company’s option grants been determined based on their fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company’s net income (loss) for the years ended December 31, 2004 and 2003 would have been decreased to the adjusted pro forma amounts indicated below:

				2003
	2004			(As Restated – See Note 2)
Net income (loss) as reported	$	1,443		$	(756	)
Stock option compensation costs, net of related tax effects, included in as reported net income (loss)		91			18
Stock option compensation costs, net of related tax effects, that would have been included in the determination of net income if the fair value method had been applied		(113	)		(26	)
Pro forma net income (loss)	$	1,421		$	(764	)

For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31, 2004 and 2003: dividend yields of 0% for all periods; expected volatility of 0% for all periods; weighted average risk-free interest rates of 3.9%, and 3.6%, respectively; and expected lives of 8 years for all periods.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

13

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.

Adoption of Statement of Financial Accounting Standard No. 150

Effective July 1, 2003, the Company adopted SFAS No. 50, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The scope of this pronouncement includes mandatory redeemable equity instruments.

Upon the adoption of SFAS No. 150, the Company’s mandatory redeemable warrants (“Warrants”) in the amount of $1,226 and $749 as of December 31, 2004 and 2003, respectively, have been classified as long-term liabilities in the Company’s consolidated balance sheet as they are redeemable at the option of the holder.

Under the provisions of SFAS No. 150, the Company is required to record the fair value of the warrants as a liability. The changes in the fair value of the warrants have been charged to interest expense in the accompanying statement of operations since adoption of this standard and amounted to $477 and $432 during the years ended December 31, 2004 and 2003, respectively. Prior to the adoption of SFAS No. 150, the Company had recorded these warrants with imbedded put rights as equity instruments and had been accreting the warrants to their redemption value through retained earnings. Upon the adoption of SFAS No. 150, the Company recorded a cumulative effect of a change in accounting principle of $259, net of tax effect of $173 in the consolidated statements of operations.

Joint Venture

During the year ended December 31, 2004, the Company entered into a joint venture to establish a pediatric weight loss program. The Company obtained a seventy-five percent interest in the joint venture in exchange for a capital contribution of $525. The other party to the joint venture contributed $175 in exchange for a twenty-five percent minority stake in the joint venture. The Company consolidated the joint venture for financial reporting purposes. As a result of the minority interest the Company has allocated 25% of the joint ventures losses as of year-end to the minority interest holder. Losses are allocated based upon the “at risk” capital of each of owner. Losses in excess of their “at risk” capital are allocated to the Company without regard to percentage of ownership.

14

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Joint Venture (Continued)

The Company retains an option to buy-out the minority interest holder at a price to be calculated by the terms and conditions of the operating agreement.

Recent Accounting Pronouncements

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB No. 20 and FAS No.3.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error calculations. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS No. 154 also provides guidance for determining whether retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is required to be adopted in fiscal years beginning after December 15, 2005. The Company does not believe its adoption will have a material impact on its consolidated results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment.” SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method that is currently used and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated statement of operations. The effective date of SFAS No. 123R is for annual periods beginning after June 15, 2005. The Company is currently assessing the provisions of SFAS No. 123R and its impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. The Company does not believe that the adoption of SFAS No. 153 will have a material impact on its consolidated financial statements.

15

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In December 2003, the FASB reissued Interpretation No. 46-R, “Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” The Interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support. The provisions of this Interpretation will be effective for interim or annual periods beginning after December 15, 2005. The Company is assessing the effects of the Interpretation No. 46-R.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform with current year presentations.

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable and payable, accrued and other current liabilities and current maturities of long-term debt approximate fair value due to their short maturity. The carrying amount of the Company’s long-term liabilities also approximates fair value based on interest rates currently available to us for debt of similar terms and remaining maturities.

16

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

3. Property and Equipment

Property and equipment consist of the following at December 31:

	2004			2003
Leasehold improvements	$	8,802		$	7,709
Office equipment and furnishings		10,178			7,650
Buildings and improvements		16,426			12,682
Vehicles		3,611			2,863
Construction in progress		3,850			500
Land		3,512			1,659
Field equipment		1,238			957
		47,617			34,020
		(16,211	)		(13,051	)
	$	31,406		$	20,969

Depreciation expense associated with property and equipment was $3,194 and $2,720 for the years ended December 31, 2004 and 2003, respectively.

17

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

4. Long-Term Debt

Long-term debt consists of the following at December 31:

	2004			2003
Borrowings from senior secured – revolving credit facility; variable interest payable monthly (7.88% interest rate at December 31, 2003); any unpaid principal and interest due October 16, 2006	$	—		$	1,409
Borrowings from senior secured – acquisition term loan facility; variable interest payable monthly (8.75% and 9.88% interest rate at December 31, 2004 and 2003); any unpaid principal and interest due October 16, 2006		19,669			3,391
Borrowings from senior secured – term loan facility; variable interest payable monthly (8.00% and 8.88% interest rate at December 31, 2004 and 2003); any unpaid principal and interest due October 16, 2006		9,191			12,280
Borrowings from real estate notes; fixed interest rates ranging from 6.50% to 6.88%; principal and interest payable monthly; any unpaid principal and interest mature at various dates through February 5, 2014		3,816			—
Various seller notes; interest rates ranging from 6.75% to 10.00%; principal and interest payable quarterly at various dates through November 2009		10,010			5,371
		42,686			22,451
Less: Current portion		(4,014	)		(3,703	)
	$	38,672		$	18,748

In November 2004, the Company modified certain borrowing terms under its senior credit facilities with a financial institution which provides the Company a $51,600 Senior Secured Credit Facility (the 2004 Senior Credit Facility). Such credit facility is comprised of the revolving credit facility, the acquisition term loan facility and term loan facility.

18

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

4. Long-Term Debt (Continued)

The terms of Amended Credit Facility provided for the following significant modifications: (i) the credit limit on the acquisition loan facility was increased from $13,400 to $30,000, (ii) the interest rates on the credit facilities were lowered by approximately 0.75% and are no longer subject to minimum floor rates (iii) the acquisition loan draw and start date on principal payments was extended until October 16, 2006 (iv) financial covenants contained in the original agreement were revised to levels that were consistent with the Company’s business levels and outlook. In consideration for the amendment, the Company paid the lenders an amendment fee of $220.

The Amended Credit Facility was not considered to represent a significant modification for financial reporting purposes. As a result, the $220 amendment fee was capitalized as debt issuance costs and is being amortized over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment were expensed as incurred.

Outstanding borrowings under the agreement are collateralized by substantially all of the Company’s assets. The agreement contains certain financial and non-financial covenants and places restrictions on the amount of dividends payable. Among other covenants, the Company must maintain minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”), maintain certain leverage ratios, maintain a certain fixed charge ratio and not exceed a maximum limit for capital expenditures. As of December 31, 2004, the Company was in compliance with all financial covenants under the agreement. The Company was not in compliance with the financial reports covenant requiring audited financial statements to be completed within 90 days after the end of the fiscal year. A waiver was obtained by the Company.

Scheduled maturities of long-term debt at December 31, 2004, are as follows:

Year Ending December 31,
2005	$	4,014
2006		31,352
2007		1,542
2008		2,078
2009		2,442
Thereafter		1,258
	$	42,686

19

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

5. Subordinated Debt

Subordinated debt consists of the following at December 31:

	2004		2003
Subordinated debt, payable in monthly installments of interest only with principal due at maturity, bearing interest at 14% (12% paid monthly and 2% paid in kind), maturing January 16, 2007	$	8,523	$	8,318

During 2001, the Company received $8,000 under a subordination agreement. Concurrent with the issuance of the Note, the Company granted the holders of the Notes mandatory redeemable warrants to purchase up to an aggregate of 972,653 shares of common stock. The warrants are exercisable at any time subsequent to the grant date at an exercise price of $0.136 per share. The estimated relative fair value of the warrants was $91 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility of 60%, risk-free interest rate of 5.6%, and an expected life of 8 years. In addition, the Company also issued 636,287 shares of Series A Cumulative Convertible Redeemable Preferred Stock. The estimated relative fair value of the preferred stock was $86. The fair value of the warrants and Preferred Shares was recorded as a discount on the related Notes and is being amortized as interest expense over the term of the Notes.

The agreement contains an acceleration clause whereby in the event of change in control or an initial public offering, the Company is to redeem all outstanding notes for a redemption price equal to 101% of aggregate principal and any unpaid interest. The agreement also contains a prepayment penalty of 2.0 % if any principal is prepaid prior to July 2005. Finally, the agreement contains certain financial and non-financial covenants. Among other covenants, the Company must maintain certain leverage ratios, maintain a certain fixed charge ratio and not exceed a maximum limit for capital expenditures. As of December 31, 2004, the Company was in compliance with all financial covenants under the agreement. The Company was not in compliance with the financial reports covenant requiring audited financial statements to be completed within 90 days after the end of the fiscal year. A waiver was obtained by the Company.

20

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

6. Shareholders’ Equity

Common Stock

The holders of the common and preferred stock vote together as a single class with each share of common stock and preferred stock entitled to one vote per share.

On February 1, 2004, the Company sold substantially all of the assets of two special education schools in exchange for 150,000 shares of the Company’s common stock and 250,000 shares of the Company’s Cumulative Convertible Preferred Stock series A. In addition, the buyer forfeited the rights to the preferred stock dividend. Upon receipt the Company retired such shares. The Company valued the shares of stock at their respective fair market values based on a number of factors including an independent appraisal.

On November 19, 2004, the Company acquired substantially all of the assets of a residential therapeutic boarding school. In connection with the transaction, the Company issued 1,780 shares of common stock which was valued at $2,261. The Company valued the shares of common stock at its fair market value based on a number of factors including an independent appraisal.

During 2003, the Company recorded compensation expense of $54 related to issuance of common stock to a certain employee for services rendered. The compensation expense and related additional paid-in-capital was recorded at the fair market value at the time the services were rendered.

Preferred Stock

The preferred A stock is designated as 12% Series A Cumulative Convertible Preferred Stock with liquidation value of $2.85 per share. The preferred B stock is designated as 12% Series B Cumulative Convertible Preferred Stock with a liquidation value of $3.49 per share. The holders of the preferred stock are entitled to receive when, as and if declared by the Board of Directors, a compounded annual dividend which accrues at the rate of 12% per year based on the liquidation value. As of December 31, 2004, the Board of Directors has not declared a dividend on the preferred stock. Accordingly, accumulated and unpaid preferred stock dividends amounted to approximately $33,412 for preferred A stock and $5,128 for preferred B stock at December 31, 2004.

In connection with the Company’s subordinated debt offering the Company issued 636,287 shares of Series A Cumulative Convertible Redeemable Preferred Stock (Refer to Note 5). These shares are redeemable at the option of the holder any time on or after July 13, 2006. The redemption price is equal to the greater of (i) the fair market value per share or (ii) the EBITDA per share. The Company accretes the changes in the redemption value of the shares over the period from the date of issuance to the earliest redemption date. During the year ended December 31, 2004, the Company increased the value of its Series A preferred shares in the amount of $468 as a result of changes in the redemption value.

21

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

6. Shareholders’ Equity (Continued)

Preferred Stock (Continued)

Upon a conversion event (which includes, among other things, a sale of the Company or an initial public offering), each share of preferred stock will convert into that number of shares of common stock equal to (a) one plus (b) the value of accrued or accumulated and unpaid dividends divided by the respective liquidation value per share. In the event of a dissolution, liquidation or winding down of the Company each share of preferred stock will continue to carry a liquidation preference such that each share of preferred stock shall be entitled to a liquidation value plus all dividends (whether or not declared) accrued or accumulated and unpaid to the date of final distribution prior to any distribution to common shareholders and following payment in full of the liquidation preference will also continue to be entitled to share in any remaining assets of the Company like common shareholders.

Stock Performance Plan

Under the Stock Performance Plan (“Plan”), up to 5,240,000 shares of common stock (or its equivalent) may be issued via stock options, stock appreciation rights, restricted and performance shares or other stock-based awards. Options issued vest at a rate of 25% each year and have a term that shall not exceed 10 years. However, in the event of a change in control, as defined, the optionee becomes immediately vested in 100% of the options. Options issued will have an exercise price of no less than 75% of fair market value as determined on the date of grant. Prior to fiscal year 2003 fair market value was determined in good faith by the Plan administrator. During the year ended December 31, 2004, the Company determined the fair market value of the Company’s common stock based on a number of factors including an independent appraisal.

The following represents a summary of the option activity for the years ended December 31:

	Shares			Weighted- Average Exercise Price
Outstanding at beginning of period		1,363,716		$	.111
Granted		707,500		$	.158
Exercised		(178,958	)	$	.096
Forfeited		(87,700	)	$	.156
Balance, December 31, 2003		1,804,558		$	.129
Granted		1,384,500		$	.643
Exercised		(136,058	)	$	.137
Forfeited		(450,300	)	$	.130
Balance, December 31, 2004	$	2,602,700		$	.402

22

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

6. Shareholders’ Equity (Continued)

Stock Performance Plan (Continued)

Of the total options outstanding, 797,700 and 834,948 options were exercisable at December 31, 2004 and 2003, respectively, at weighted average exercise prices of $0.114 and $0.100, respectively. As of December 31, 2004, the 2,602,700 options outstanding had a weighted average remaining contractual life of eight years.

During the years ended December 31, 2004 and 2003, the Company granted 1,384,500 and 707,500 options to purchase common stock to employees with exercise prices ranging from $0.16 to $1.60 per share. The fair market value of the Company’s common stock on the date of grants was $1.26 and $0.60 per share for the years ended December 31, 2004 and 2003. In connection with the issuances, the Company recorded deferred compensation charges of $862 and $125 during the years ended December 31, 2004 and 2003, respectively as the exercise price of the shares was less than the estimated fair market value of the Company’s common stock as of the dates of grant. The Company will amortize the deferred compensation charge over the four year vesting period of the options. As of December 31, 2004, the Company has amortized $179 of the deferred compensation charge.

In December 2003, the Company recorded compensation expense of $58 related to the acceleration of vesting of stock options for a certain terminated employee. The compensation expense and related additional paid-in-capital was recorded at the fair market value at the time of termination.

Warrants

The Company had 5,192,316 common stock warrants issued and outstanding during the years ended December 31, 2004 and 2003. As of December 31, 2004, the weighted-average exercise price of the warrants were $0.144. Additionally, 1,478,829 of these warrants are redeemable at the options of the holder. The Company has recorded the fair value of the redeemable warrants as long-term liabilities in the consolidated balance sheet. (Refer to Note 2 – Adoption of Statement of Financial Accounting Standard No. 150.)

23

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

7. Income Taxes

The components of the income tax provision for the years ended December 31, 2004 and 2003 are as follows:

				2003 (As Restated – See Note 2)
	2004
Current
Federal	$	(496	)	$	653
State		(286	)		667
		(782	)		1,320
Deferred
Federal		1,130			(238	)
State		273			(168	)
		1,403			(406	)
	$	621		$	914

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate from continuing operations is as follows:

			2003 (As Restated – See Note 2)
	2004
Statutory federal income tax rate	34.0	%	$	34.0	%
State income taxes, net of federal benefit	5.0			5.1
Meals and entertainment	4.0			1.6
Other	10.3			—
	53.3	%		40.7	%

24

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

7. Income Taxes (Continued)

The components of the Company’s deferred tax assets (liabilities) at December 31, 2004 and 2003 are as follows:

				2003 (As Restated – See Note 2)
	2004
Current deferred tax liability
Accrued vacation	$	285		$	370
Prepaids		(412	)		(370	)
Other		88			—
Current deferred tax liability		(39	)		—
Non-current deferred tax asset
Depreciation and amortization		(1,663	)		1,069
Accrued deferred compensation		104			67
Net operating loss carry-forward		1,229			—
Other		394			292
Non-current deferred tax asset		64			1,428
	$	25		$	1,428

At December 31, 2004, the Company had federal and state net operating loss carry-forwards of approximately $3,306 and $1,750, respectively, that expire through 2023 and 2008.

8. Commitments and Contingencies

Lease Obligations

The Company leases machinery, equipment, and office and operational facilities under noncancelable operating lease agreements. Certain lease agreements for the Company’s facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. Related party leases arise as a result of the Company’s acquisitions. The following is a schedule of the Company’s future minimum lease payments as of December 31, 2004:

	Third Party		Related Party		Total
Year Ending December 31,
2005	$	1,568	$	1,984	$	3,552
2006		1,405		1,996		3,401
2007		1,159		2,064		3,223
2008		911		2,150		3,061
2009		761		2,039		2,800
Thereafter		1,836		7,161		8,997
	$	7,640	$	17,394	$	25,034

25

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

8. Commitments and Contingencies (Continued)

Lease Obligations (Continued)

Total rent expense under operating leases, including month-to-month rentals, amounted to $2,668 and $2,073 during the years ended December 31, 2004 and 2003, respectively. Under certain lease agreements, the Company is responsible for other costs such as property taxes, insurance, maintenance, and utilities.

Legal Matters

During the year ended December 31, 2004, the Company was a defendant in a wrongful termination lawsuit at a program it divested during 2004. The compliant sought, among other things, back pay, punitive damages, and attorneys’ fees. On August 24, 2005, the Company reached a settlement in which they agreed to pay $600. During the year ended December 31, 2004, the Company recorded a liability of $600 in connection with the settlement.

There are various other claims and litigation proceedings in which the Company is involved in the ordinary course of business. While the outcome of these claims and proceedings cannot be predicted with certainty, after consulting with legal counsel, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company’s business, financial position and results of operations or cash flows.

Indemnifications

The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct, or breach of representations and warranties and covenants.

The Company provides for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable the Company to recover a portion of any future amounts paid.

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with business dispositions and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to such sales.

26

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

8. Commitments and Contingencies (Continued)

Indemnifications (Continued)

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, no payments made under any of these indemnities.

Employment Agreements

The Company has entered into employment agreements with certain of its professionals which require annual gross salary payments which range from $66 to $320 per annum. The employment agreements range from a period of one to five years and include a provision for annual bonuses based on specific performance criteria. In the event that such key management employees are terminated without cause, the Company is contractually obligated to pay the remaining balance due on the employment contracts.

The following is a schedule of the Company’s future minimum annual payments under such employment agreements as of December 31, 2004:

Year Ending December 31,
2005	$	1,204
2006		743
2007		655
2008		270
2009		105
	$	2,977

Consulting Agreements

The Company has entered into consultant agreements with certain professionals which require annual consulting fee payments which range from $165 to $355 per annum. The consulting agreements range from a period of one to seven years. In the event that such consulting agreements are terminated without cause, the Company is contractually obligated to pay the remaining balance due on the consulting agreements.

27

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

8. Commitments and Contingencies (Continued)

Consulting Agreements (Continued)

The following is a schedule of the Company’s future minimum annual payments under such consulting agreements as of December 31, 2004:

Year Ending December 31,
2005	$	1,238
2006		1,019
2007		817
2008		520
2009		313
Thereafter		227
	$	4,134

9. Business Acquisitions

During 2004, the Company acquired substantially all the assets and liabilities of three residential therapeutic boarding schools and one outdoor therapeutic program. The aggregate purchase price of such acquisitions, including related acquisition costs of $676, amounted to $34,908, which includes the assumption of $3,291 of liabilities. The purchase price of such acquisitions was funded from $15,191 in borrowings under the acquisition line of the senior credit facility, $4,767 from notes payable to the sellers, $2,261 from the issuance of common stock to the sellers (Refer to Note 6 – Shareholders’ Equity) and $9,398 in cash. The acquisitions increase the Company’s market share in this growing sector of the therapeutic education market. In connection with the acquisitions the Company obtained all of the voting equity interest in each of the programs.

During 2003, the Company acquired substantially all of the assets and liabilities of two residential therapeutic boarding schools and the membership interest of a mental health clinic operation. The aggregate purchase price of such acquisitions, including related acquisition costs of $207, amounted to $5,761, which includes the assumption of $2,274 of liabilities. The purchase price of such acquisitions was funded from $704 in borrowings under the acquisition line of the senior credit facility, $2,444 from notes payable to the sellers and $339 in cash. One of the residential therapeutic boarding schools and the mental health clinic operations were subsequently sold in 2004 (Refer to Note 10 – Business Dispositions).

Certain acquisition agreements entered into by the Company contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the acquired entity’s results of operations exceed certain benchmarks. These benchmarks are measured on an annual basis, generally from one to six years after the acquisition, and are generally set above the historical operating experience of the acquired entity at the time of acquisition. Earnout payments are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable and consist of a combination of cash and notes payable issued to the seller. The increase to goodwill during the years ended December 31, 2004 and 2003 as a result of the earnouts was $550, and $1,606, respectively.

28

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

9. Business Acquisitions (Continued)

The results of operations for the companies acquired during the years ended December 31, 2004 and 2003 have been included in the consolidated financial statements from their respective dates of acquisition. Such acquisitions were accounted using the purchase method of accounting, and the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the dates of acquisition. The excess purchase price over the net assets acquired has been allocated to goodwill. For income tax purposes, $28,003 and $1,270 of goodwill resulting from acquisitions completed during the years ended December 31, 2004 and 2003, respectively, are amortized over a 15 year period.

The assets and liabilities of the entities acquired are as follows for the year ended December 31:

				2003 (As Restated – See Note 2)
	2004
Current assets, which consist primarily of accounts receivable	$	490		$	2,193
Property and equipment		938			139
Intangible assets subject to amortization
Curriculum		2,679			264
Accreditation		1,028			–
Non-compete agreements		573			60
Trade names		305			31
Student contracts		892			111
Goodwill		28,003			2,963
Total assets acquired		34,908			5,761
Total liabilities assumed, which consist primarily of deferred revenue		(3,291	)		(2,274	)
Purchase price, net of liabilities assumed	$	31,617		$	3,487

29

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

10. Business Dispositions

Due to certain economic conditions associated with government funded programs the Company reviewed its strategic alternatives and determined that it would benefit from focusing on private payment programs. As a result, during 2004, the Company sold two special education schools and a residential boarding school. Additionally, the Company sold three mental health clinic operations. These dispositions comprise three separate reporting units. Consideration received for such dispositions was 250,000 shares of the Company’s Cumulative Convertible Series A Preferred Stock, 150,000 shares of the Company’s common stock, cancellation of a $1,544 note payable, and $8,650 cash. As a result of the dispositions, the Company recorded in the consolidated statements of operations a net gain of $1,112, net of tax expense of $909, which represented the difference between the fair value of the consideration and the book value of the net assets sold. The consideration received does not include $1,000 held in escrow due to the uncertainty of the final purchase price adjustment from the three mental health clinic operations. In addition, the buyer of the two special education schools forfeited the rights to the preferred stock dividend.

The Company accounted for the business operations for these two entities in 2004 and 2003 as discontinued operations. In 2003, the Company recorded an impairment charge of $3,584 on the goodwill and fixed assets of the two special education schools, which is included in discontinued operations. The accompanying consolidated balance sheet at December 31, 2003 classifies the assets and liabilities of these entities as assets and liabilities of discontinued operations.

Summarized operating results from the discontinued operations included in the Company’s consolidated statements of operations were as follows for the year ended December 31:

				2003 (As Restated – See Note 2)
	2004
Revenues	$	12,477		$	28,137
Loss from discontinued operations, net of related tax effect		(335	)		(1,827	)

11. Employee Benefit Plans

401(k) Retirement Savings Plan

The Company maintains an elective retirement savings plan which is qualified under Section 401(k) of the Internal Revenue Code. Participating employees are allowed to contribute up to the Internal Revenue Code maximums. The Company makes contributions to the plan at the discretion of management. Contributions to the plan were $203 and $198 for the years ended December 31, 2004 and 2003, respectively.

30

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003 (In thousands, except share data)

11. Employee Benefit Plans (Continued)

Deferred Compensation Plan

In December 2003, the Company began a new non-qualified Insured Security Option Plan (“ISOP”) for certain key employees. Employees of the old plan (see below) had the option of rolling over their deferrals, net of taxes, into the ISOP. The ISOP permits these employees on an after-tax basis to defer a portion of their salary and/or bonus each calendar year. The Company may also make discretionary contributions to these employee accounts, up to a maximum of $6 per employee, which become fully vested three years after the contribution. Company contributions made under the old Plan continue to vest under the ISOP. Contributions to the plan were $71 and $76 for the years ended December 31, 2004 and 2003

The Company had a non-qualified deferred compensation plan for certain key employees. The plan permitted these employees to defer a portion of their salary and/or bonus each calendar year. The Company could make discretionary contributions to these employee accounts, up to a maximum of $5 per employee, which became fully vested three years after the contribution. Effective December 2003, the plan was discontinued and substantially all deferred compensation amounts were paid out of the plan or rolled over into the ISOP.

The Company had established a life insurance policy for certain employees in part to assist with the funding of the old deferred compensation plan. During 2003, the life insurance policies were cancelled and the proceeds of the policy were used to pay out the deferrals of the Plan.

12. Subsequent Events

On July 1, 2005, the Company sold one of their education schools in exchange for $6,570 in cash and a note receivable of $1,460, which is subject to certain working capital adjustments. The note is due on or before July 1, 2009, bears interest at a rate of 10% and is secured by the holders’ assets. The Company anticipates recording a gain in connection with the transaction.

31

EX-99.4

Exhibit 99.4

Aspen Education Group, Inc.

and Subsidiaries

Consolidated Financial Statements

December 31, 2005 and 2004

Aspen Education Group, Inc. and Subsidiaries

Index

December 31, 2005 and 2004

	Page(s)
Report of Independent Auditors	1
Financial Statements
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5-6
Notes to Consolidated Financial Statements	7-33

Report of Independent Auditors

To the Board of Directors and Shareholders of

Aspen Education Group, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Aspen Education Group, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

April 7, 2006

1

Aspen Education Group, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2005 and 2004

(in thousands)	2005			2004 (As Revised – see Note 2)
Assets
Current assets
Cash and cash equivalents	$	5,784		$	2,420
Short-term investments		7,675			1,000
Accounts receivable, net of allowance for doubtful accounts of $492 and $742 in 2005 and 2004, respectively		3,051			3,439
Prepaid expenses and other current assets		3,268			3,648
Deferred tax asset		150			—
Assets of discontinued operations		—			2,111
Total current assets		19,928			12,618
Property and equipment, net		13,450			28,123
Deferred tax asset		1,608			—
Other assets		1,528			1,475
Goodwill		53,825			49,387
Intangible assets, net		5,136			5,880
Assets of discontinued operations		—			7,083
Total assets	$	95,475		$	104,566
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	2,929		$	2,657
Accrued expenses		8,574			6,516
Income tax payable		3,865			161
Deferred revenue		11,499			7,090
Deferred tax liability		—			24
Other current liabilities		4,487			2,557
Current portion of long-term debt		4,686			4,014
Liabilities of discontinued operations		—			1,063
Total current liabilities		36,040			24,082
Long-term debt, less current portion		12,127			38,672
Subordinated debt		—			8,523
Warrant liability		2,647			1,226
Deferred gain on sale of real estate		4,853			—
Deferred tax liability		—			151
Other liabilities		1,234			—
Total liabilities		56,901			72,654
Minority interest		275			53
Commitments and contingencies (Note 8)
Shareholders’ equity
Convertible preferred stock, series A ($76,479 liquidation value), 20,000 shares authorized; 12,236 shares issued and outstanding		33,559			33,120
Convertible preferred stock, series B ($21,687 liquidation value), 10,000 shares authorized; 4,079 shares issued and outstanding		13,576			13,576
Common stock and additional paid-in capital, no par or stated value, 60,000 shares authorized, 20,190 and 19,965 shares issued and outstanding at December 31, 2005 and 2004, respectively		12,232			12,197
Deferred stock compensation		(593	)		(808	)
Preferred stock dividend paid		(28,500	)		(28,500	)
Retained earnings		8,025			2,274
Total shareholders’ equity		38,299			31,859
Total liabilities and shareholders’ equity	$	95,475		$	104,566

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

2

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2005 and 2004

(in thousands)	2005		2004
Net revenues	$	122,656	$	81,075
Operating expenses
Salaries, wages and benefits		58,662		40,540
Other operating expenses		34,863		24,028
		93,525		64,568
Operating margin		29,131		16,507
Corporate general and administrative		11,721		8,799
Depreciation and amortization		5,070		3,168
Loss on sale of fixed asset		421		—
Income from operations		11,919		4,540
Interest expense, net		6,385		4,699
Income (loss) from continuing operations before provision for income taxes, minority interest, and discontinued operations		5,534		(159	)
Provision for income taxes		2,277		90
Minority interest in income (loss) of subsidiaries		222		(122	)
Income (loss) before discontinued operations		3,035		(127	)
Income from discontinued operations, net of tax expense of $2,502 and $1,440		3,155		1,570
Net income	$	6,190	$	1,443

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

3

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2005 and 2004

(in thousands)	Cumulative Convertible Preferred Stock, Series A					Cumulative Convertible Preferred Stock, Series B			Common Stock and Additional Paid-in Capital					Deferred Stock Compensation			Preferred Stock Dividend Paid			Retained Earnings			Total Shareholders’ Equity
	Shares		Amount			Shares	Amount		Shares		Amount
Balance, December 31, 2003	12,486		$	33,859		4,079	$	13,576	18,199		$	9,236		$	(96	)	$	(28,500	)	$	1,299		$	29,374
Issuance of common stock for acquisition	—			—		—		—	1,780			2,261			—			—			—			2,261
Stock received from sale of assets	(250	)		(1,207	)	—		—	(150	)		(181	)		—			—			—			(1,388	)
Stock options exercised	—			—		—		—	136			19			—			—			—			19
Deferred stock option compensation	—			—		—		—	—			862			(862	)		—			—			—
Amortization of deferred stock option compensation	—			—		—		—	—			—			150			—			—			150
Accretion of preferred stock, series A	—			468		—		—	—			—			—			—			(468	)		—
Net income	—			—		—		—	—			—			—			—			1,443			1,443
Balance, December 31, 2004	12,236			33,120		4,079		13,576	19,965			12,197			(808	)		(28,500	)		2,274			31,859
Stock options exercised	—			—		—		—	225			35			—			—			—			35
Amortization of deferred stock option compensation	—			—		—		—	—			—			215			—			—			215
Accretion of preferred stock, series A	—			439		—		—	—			—			—			—			(439	)		—
Net income	—			—		—		—	—			—			—			—			6,190			6,190
Balance, December 31, 2005	12,236		$	33,559		4,079	$	13,576	20,190		$	12,232		$	(593	)	$	(28,500	)	$	8,025		$	38,299

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

4

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2005 and 2004

(in thousands)	2005			2004 (As Revised – see Note 2)
Cash flows from operating activities
Net income	$	6,190		$	1,443
Adjustments to reconcile income to net cash provided by operating activities
Depreciation		3,869			2,703
Amortization of intangibles		1,201			467
Amortization of deferred financing costs		718			520
Interest capitalized		(107	)		—
Minority interest in income (loss) of subsidiaries		222			(122	)
Change in putable warrants value		1,421			477
Paid-in-kind interest expense		145			169
Non-cash stock-based compensation		215			150
Discontinued operations		(4,732	)		1,849
Loss on sale of fixed asset		421			9
Bad debt provision		(250	)		(372	)
Deferred income taxes		(1,934	)		1,604
Changes in operating assets and liabilities, net of effects of business acquisitions
Accounts receivable, net		688			57
Prepaid expenses and other current assets		817			(773	)
Other assets – non-current		310			(136	)
Accounts payable and accrued expenses		2,341			2,005
Income tax payable		3,704			160
Deferred revenue		4,108			1,486
Net cash provided by operating activities		19,347			11,696
Cash flows from investing activities
Capital expenditures		(6,286	)		(12,370	)
Investments purchased		(7,675	)		(9,000	)
Investments sold		1,000			12,000
Payments for businesses acquired, net of cash acquired and including other cash payments associated with the acquisitions		(1,431	)		(25,667	)
Net proceeds from sale of real estate		22,384			7
Net proceeds from sale of discontinued operations		11,403			8,650
Net cash provided by (used in) investing activities		19,395			(26,380	)

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

5

Aspen Education Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

Years Ended December 31, 2005 and 2004

(in thousands)	2005			2004 (As Revised – see Note 2)
Cash flows from financing activities
Stock options exercised	$	35		$	19
Investment by minority interest		50			125
Payment of loan fees		—			(296	)
Payments under debt agreements		(35,463	)		(5,028	)
Borrowing under debt agreements		—			20,200
Net cash (used in) provided by financing activities		(35,378	)		15,020
Net increase in cash and cash equivalents		3,364			336
Cash and cash equivalents at beginning of period		2,420			2,084
Cash and cash equivalents at end of period	$	5,784		$	2,420
Supplemental disclosures
Interest paid	$	4,827		$	3,651
Income taxes paid		3,270			(1,020	)
Noncash investing and financing activities
Accretion of series convertible preferred stock Series A		439			468
Issuance of note receivable in connection with the sale of businesses		1,460			—
Stock received from sale of discontinued operations		—			1,388
Liabilities assumed in connection with the acquisitions of businesses		857			3,291
Deferred tax liability assumed in connection with acquisition of businesses		182			—
Stock issued in connection with acquisition of businesses		—			2,261
Notes payable issued in connection with the acquisitions of businesses		500			4,767
Accrued earnouts		2,246			—
Capital lease acquisitions		424			—
Minority interest subscription receivable		—			50

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

6

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

1. Description of the Business

Aspen Education Group, Inc. has provided education opportunities for underachieving youth for more than two decades. The residential schools and outdoor programs give young people struggling with academic and emotional issues the time and opportunity to make positive change in their lives.

Aspen Education Group, Inc. owns 100% of Aspen Youth, Inc. Aspen Education Group, Inc. is hereinafter referred to as the “Parent” and Aspen Youth, Inc. and its wholly-owned subsidiaries are hereinafter referred to as the “Company.”

As of December 31, 2005, the Company owned 29 education facilities, which operate schools and educational programs in 11 states for underachieving youth and young adults who have been unsuccessful in traditional public and private school settings.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned subsidiary which it controls. All intercompany accounts and transactions have been eliminated.

Concentrations of Credit Risk

Concentrations of credit risk with respect to trade receivables are limited due to a large and diverse customer base. No individual customer represented more than 5% of net sales during the twelve months ended December 31, 2005 and 2004.

The Company estimates its allowance for doubtful accounts based on historical experience, aging of accounts receivable and information regarding the creditworthiness of its customers. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. Accounts receivable are generally due within 30 days. To date, losses have been within the range of management’s expectations.

Revenue Recognition

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured.

Revenues consist primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenues and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered.

The Company charges an enrollment fee for new students under its service contracts. Such fees are deferred and recognized over the average student length of stay, which generally approximates eleven months.

7

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Revenue Recognition (Continued)

Alumni services revenue represents non-refundable upfront fees charged for post graduation student support. Such fees are deferred and recognized systematically over the contracted period of performance, which is three to twelve months.

Operating Expenses and General and Administrative Expenses

Operating expenses include direct costs at the Company’s facilities and consist primarily of facility rentals, supplies, materials and salaries, wages and benefits and exclude all depreciation and amortization expense. General and administrative expenses include primarily corporate salaries, wages and benefits, marketing costs, professional fees and corporate office rent.

Cash Equivalents

The Company considers all highly liquid instruments, with an original maturity of three months or less, to be cash equivalents.

The Company has bank balances, including cash equivalents, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to significant risk on cash and cash equivalents.

Marketable Securities

The Company has reclassified its 2004 consolidated financial statements to record auction rate securities as short-term marketable securities rather than cash equivalents. Auction rate securities are variable rate bonds tied to short term interest rates with maturities on the face of the underlying security in excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction at predetermined short-term intervals, typically every 7, 28 or 35 days. Interest paid during a given period is based upon the interest rate determined during the prior auction.

8

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Marketable Securities (Continued)

Although these securities are issued and rated as long-term bonds, they are priced and traded as short term instruments because of the liquidity provided through the interest rate reset. The Company had historically recorded these instruments as cash equivalents if the period between interest rate resets was 90 days or less, which was based on our ability to either liquidate our holdings or roll our investment over to the next reset period. The Company’s re-evaluation of the maturity dates and other provisions associated with the underlying bonds resulted in a reclassification to its 2004 consolidated financial statements to record auction rate securities of $1,000 at December 31, 2004 as short-term marketable securities rather than as cash equivalents. As a result, short term investments as of December 31, 2004 have been revised to $1,000 from the previously recorded amount of $0. In addition, due to this balance sheet reclassification at both December 31, 2004 and 2003, certain amounts in the accompanying consolidated statement of cash flows for the year ended December 31, 2004 were also reclassified to reflect the gross purchases and sale of these securities as investing activities rather than as a component of cash and cash equivalents. As a result, cash used by investing activities for the year ended December 31, 2004 has been revised to $26,380 from the previously recorded amount used in investing activities of $29,256. This revision does not affect previously reported cash flows from operating or from financing activities in the previously reported consolidated statements of cash flows and did not impact the previously reported consolidated statements of income.

Notes Receivable

In connection with the sale of two special education schools during 2005, the total consideration received included a note receivable of $1,460 (See Note 10). The note has a 10.00% interest rate and both interest and principal are paid quarterly over four years with final maturity on June 30, 2009. The non-current portion amounted to $913 as of December 31, 2005 and is included in other assets in the consolidated balance sheets. The current portion amounted to $456 as of December 31, 2005 and is included in prepaid expenses and other current assets in the consolidated balance sheets.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, as follows:

Buildings	30-40 years
Leasehold improvements	Lesser of useful life or lease term
Furniture and fixtures	5-7 years
Equipment	3-5 years
Computer equipment and software	3-5 years
Vehicles	3-5 years

Expenses for repairs and maintenance are charged to expense as incurred, while renewals and betterments are capitalized. Gains or losses on the sale or disposal of property and equipment are reflected in operating income.

9

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Impairment of Long-Lived Assets

The Company periodically assesses potential impairments of its long-lived assets in accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors considered by the Company include, but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When the carrying value of a long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows and eventual disposition is less than the carrying amount of the asset, the Company recognizes an impairment loss. An impairment loss is reflected as the amount by which the carrying amount of the asset exceeds the fair value of the asset. To date, the Company has not recognized an impairment charge related to the write-down of long-lived assets.

Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires, among other things, the use of a non-amortization approach for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and intangibles having an indefinite life are not amortized, but instead are reviewed for impairment at least annually or if an event occurs or circumstances indicate that the carrying amount may be impaired. Events or circumstances which could indicate an impairment include: a significant change in the business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy or disposition of a reporting unit or a portion thereof. Goodwill impairment testing is performed at the reporting unit level.

SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

10

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Goodwill (Continued)

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a combination of market earnings multiples and discounted cash flow methodologies. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth of the Company’s business, the useful life over which cash flows will occur and determination of the Company’s weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

In accordance with SFAS No. 142, the Company completed the first step of the transitional goodwill impairment test on January 1, 2002 and determined, based on such tests, that no impairment of goodwill was indicated. The Company selected December 31 as the date on which it will perform its annual goodwill impairment test. Based on the Company’s valuation of goodwill, no impairment charges related to the write-down of goodwill were recognized for the years ended December 31, 2005 and 2004.

In connection with its acquisitions subsequent to July 1, 2001, the Company applied the provisions of SFAS No. 141 “Business Combinations,” using the purchase method of accounting. The assets and liabilities assumed were recorded at their estimated fair values. The excess purchase price over those fair values was recorded as goodwill and other intangible assets.

The changes in the carrying amount of goodwill from December 31, 2004 through December 31, 2005 are summarized as follows:

Balance at December 31, 2004	$	49,387
Additions
Acquisitions		2,192
Earnouts (See Note 9)		2,246
Balance at December 31, 2005	$	53,825

11

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Intangibles

Other intangible assets that have finite useful lives are amortized over their useful lives. These intangible assets are reviewed for impairment in accordance with SFAS No. 144. Accordingly, an impairment loss is recognized when the carrying amount of an intangible asset is not recoverable and when its carrying amount exceeds its fair value. Intangible assets with finite useful lives consist primarily of curriculum, not-to-compete covenants, accreditation, trade names and student contracts and are amortized over the expected period of benefit which ranges from one to twenty years using the straight-line method. Amortization expense related to intangible assets for the years ended December 31, 2005 and 2004 was $1,201 and $467, respectively.

The estimated future amortization expense of intangible assets as of December 31, 2005 is as follows:

Year Ending December 31,
2006	$	437
2007		378
2008		355
2009		342
2010		304
Thereafter		3,320
	$	5,136

At December 31, 2005 and 2004, the gross amounts and accumulated amortization of intangible assets were as follows:

	2005				2004
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Curriculum (20 year life)	$	3,813	$	309	$	3,448	$	135
Accreditation (20 year life)		1,028		58		1,028		7
Trade name (3 year life)		435		340		410		134
Non-compete agreements (2 to 7 year life)		1,053		519		1,004		498
Student contracts (1 year life)		1,441		1,408		1,425		661
Total intangible assets	$	7,770	$	2,634	$	7,315	$	1,435

12

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Deferred Financing Costs

Direct costs incurred in connection with debt agreements are capitalized as incurred and amortized on a straight line basis over the term of the related indebtedness, which approximates the effective interest method. At December 31, 2005 and 2004, the Company has deferred financing costs of $1,677 and $2,311, respectively, net of accumulated amortization of $1,383 and $1,377, respectively, which has been recorded in other assets in the accompanying consolidated balance sheets.

Stock-Based Compensation

The Company accounts for grants of options to purchase its common stock to key personnel in accordance with APB25, “Accounting for Stock Issued to Employees.” In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. The disclosure provisions are required, however, for all companies with stock-based employee compensation, regardless of whether they utilize the fair value method of accounting described in SFAS No. 123 or the intrinsic value method described in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

Effective January 1, 2003, the Company adopted the disclosure requirements of SFAS No. 148. The adoption of this standard did not affect the Company’s financial condition or operating results.

13

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Stock-Based Compensation (Continued)

Had compensation cost for the Company’s option grants been determined based on their fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company’s net income for the years ended December 31, 2005 and 2004 would have been decreased to the adjusted pro forma amounts indicated below:

	2005			2004
Net income as reported	$	6,190		$	1,443
Stock option compensation costs, net of related tax effects, included in as reported net income		148			91
Stock option compensation costs, net of related tax effects, that would have been included in the determination of net income if the fair value method had been applied		(198	)		(113	)
Pro forma net income	$	6,140		$	1,421

For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31, 2005 and 2004: dividend yields of 0% for all periods; expected volatility of 0% for all periods; weighted average risk-free interest rates of 4.1%, and 3.9%, respectively; and expected lives of 8 years for all periods.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

14

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized.

Adoption of Statement of Financial Accounting Standard No. 150

Effective July 1, 2003, the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The scope of this pronouncement includes mandatory redeemable equity instruments.

The Company’s mandatory redeemable warrants (“Warrants”) have been classified as long-term liabilities in the Company’s consolidated balance sheet as they are redeemable at the option of the holder. As of December 31, 2005 and 2004 the Company has recorded a liability of $2,647 and $1,226, respectively.

Under the provisions of SFAS No. 150, the Company is required to record the fair value of the warrants as a liability. The changes in the fair value of the warrants have been charged to interest expense in the accompanying statement of operations since adoption of this standard and amounted to $1,421 and $477 during the years ended December 31, 2005 and 2004, respectively. Prior to the adoption of SFAS No. 150, the Company had recorded these warrants with imbedded put rights as equity instruments and had been accreting the warrants to their redemption value through retained earnings.

Minority Interests

During the year ended December 31, 2004, the Company entered into a joint venture to establish a pediatric weight loss program. The Company obtained a seventy-five percent interest in the joint venture in exchange for a capital contribution of $525. The other party to the joint venture contributed $175 in exchange for a twenty-five percent minority stake in the joint venture. The Company consolidated the joint venture for financial reporting purposes. As a result of the minority interest the Company has allocated 25% of the joint ventures losses as of year-end to the minority interest holder. Losses are allocated based upon the “at risk” capital of each of owner. Losses in excess of their “at risk” capital are allocated to the Company without regard to percentage of ownership. The Company retains an option to buy-out the minority interest holder at a price to be calculated by the terms and conditions of the operating agreement.

15

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Minority Interests (Continued)

The Company granted a senior executive restricted stock which amounts to 10% of the outstanding shares at three of its outdoor programs. The shares at one of the programs were completed vested as of December 31, 2005. The remaining awards cliff vest on April 1, 2008. The estimated fair value of the awards on the date of grant was $96, which is being recognized as compensation expense over the vesting period. Under the provisions of the awards, the executive is not eligible for income distributions. However, the awards contain change in control provisions that would require the Company to repurchase the vested shares at a price based on earnings of the respective programs. The fair value of the change in control provision was $2,500 as of December 31, 2005. The Company has determined that the change in control provisions are conditional and based on an event that is uncertain. Therefore, a liability is not required to be recorded under the provision of SFAS 150. The consolidated financial statements include minority interest expense for the 10% vested minority ownership interest.

The changes in the minority interest liability from December 31, 2004 through December 31, 2005 are summarized as follows:

Balance at December 31, 2004	$	53
Net income allocated to minority interest		180
Stock compensation in minority interest		42
Balance at December 31, 2005	$	275

Recent Accounting Pronouncements

In September 2005, the Emerging Issues Task Force (EITF) amended and ratified previous consensus on EITF No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” which addresses the amortization period for leasehold improvements in operating leases that are either placed in service significantly after and not contemplated at or near the beginning of the initial lease term or acquired in a business combination. This consensus applies to leasehold improvements that are purchased or acquired in reporting periods beginning after ratification. Adoption of the provisions of EITF No. 05-6 did not have an impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (SFAS No. 154). SFAS No. 154 requires retrospective application to prior-period financial statements of changes in accounting principles, unless a new accounting pronouncement provides specific transition provisions to the contrary or it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

16

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of SFAS 143. This statement clarified the term conditional asset retirement obligation and is effective for the year ending December 31, 2005. Adoption of FIN 47 did not have an impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-based Compensation,” (“SFAS 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their grant date fair values. The provisions of SFAS 123R, as supplemented by SEC Staff Accounting Bulletin No. 107, “Share-Based Payment,” are effective no later than the beginning of the next fiscal year that begins after June 15, 2005. The Company will adopt the new requirements using the modified prospective transition method in the first quarter of fiscal 2006, and as a result, will not retroactively adjust results from prior periods. Under this transition method, compensation expense associated with stock options recognized in the first quarter of fiscal 2006 will include: 1) expense related to the remaining unvested portion of all stock option awards granted prior to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and 2) expense related to all stock option awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company will apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis over the requisite service period. The Company is currently assessing the provisions of SFAS 123R and the impact that it will have on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” SFAS No. 153 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. Under APB Opinion No. 29, an exchange of a productive asset for a similar productive asset was based on the recorded amount of the asset relinquished. SFAS No. 153 eliminates this exception and replaces it with an exception of exchanges of nonmonetary assets that do not have commercial substance. The Company does not believe that the adoption of SFAS No. 153 will have a material impact on its consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.

17

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

2. Summary of Significant Accounting Policies (Continued)

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable and payable, accrued and other current liabilities and current maturities of long-term debt approximate fair value due to their short maturity. The carrying amount of the Company’s long-term liabilities also approximates fair value based on interest rates currently available to us for debt of similar terms and remaining maturities.

3. Property and Equipment

Property and equipment consist of the following at December 31:

	2005			2004
Leasehold improvements	$	6,035		$	6,368
Office equipment and furnishings		11,845			9,534
Buildings and improvements		2,737			15,296
Vehicles		3,437			2,893
Construction in progress		1,042			3,835
Land		1,009			2,634
Field equipment		1,498			1,203
		27,603			41,763
Accumulated depreciation		(14,153	)		(13,640	)
	$	13,450		$	28,123

Depreciation expense associated with property and equipment was $3,869 and $2,703 for the years ended December 31, 2005 and 2004, respectively.

18

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

4. Long-Term Debt

Long-term debt consists of the following at December 31:

	2005			2004
Borrowings from senior secured – revolving credit facility; variable interest payable monthly (8.75% interest rate at December 31, 2005); any unpaid principal and interest due April 17, 2007	$	—		$	—
Borrowings from senior secured – acquisition term loan facility; variable interest payable monthly (10.75% and 8.75% interest rate at December 31, 2005 and 2004); principal paid and interest paid December 30, 2005, maturity April 17, 2007		—			19,669
Borrowings from senior secured – term loan facility; variable interest payable monthly (10.00% and 8.00% interest rate at December 31, 2005 and 2004); any unpaid principal and interest due April 17, 2007		7,620			9,191
Borrowings from real estate notes; fixed interest rates ranging from 6.50% to 6.88%; principal and interest payable monthly; debt retired on December 7, 2005		—			3,816
Various seller notes; interest rates ranging from 6.75% to 10.00%; principal and interest payable quarterly at various dates through November 2010		8,798			9,998
Various capital leases; interest rates ranging from 5.00% to 9.99%; principal and interest payable monthly at various dates through September 2011		395			12
		16,813			42,686
Less: Current portion		(4,686	)		(4,014	)
	$	12,127		$	38,672

During 2005 and 2004, the Company amended certain borrowing terms under its senior credit facilities with a financial institution which provides the Company a $51,600 Senior Secured Credit Facility (the Amended Credit Facility). Such credit facility is comprised of the revolving credit facility, the acquisition term loan facility and term loan facility.

19

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

4. Long-Term Debt (Continued)

The terms of Amended Credit Facility provided for the following modifications in 2005: (i) term loan facility’s monthly principal payment amortization was stopped and any unpaid principal is due at the end of the term, (ii) the draw period on the acquisition term loan was extended through the term of agreement and (iii) the available credit limit on the acquisition term loan was fully restored.

The following modifications occurred in November 2004: (i) the credit limit on the acquisition loan facility was increased from $13,400 to $30,000, (ii) the interest rates on the credit facilities were lowered by approximately 0.75% and are no longer subject to minimum floor rates, (iii) the acquisition term loan draw and start date on principal payments was extended until October 16, 2005 and (iv) financial covenants contained in the original agreement were revised to levels that were consistent with the Company’s business levels and outlook. In consideration for the November 2004 amendment, the Company paid the lenders an amendment fee of $220.

The Amended Credit Facilities were not considered a significant modification for financial reporting purposes. As a result, the Company capitalized debt issuance costs of $0 and $220 during the years ended December 31, 2005 and 2004, respectively. The debt issuance costs are being amortized over the term of the amended agreement while professional fees and other related costs incurred in connection with the amendment were expensed as incurred.

Outstanding borrowings under the agreement are collateralized by substantially all of the Company’s assets. The agreement contains certain financial and non-financial covenants and places restrictions on the amount of dividends payable. Among other covenants, the Company must maintain minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”), maintain certain leverage ratios, maintain a certain fixed charge ratio and not exceed a maximum limit for capital expenditures. As of December 31, 2005, the Company was in compliance with all financial covenants under the agreement. The Company was not in compliance with one of its non-financial covenants which required audited financial statements to be completed within 90 days after the end of the fiscal year. A waiver was obtained by the Company.

20

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

4. Long-Term Debt (Continued)

Scheduled maturities of long-term debt and capital lease obligations at December 31, 2005, are as follows:

	Long-Term Debt		Capital Lease Obligations
Year Ending December 31,
2006	$	4,494	$	221
2007		8,872		182
2008		1,939		18
2009		1,013		7
2010		100		6
Thereafter		—		5
	$	16,418		439
Less interest				(44	)
			$	395

5. Subordinated Debt

Subordinated debt consists of the following at December 31:

	2005		2004
Subordinated debt, payable in monthly installments of interest only with principal due at maturity, bearing interest at 14% (12% paid monthly and 2% paid in kind), retired November 16, 2005	$	—	$	8,523

During 2001, the Company received $8,000 under a subordination agreement. Concurrent with the issuance of the Note, the Company granted the holders of the Notes mandatory redeemable warrants to purchase up to an aggregate of 972,653 shares of common stock. The warrants are exercisable at any time subsequent to the grant date at an exercise price of $0.136 per share. The estimated relative fair value of the warrants was $91 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility of 60%, risk-free interest rate of 5.6%, and an expected life of 8 years. In addition, the Company also issued 636,287 shares of Series A Cumulative Convertible Redeemable Preferred Stock. The estimated relative fair value of the preferred stock was $86. The fair value of the warrants and Preferred Shares was recorded as a discount on the related Notes and is being amortized as interest expense over the term of the Notes. During 2005, the Notes were paid-off and retired and the remaining amount of discount was written-off in the amount of $24.

21

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

6. Shareholders’ Equity

Common Stock

The holders of the common and preferred stock vote together as a single class with each share of common stock and preferred stock entitled to one vote per share.

On February 1, 2004, the Company sold substantially all of the assets of two special education schools in exchange for 150,000 shares of the Company’s common stock and 250,000 shares of the Company’s Cumulative Convertible Preferred Stock series A. In addition, the buyer forfeited the rights to the preferred stock dividend. Upon receipt the Company retired such shares. The Company valued the shares of stock at their respective fair market values based on a number of factors including an independent appraisal.

On November 19, 2004, the Company acquired substantially all of the assets of a residential therapeutic boarding school. In connection with the transaction, the Company issued 1,780 shares of common stock which was valued at $2,261. The Company valued the shares of common stock at its fair market value based on a number of factors including an independent appraisal.

Preferred Stock

The preferred A stock is designated as 12% Series A Cumulative Convertible Preferred Stock with liquidation value of $2.85 per share. The preferred B stock is designated as 12% Series B Cumulative Convertible Preferred Stock with a liquidation value of $3.49 per share. The holders of the preferred stock are entitled to receive when, as and if declared by the Board of Directors, a compounded annual dividend which accrues at the rate of 12% per year based on the liquidation value. As of December 31, 2005, the Board of Directors has not declared a dividend on the preferred stock. Accordingly, accumulated and unpaid preferred stock dividends amounted to approximately $41,606 for preferred A stock and $7,452 for preferred B stock at December 31, 2005.

In connection with the Company’s subordinated debt offering the Company issued 636,287 shares of Series A Cumulative Convertible Redeemable Preferred Stock (Refer to Note 5). These shares are redeemable at the option of the holder any time on or after July 13, 2006. The redemption price is equal to the greater of (i) the fair market value per share or (ii) the EBITDA per share. The Company accretes the changes in the redemption value of the shares over the period from the date of issuance to the earliest redemption date. During the year ended December 31, 2005, the Company increased the value of its Series A preferred shares in the amount of $439 as a result of changes in the redemption value.

22

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

6. Shareholders’ Equity (Continued)

Preferred Stock (Continued)

Upon a conversion event (which includes, among other things, a sale of the Company or an initial public offering), each share of preferred stock will convert into that number of shares of common stock equal to (a) one plus (b) the value of accrued or accumulated and unpaid dividends divided by the respective liquidation value per share. In the event of a dissolution, liquidation or winding down of the Company each share of preferred stock will continue to carry a liquidation preference such that each share of preferred stock shall be entitled to a liquidation value plus all dividends (whether or not declared) accrued or accumulated and unpaid to the date of final distribution prior to any distribution to common shareholders and following payment in full of the liquidation preference will also continue to be entitled to share in any remaining assets of the Company like common shareholders.

Stock Performance Plan

Under the Stock Performance Plan (“Plan”), up to 5,240,000 shares of common stock (or its equivalent) may be issued via stock options, stock appreciation rights, restricted and performance shares or other stock-based awards. Options issued vest at a rate of 25% each year and have a term that shall not exceed 10 years. However, in the event of a change in control, as defined, the optionee becomes immediately vested in 100% of the options. Options issued will have an exercise price of no less than 75% of fair market value as determined on the date of grant. Prior to fiscal year 2003 fair market value was determined in good faith by the Plan administrator. During the years ended December 31, 2005 and 2004, the Company determined the fair market value of the Company’s common stock based on a number of factors including an independent appraisal.

The following represents a summary of the option activity for the years ended December 31:

	Shares		Weighted- Average Exercise Price
Balance, December 31, 2003	1,804,558		$	0.129
Granted	1,384,500		$	0.643
Exercised	(136,058	)	$	0.137
Forfeited	(450,300	)	$	0.130
Balance, December 31, 2004	2,602,700		$	0.402
Granted	657,900		$	1.500
Exercised	(225,000	)	$	0.157
Forfeited	(57,500	)	$	0.476
Balance, December 31, 2005	2,978,100		$	0.662

23

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

6. Shareholders’ Equity (Continued)

Stock Performance Plan (Continued)

Of the total options outstanding, 1,173,075 and 797,700 options were exercisable at December 31, 2005 and 2004, respectively, at weighted average exercise prices of $0.270 and $0.114, respectively. As of December 31, 2005, the 2,978,100 options outstanding had a weighted average remaining contractual life of 7.47 years.

During the year ended December 31, 2005, the Company granted 657,900 options to purchase common stock to employees with exercise prices of $1.50 per share. The weighted average fair market value of the Company’s common stock on the date of grants was $1.32 per share. No stock compensations charges were recorded as the exercise price was greater then or equal to the estimated fair market value at the date of grant.

During the year ended December 31, 2004, the Company granted 1,384,500 options to purchase common stock to employees with exercise prices ranging from $0.20 to $1.60 per share. The weighted average fair market value of the Company’s common stock on the date of grants was $1.24 per share. In connection with the issuances in 2004, the Company recorded deferred compensation charges of $862 as the exercise price of the shares was less than the estimated fair market value of the Company’s common stock as of the dates of grant. The Company will amortize the deferred compensation charge over the four year vesting period of the options. As of December 31, 2005, the Company has amortized $365 of the deferred compensation charge.

Warrants

The Company had 5,192,316 common stock warrants issued and outstanding during the years ended December 31, 2005 and 2004. As of December 31, 2005, the weighted-average exercise price of the warrants was $0.144. Additionally, 1,478,829 of these warrants are redeemable at the options of the holder. The Company has recorded the fair value of the redeemable warrants as long-term liabilities in the consolidated balance sheet. (Refer to Note 2 – Adoption of Statement of Financial Accounting Standard No. 150.)

24

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

7. Income Taxes

The components of the income tax provision for the years ended December 31, 2005 and 2004 are as follows:

	2005			2004
Current
Federal	$	3,045		$	(1,062	)
State		1,348			(452	)
		4,393			(1,514	)
Deferred
Federal		(1,284	)		1,285
State		(832	)		319
		(2,116	)		1,604
	$	2,277		$	90

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate from continuing operations is as follows:

	2005		2004
Statutory federal income tax rate	34.0	%	34.0	%
State income taxes, net of federal benefit	6.4		6.6
Non-deductible expenses	0.7		(97.2	)
	41.1	%	(56.6	)%

25

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

7. Income Taxes (Continued)

The components of the Company’s deferred tax assets (liabilities) at December 31, 2005 and 2004 are as follows:

	2005			2004
Current deferred tax asset (liability)
Accrued vacation	$	634		$	285
Prepaids		(573	)		(389	)
Other		89			80
Current deferred tax asset (liability)		150			(24	)
Non-current deferred tax asset (liability)
Depreciation and amortization		(60	)		(1,878	)
Accrued deferred compensation		88			104
Net operating loss carry-forward		193			1,229
Fair value of putable warrants		1,059			363
Other		328			31
Non-current deferred tax asset (liability)		1,608			(151	)
	$	1,758		$	(175	)

At December 31, 2005, the Company had state net operating loss carry-forwards of approximately $3,873 that expire through 2008.

26

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

8. Commitments and Contingencies

Lease Obligations

The Company leases machinery, equipment, and office and operational facilities under noncancelable operating lease agreements. Certain lease agreements for the Company’s facilities generally contain renewal options and provide for annual increases in rent based on the local Consumer Price Index. Related party leases arise as a result of the Company’s acquisitions and were consummated on terms equivalent to those that prevail in arms-length transactions. The following is a schedule of the Company’s future minimum lease payments as of December 31, 2005:

	Third Party		Related Party		Total
Year Ending December 31,
2006	$	3,926	$	2,149	$	6,075
2007		3,582		2,240		5,822
2008		3,269		2,298		5,567
2009		3,099		1,989		5,088
2010		2,764		1,734		4,498
Thereafter		23,369		5,335		28,704
	$	40,009	$	15,745	$	55,754

Total rent expense under operating leases, including month-to-month rentals, amounted to $4,724 and $2,646 during the years ended December 31, 2005 and 2004, respectively. The Company leases several of its facilities under operating leases with entities owned by certain related parties which expire through November 2014. Rental expense on these facilities amounted to $2,220 and $701 during the years ended December 31, 2005 and 2004, respectively. Such related party leases are due and payable on a monthly basis on similar terms and conditions as the Company’s other leasing arrangements. Under certain lease agreements, the Company is responsible for other costs such as property taxes, insurance, maintenance, and utilities.

Legal Matters

During the year ended December 31, 2004, the Company was a defendant in a wrongful termination lawsuit at a program it divested during 2004. The complaint sought, among other things, back pay, punitive damages, and attorneys’ fees. On August 24, 2005, the Company reached a settlement in which they agreed to pay $600. During the year ended December 31, 2004, the Company recorded a liability of $600 in connection with the settlement. The amount was subsequently paid in 2005.

There are various other claims and litigation proceedings in which the Company is involved in the ordinary course of business. While the outcome of these claims and proceedings cannot be predicted with certainty, after consulting with legal counsel, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company’s business, financial position and results of operations or cash flows.

27

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

8. Commitments and Contingencies (Continued)

Indemnifications

The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct, or breach of representations and warranties and covenants.

The Company provides for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable the Company to recover a portion of any future amounts paid.

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with business dispositions and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to such sales.

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, no payments have been made under any of these indemnities.

Employment Agreements

The Company has entered into employment agreements with certain of its professionals which require annual gross salary payments which range from $54 to $320 per annum. The employment agreements range from a period of one to five years and include a provision for annual bonuses based on specific performance criteria. In the event that such key management employees are terminated without cause, the Company is contractually obligated to pay the remaining balance due on the employment contracts.

28

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

8. Commitments and Contingencies (Continued)

Employment Agreements (Continued)

The following is a schedule of the Company’s future minimum annual payments under such employment agreements as of December 31, 2005:

Year Ending December 31,
2006	$	1,685
2007		1,258
2008		548
2009		266
2010		—
	$	3,757

Consulting Agreements

The Company has entered into consulting agreements with certain professionals which require annual consulting fee payments which range from $35 to $355 per annum. The consulting agreements range from a period of one to seven years. In the event that such consulting agreements are terminated without cause, the Company is contractually obligated to pay the remaining balance due on the consulting agreements.

The following is a schedule of the Company’s future minimum annual payments under such consulting agreements as of December 31, 2005:

Year Ending December 31,
2006	$	1,311
2007		858
2008		546
2009		346
2010		207
Thereafter		61
	$	3,329

9. Business Acquisitions

During December 2005, the Company acquired the stock of an outdoor therapeutic program. The purchase price of such acquisition, including related acquisition costs of $63, amounted to $3,388, which includes the assumption of $857 of liabilities. The purchase price of such acquisitions was funded from $2,031 in cash and $500 from notes payable to the sellers. The acquisitions increase the Company’s market share in this growing sector of the therapeutic education market. In connection with the acquisitions, the Company obtained all of the voting equity interest in the program.

29

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

9. Business Acquisitions (Continued)

During 2004, the Company acquired substantially all the assets and liabilities of three residential therapeutic boarding schools and one outdoor therapeutic program. The aggregate purchase price of such acquisitions, including related acquisition costs of $676, amounted to $34,908, which includes the assumption of $3,291 of liabilities. The purchase price of such acquisitions was funded from $15,191 in borrowings under the acquisition line of the senior credit facility, $4,767 from notes payable to the sellers, $2,261 from the issuance of common stock to the sellers (Refer to Note 6 – Shareholders’ Equity) and $9,398 in cash.

Certain acquisition agreements entered into by the Company contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the acquired entity’s results of operations exceed certain benchmarks. These benchmarks are measured on an annual basis, generally from one to six years after the acquisition, and are generally set above the historical operating experience of the acquired entity at the time of acquisition. Earnout payments are recorded as additional purchase price (as goodwill) when the contingent payments are earned and become payable and consist of a combination of cash and notes payable issued to the seller. The Company records compensatory earnout arrangements as compensation expense. The increase to goodwill during the years ended December 31, 2005 and 2004 as a result of the earnouts was $2,246 and $550, respectively.

The results of operations for the companies acquired during the years ended December 31, 2005 and 2004 have been included in the consolidated financial statements from their respective dates of acquisition. Such acquisitions were accounted using the purchase method of accounting, and the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the dates of acquisition. The excess purchase price over the net assets acquired has been allocated to goodwill. For income tax purposes, $0 and $28,003 of goodwill resulting from acquisitions completed during the years ended December 31, 2005 and 2004, respectively, are amortized over a 15 year period.

30

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

9. Business Acquisitions (Continued)

The assets and liabilities of the entities acquired are as follows for the year ended December 31:

	2005			2004
Current assets, which consist primarily of cash and accounts receivable	$	682		$	490
Property and equipment		59			938
Intangible assets subject to amortization
Curriculum		365			2,679
Accreditation		—			1,028
Non-compete agreements		49			573
Trade names		25			305
Student contracts		16			892
Goodwill		2,192			28,003
Total assets acquired		3,388			34,908
Total liabilities assumed, which consist primarily of deferred revenue		(857	)		(3,291	)
Purchase price, net of liabilities assumed	$	2,531		$	31,617

10. Business Dispositions

During 2005, the Company sold two special education schools. Consideration received for such dispositions was $6,711 in cash and a $1,460 note receivable. As a result of the dispositions, the Company recorded in the consolidated statements of operations a net gain of $1,220, net of tax expense of $1,089, which represented the difference between the fair value of the consideration and the book value of the net assets sold.

In addition to the businesses sold in 2005, the Company sold the educational facilities related to one of the special education schools for $4,196. As a result, the Company recorded in the consolidated statements of operations a net gain of $1,035, net of tax expense of $756, which represented the difference between the fair value of the consideration and the book value of the assets sold.

In addition, the Company recorded net working capital changes in the amount of $62, net of tax expense of $45, in the consolidated statement of operations.

31

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

10. Business Dispositions (Continued)

During 2004, the Company sold two special education schools and a residential boarding school. Additionally, the Company sold three mental health clinic operations. These dispositions comprise three separate reporting units. Consideration received for such dispositions was 250,000 shares of the Company’s Cumulative Convertible Series A Preferred Stock, 150,000 shares of the Company’s common stock, cancellation of a $1,544 note payable, and $8,650 cash. As a result of the dispositions, the Company recorded in the consolidated statements of operations a net gain of $1,112, net of tax expense of $909, which represented the difference between the fair value of the consideration and the book value of the net assets sold. The consideration received does not include $1,000 held in escrow due to the uncertainty of the final purchase price adjustment from the three mental health clinic operations. During 2005, the $1,000 held in escrow was settled for $225, net of tax expense of $164, which has been recorded in the consolidated statement of operations. In addition, the buyer of the two special education schools forfeited the rights to the preferred stock dividend.

The Company accounted for the business operations for these entities in 2005 and 2004 as discontinued operations.

Summarized operating results from the discontinued operations included in the Company’s consolidated statements of operations were as follows for the year ended December 31:

	2005		2004
Revenues	$	4,924	$	21,469
Income from discontinued operations, net of related tax effect		613		458

11. Sales Leaseback Transaction

In December 2005, the Company sold five educational facilities from its portfolio for $22,384, net of transaction costs of $764. The carrying value of the facilities totaled $17,565. These facilities were leased back from the purchaser for a period of 15 years. These leases are being accounted for as operating leases. In the current year, the Company recognized a loss on the sale of $421 for one of the five facilities. The sale of the remaining four facilities resulted in a gain of $5,199, which is to be accreted into income on a straight-line basis over the 15-year lease term. The current portion of the gain of $346 is included in the other current liabilities of the consolidated balance sheets. The leases provide the Company with four 5-year renewal options. The leases require the Company to pay for customary operating repairs and expenses including utilities, taxes and insurance. Annual payments under the terms of the leases total $2,199.

32

Aspen Education Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2005 and 2004 (In thousands, except share data)

12. Employee Benefit Plans

401(k) Retirement Savings Plan

The Company maintains an elective retirement savings plan which is qualified under Section 401(k) of the Internal Revenue Code. Participating employees are allowed to contribute up to the Internal Revenue Code maximums. The Company makes contributions to the plan at the discretion of management. Contributions to the plan were $219 and $203 for the years ended December 31, 2005 and 2004, respectively.

Deferred Compensation Plan

In December 2003, the Company began a new non-qualified Insured Security Option Plan (“ISOP”) for certain key employees. The ISOP permits these employees on an after-tax basis to defer a portion of their salary and/or bonus each calendar year. The Company may also make discretionary contributions to these employee accounts, up to a maximum of $6 per employee, which become fully vested three years after the contribution. Contributions to the plan were $194 and $151 for the years ended December 31, 2005 and 2004, respectively.

33

EX-99.5

Exhibit 99.5

Aspen Education Group

Aspen has derived the historical financial information for the nine months ended September 30, 2006 and 2005 from its unaudited interim condensed consolidated financial statements. These financial statements have been prepared in accordance with generally accepted accounting principles as applied in the United States of America (“U.S. GAAP”) applied on a consistent basis during the periods involved (except that they are subject to year-end adjustments and do not contain all footnote disclosures required by U.S. GAAP).

	Nine months ended September 30,
(Dollars in thousands)	2006			2005
	(unaudited)			(unaudited)
Income Statement Items:
Total net revenue	$	112,001		$	91,483
Total operating expenses (1)	$	96,564		$	81,074
Income (loss) from continuing operations	$	8,240		$	3,406
Operating margin		13.8	%		11.4	%
Balance Sheet Items:
Cash and cash equivalents	$	9,329		$	21,058
Property and equipment, net	$	18,583		$	32,504
Total assets	$	99,335		$	116,312
Total debt	$	9,179		$	48,608
Cash Flow Statement Items:
Working capital (2)	$	(22,719	)	$	(5,108	)
Total capital expenditures	$	7,947		$	4,472

(1) Includes corporate overhead.

(2) Working capital is defined as current assets (including cash) minus current liabilities, which includes the current portion of long-term debt and accrued interest thereon.

Management’s Discussion and Analysis

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Revenue

Aspen’s consolidated net revenues increased $20.5 million or 22.4% to $112.0 million in the nine months ended September 30, 2006 from the nine months ended September 30, 2005. Growth was largely driven by an increase in average daily census (“ADC”) which measures the average number of students attending Aspen’s programs per day. ADC increased by 16.9% in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. This growth was caused by a number of factors including: (1) increased census and utilization at its established programs in both the Residential and Outdoor Divisions, (2) revenues generated from start-up programs which commenced operations in 2005, (3) continued growth in programs

which were launched in 2004, most notably Aspen’s Healthy Living Division and (4) the December 2005 acquisition of SageWalk.

Operating Expense

Aspen’s consolidated operating expense increased by $15.5 million, or 19.1%, to $96.6 million in the nine months ended September 30, 2006 from the nine months ended September 30, 2005. Salaries and related payroll costs increased by $9.5 million or 21.7% in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 in line with overall revenue growth. Supplies, facilities and other operating costs increased by $6.4 million or 16.9% in the nine months ended September 30, 2006. Included in these costs is an increase in rent expense of $1.6 million as a result of Aspen’s December 2005 sales leaseback transaction which involved the sale of owned real estate of five of Aspen’s facilities. Depreciation and amortization expense decreased by $0.2 million in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 as a result of the sales leaseback transaction as Aspen no longer incurs depreciation expense on the formerly owned properties.

Operating Margins

Aspen’s operating margins increased to 13.8% in the nine months ended September 30, 2006 from 11.4% in the nine months ended September 30, 2005. This increase is driven by overall revenue growth, increased utilization and positive operating leverage.

Net Income From Continuing Operations

Aspen’s income from continuing operations increased by $5.0 million in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, primarily due to the factors described above. Interest expense decreased by $3.1 million in the nine months ended September 30, 2006 to $0.9 million from $4.0 million in the nine months ended September 30, 2005 due to the repayment of a substantial portion of Aspen’s borrowing under its term loans and subordinated debt. Interest expense in the nine months ended September 30, 2006 primarily relates to seller financed notes and capital lease obligations. Income tax expense increased $2.7 million to $5.8 million in the nine months ended September 30, 2006 compared to $3.1 million in the nine months ended September 30, 2005 as a result of Aspen’s increase in income from operations.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2003

Residential Division

Revenues for all programs owned and operated prior to January 1, 2003, or base revenues, in the Residential Division grew at an 11.9% CAGR between 2003 and 2005. Growth was driven by a combination of increased ADC and increased average monthly tuition rates. Base operating profit margin increased from 24.5% in 2003 to 27.9% in 2005 due primarily to positive operating leverage, particularly at the compensation expense line. As a percentage of revenue, compensation expense declined from 48.7% in 2003 to 45.9% in 2005, as Aspen benefited from improved utilization at existing facilities and strong tuition rate growth which surpassed wage growth.

Outdoor Division

Outdoor base revenue grew at a 29.7% CAGR between 2003 and 2005. Growth was driven by a combination of increased ADC and increased average monthly tuition rates. Outdoor programs are less capacity constrained than Residential programs and therefore can typically grow ADC much faster. Base operating profit margin increased from 30.5% in 2003 to 36.2% in 2005 due primarily to positive operating leverage, particularly at the compensation expense line. The Outdoor Division has more scalable student to employee ratios than the Residential Division and therefore experiences strong operating margin expansion with increased ADC. As a percentage of revenue, compensation expense declined from 46.3% in 2003 to 39.3% by 2005 as Aspen benefited from strong ADC growth.

Outdoor acquisitions revenue grew 70.7% between 2004 and 2005 due to a full year of operations for the Outback Therapeutic Expedition program, which was acquired in May 2004. Aspen also acquired the SageWalk business in December 2005. However, operating margins declined from 21.1% in 2004 to 17.8% in 2005 primarily due to an increase in other operating expenses at the Outback Therapeutic Expedition program resulting from higher staffing to meet tighter safety standards than had been used prior to the acquisition.

Outdoor startups revenue grew at a 125.5% CAGR from 2003 to 2005. Startups revenue in the Outdoor Division consists of the Adirondack program, which started in 2003. Growth was driven by a combination of increased ADC and average monthly tuition rates. The Adirondack program became profitable in 2004, and operating profitability increased from 12.9% in 2004 to 18.7% in 2005, due primarily to positive operating leverage, particularly at the compensation expense line. As a percentage of revenue, compensation expense decline from 57.7% in 2004 to 51.3% in 2005.

Healthy Living Division

The Healthy Living Division was launched in 2004, with the opening of three programs; Academy of the Sierras, a residential school for obese adolescents, and Wellspring New York and Wellspring Adventure Camp (NC), two summer camps for obese adolescents. Wellspring Adventure Camps (CA), a third summer camp, was opened in 2005. By 2005, the Healthy Living Division had achieved $5.0 million in revenues. Due to robust demand, in the first full year of operation the Healthy Living Division achieved a utilization rate of 76.3% in Aspen’s Academy of the Sierras residential school (which represented approximately 72% of total division revenue), rapidly approaching the utilization rates of Aspen’s more established Residential Division. The Wellspring New York and Wellspring Adventure Camp (NC) summer camps contributed $1.4 million in revenues in 2005, representing approximately 150% growth over 2004. Wellspring Adventure Camp (CA) did not have any revenues in 2005.