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is relieved with no impact on the consolidated income statement. *** Revenue Recognition, Deferred Revenue and Deferred Seminar Expenses We recognize revenue for the sale of products and software, upon delivery. Revenue from educational seminars is recognized upon the earlier of (1) when the nonrefundable deposit is received for the seminars and the seminar has taken place; or (2) upon the contractual expiration of our obligation to provide a seminar only if the seminar was paid for. Deferred revenue is recorded when the seminar proceeds are received prior to the related seminar taking place. Expenses for commission payments made to our speakers directly related to additional courses sold are considered acquisition costs of those revenues and deferred until the related revenue is recognized in accordance with the guidance in SAB 104.

(Emphasis added.)


On August 14, 2006, Defendants filed the Company’s 2Q:06 Form 10-Q

for the quarter ended June 30, 2006, signed by Defendants Russ Whitney, Maturo, Novas, and Simon and certified by Defendants Russ Whitney and Novas. In addition to making substantially similar statements concerning the Company operations, including revenues, deferred revenues, net income and

earnings, as had been published previously, the 2Q:06 Form 10-Q also provided

an updated Revenue Recognition statement – introducing the concept of “breakage” – in part, as follows:

Revenue recognition policy The student is permitted to attend courses (in all available learning formats) throughout the life of the student contract. We allow students to attend courses subsequent to expiration upon request. The tuition is generally nonrefundable. A student may receive a refund within three days of the purchase by exercising a right of rescission. In such cases, the corresponding amount of deferred revenue is relieved with no impact on the Consolidated Statement of Operations.

We recognize revenue based on: when the course is attended by the student; or likelihood of the attendance by the student is remote (course breakage), which is based on the historical: percentage of students who never attended a course and those students who never attended a course subsequent to expiration; and highest number of days in which 95% of those students who attended our courses subsequent to expiry.


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