Princeton Review (NASDAQ:REVU) didn't see its fiscal year get off to a great start. According to its first-quarter earnings release, red ink marks continue to dominate.

Total net revenues increased 4.4% to $35.1 million. The operating loss widened scarily, coming in at $1.9 million. Yikes! Operating income in the previous year's quarter might have been small, but at least it was positive at approximately $0.2 million. The net loss for shareholders also expanded. This quarter saw the bleed equal to $2.1 million, or $0.08 per diluted share. For comparison, last year saw a loss of $0.3 million, or a single penny per diluted share.

According to Rich Smith's forecast, one analyst believed that revenues would come in at $32.1 million, representing a 4% decrease. So Princeton Review surprised on the upside concerning that metric. The bottom line, however, was a rank disappointment. The expectation for the per-share loss was more like $0.05 as opposed to the $0.08 that was observed.

Another disappointment can be found in the all-important gross margin. The actual gross profit in terms of dollars decreased 2.5%. The gross margin itself for the current quarter equaled 60.5%, while last year's quarter saw that value at 64.8%. The line devoted to cost of revenues increased more than 17% to $13.9 million. Furthermore, operating expenses increased 7% to $23.1 million. When sales growth is eclipsed by growth in costs and expenses, you know you're in trouble.

Last time around, I had at least something of a positive tone while reading through the numbers. This time, however, I'm struggling to be optimistic. Sure, it's only the first fiscal quarter, but there's nothing here that indicates that a huge turnaround is imminent.

Looking at the cash flow statement from the recent 10-K, we see that Princeton Review has a spotty record in terms of free cash flow. The last time the company seemed to have any free cash was back in 2003. Sadly, the last two fiscal years saw capital expenditures offset all of the operating cash flow. For example, 2005 saw net cash from operations equaling $7.5 million, while capital expenditures cost $8.3 million. Considering that the gross margins have been decreasing over time while losses in operations have established themselves as the norm, I'm not sure whether the company really knows how to create value through its model.

I'll have to again say that I wouldn't touch the stock of Princeton Review. I'll also reiterate that I do like the concept of education/test preparation as a business, and I believe that it could grow over time, since we're becoming increasingly dependent on knowledge and technology for employment opportunities. I'm especially fascinated by the potential of expanding the online-learning culture. Still, the data here tells me that the stock is still more of a risk than is necessary. My personal opinion is to stay away, but certainly and as always, you must judge for yourself in the end.

Related Foolish reading:

Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.