S-1/A

As filed with the Securities and Exchange Commission on June 29, 2004

Registration No. 333-115496

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

EDUCATE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	8200	37-1465722
(State or Other Jurisdiction of Incorporation of Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

1001 Fleet Street

Baltimore, Maryland 21202

(410) 843-8000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

R. Christopher Hoehn-Saric

Chief Executive Officer

Educate, Inc.

1001 Fleet Street

Baltimore, Maryland 21202

(410) 843-8000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies to:

Jeffrey H. Cohen, Esq. Skadden, Arps, Slate, Meagher & Flom LLP 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Telephone: (213) 687-5000 Facsimile: (213) 687-5600 Robert S. Risoleo, Esq. Sullivan & Cromwell LLP 1701 Pennsylvania Avenue, N.W. Washington, D.C. 20006 Telephone: (202) 956-7500 Facsimile: (202) 293-6330

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion. Dated June 29, 2004.

15,000,000 Shares

Common Stock

This is an initial public offering of shares of common stock of Educate, Inc.

Educate is offering 5,000,000 shares to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 10,000,000 shares. Educate will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00. Application has been made for quotation on the NASDAQ National Market under the symbol “EEEE”.

See “ Risk Factors” on page 9 to read more about factors you should consider before buying shares of the common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

	Per Share	Total
Initial price to the public	$	$
Underwriting discount	$	$
Proceeds, before expenses, to Educate	$	$
Proceeds, before expenses, to the selling stockholders	$	$

To the extent that the underwriters sell more than 15,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 2,250,000 shares from the selling stockholders at the initial price to the public less the underwriting discount.

The underwriters expect to deliver the shares on                     , 2004.

Goldman, Sachs & Co. Merrill Lynch & Co.

JPMorgan

Banc of America Securities LLC                                    

Legg Mason Wood Walker

Incorporated

ThinkEquity Partners LLC

Prospectus dated                      , 2004.

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	9
Special Note Regarding Forward-Looking Statements	20
About This Prospectus	21
Use of Proceeds	22
Dividend Policy	22
Capitalization	23
Dilution	24
Selected Consolidated Financial Data	25
Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Business	46
Management	61
Certain Relationships and Related Transactions	70
Principal and Selling Stockholders	72
Description of Capital Stock	74
Shares Eligible for Future Sale	77
United States Federal Income Tax Consequences to Non-U.S. Holders	79
Underwriting	81
Validity of Shares	85
Experts	85
Where You Can Find More Information	85
Index to Consolidated Financial Statements	86

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PROSPECTUS SUMMARY

This summary highlights key aspects of our business and this offering that are described more fully elsewhere in this prospectus. We urge you to read this entire prospectus carefully, including our consolidated financial statements and related notes appearing elsewhere in this prospectus and the “Risk Factors” section, before making an investment decision. All references in this prospectus to “Educate, Inc.,” “Educate,” “the Company,” “we,” “us,” or “our” refer to Educate, Inc. and its consolidated subsidiaries (other than Connections Academy, Inc.) and, where the context so indicates, the pre-K-12 business acquired from Laureate Education, Inc. (formerly known as Sylvan Learning Systems, Inc.) (“Laureate”), except where the context indicates that such terms mean only Educate, Inc. Some financial data in this prospectus is presented on a pro forma rather than actual basis. For further information regarding the presentation of financial data, see “Corporate Information,” below.

Educate, Inc.

Overview

We believe we are a leading national provider of tutoring and other supplemental education services to pre-kindergarten through twelfth grade, or pre-K-12, students. For over 25 years, we have provided trusted, personalized instruction to our students. We operate through three business segments, Learning Center, Institutional Services and Online Learning Services, that together served more than 250,000 students in 2003.

Our North American learning centers are operated under the Sylvan^® brand name, which we believe is the most highly recognized brand name in the supplemental education services industry. Our learning centers are staffed by trained teachers who deliver high quality education programs that are personalized for each student based upon the results of extensive diagnostic tests. These centers are leading a significant shift in the provision of pre-K-12 supplemental education services, away from the traditional model in which individual tutors provide in-home homework help to students.

We have experienced significant growth in our business over the last five years. We expect that all three of our business segments will continue to benefit from increased national attention on the quality of pre-K-12 education. We believe that parents have become more proactive in seeking education services that supplement their children’s education and are increasingly willing to pay for these services. In addition, over the past ten years, the supplemental education services market has benefited from increased spending in both public and private schools. Further, increased education spending by governmental authorities has enjoyed continued bipartisan support. We believe these market forces have contributed to our substantial growth.

Business Segments

Learning Center

Our Learning Center segment develops and delivers trusted, personalized tutoring programs to pre-K-12 students through a network of more than 1,000 franchised and company-owned learning centers in North America operating under the Sylvan brand name and more than 950 European franchised and company-owned learning centers.

North American Learning Centers—Our Sylvan Learning Centers provide supplemental, remedial and enrichment instruction, primarily in reading and mathematics, and, to an increasing extent, writing, study skills and test preparation. Our programs feature an extensive series of standardized diagnostic

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tests, personalized instruction, a student motivational program and ongoing involvement of parents and their child’s regular school teacher. Our North American learning center operations are comprised of franchised centers and company-owned centers.

Ÿ Franchised Centers.    As of March 31, 2004, there were 876 franchised Sylvan Learning Centers located in North America, including 790 in the United States and 86 in Canada. We generate income from franchising activities primarily through royalties, which are calculated as a fixed percentage of franchisee cash receipts. We generate additional licensing fees from the sale of new franchise territories, within which a franchisee is allowed to open learning centers, and from sales of learning materials and other materials to franchisees.

Ÿ Company-Owned Centers.    As of March 31, 2004, we operated 138 company-owned Sylvan Learning Centers in 16 U.S. markets. Company-owned learning centers enable us to test and refine new educational programs, marketing plans and learning center management procedures before offering them to our franchisees.

European Learning Centers—Our European learning center business, which we acquired in 1998, operates under the Schülerhilfe name. Schülerhilfe has provided after school tutoring, consisting principally of homework support, to primary and secondary students in Germany and Austria for over 30 years. As of March 31, 2004, Schülerhilfe operated 232 company-owned learning centers and 668 franchised centers in Germany, and 50 franchised centers in Austria.

Institutional Services

Since 1993, Catapult Learning, formerly known as Sylvan Education Solutions, has provided supplemental instruction programs, primarily in reading and math, to students in schools, school districts and private educational entities (primarily parochial schools) across the country. These programs encompass a wide variety of education services that supplement and expand those provided by these institutions. Our services are typically provided on location at the client school or a conveniently located community organization’s facility. These services are funded by federal, state and local governments.

Online Learning Services

eSylvan offers online tutoring programs modeled after those provided in our Sylvan Learning Centers. These online programs use a technologically sophisticated, internet-based application that enables teachers and students to talk and interact in real-time over a dial-up or broadband connection. eSylvan’s programs are provided to students primarily in the second through ninth grades.

Industry Overview

We believe the pre-K-12 supplemental education services industry is large, growing and fragmented and that the overall size of this industry has significant potential to grow as a result of a number of factors. These factors include favorable demographics, increasing parental dissatisfaction with the quality of public education and the heightened focus on school performance due to the continued failure of many students to achieve basic skills.

According to the U.S. Department of Education, enrollment in elementary and secondary schools rose 20% between 1985 and 2003 to more than 54 million students and is expected to rise by an additional two million students between 2003 and 2013. The most recent major federal legislation, the No Child Left Behind Act of 2001, or NCLB, increased federal funding for supplemental education

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services by 33% from $8.8 billion in 2001 to $11.7 billion in 2003. NCLB also enacted sweeping changes, such as requiring a school district to set aside funds to support school choice and supplemental educational services, including tutoring provided by third parties, if a school in the district fails to achieve its adequate yearly progress goals for three consecutive years. We believe these changes will drive demand for the types of supplemental education services we provide.

Our Strengths

Leading Market Position and Powerful Sylvan Brand Name.    We believe our broad geographic reach, our industry-leading brand awareness and our trusted, personalized method of instruction have enabled us to become a leading national player in a highly fragmented market.

High Quality Instruction and Broad Service Offering.    We differentiate ourselves through our proprietary learning systems that consistently produce positive results for our customers. Our high quality instruction, diversity of services and dedication to customer service reinforce our reputation as a trusted source of quality instruction.

Highly Effective Marketing.    Over the last five years, our coordinated national and local marketing strategy has resulted in approximately one out of every three inquiries leading to an enrollment in our Sylvan Learning Centers. Coordinated advertising and marketing enable us to communicate a consistent brand image at the national and local level.

Strong Institutional Relationships.     As an established provider in the institutional market, we have positioned ourselves to take advantage of the government’s increased focus and spending on supplemental education services. Although most of our contracts with school districts are school-year contracts subject to annual renewal, we have had and continue to have high rates of repeat business with our institutional customers. We have developed a new program, Education Station, to provide tutoring services mandated under NCLB. In the 2003-2004 school year, our NCLB business served approximately 16,700 students, compared to approximately 2,900 students in the 2002-2003 school year.

Strong Learning Center Franchise Model.    Franchising allows us to grow revenue with limited capital expenditures. Our franchise system is characterized by high demand for franchises and low franchisee concentration and center closures. Our franchisee selection process is highly competitive, attracting on average 4,000 applicants per year. We seek franchisees who prefer to be active owner-operators. We have had a low franchise center closing rate of approximately 1% over each of the last five years. We also maintain a very low franchisee ownership concentration, with 73% of our franchisees owning only one or two centers, and no franchisee owning more than 20 centers.

Outstanding Track Record of Growth and Financial Performance.    We have demonstrated significant growth in revenue and operating income, with revenue increasing from $154.9 million in 1999 to $242.3 million in 2003 and operating income growing from $15.4 million in 1999 to $31.4 million in 2003. For the same period, net income increased from $9.5 million to $10.9 million, reflecting the increase in operating income, offset by increased interest expense of $13.8 million and taxes of $1.6 million in 2003 as compared to 1999.

Experienced Management Team.    We have a strong and experienced management team with significant experience at Educate and the predecessor business, as well as expertise in marketing, finance, government and operations. The members of our senior management team have an average of seven years of experience with us. Our Chairman and Chief Executive Officer, R. Christopher Hoehn-Saric, has been with us since 1991.

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Business Strategy

Our goal is to strengthen our position as a leading provider of tutoring and other supplemental education services. To further this goal, certain members of our management and affiliates of Apollo Advisors, L.P. acquired substantially all of the pre-K-12 business of Laureate. This acquisition has enabled us to focus our efforts and financial resources exclusively on developing and growing our business, whose revenues represented approximately 36% of Laureate’s revenues in 2002, the year prior to the acquisition. Prior to our acquisition by Apollo, we were focused on providing similar pre-K-12 services but operated under a much larger company that had more of a post-secondary focus. Our strategy includes the following elements:

Ÿ Drive Organic Learning Center Growth.    We intend to drive same center sales and operating income growth by improving the effectiveness of our marketing, increasing revenues per student and controlling our costs.

Ÿ Expand Our Sylvan Learning Center System.    We believe there is significant potential to establish new Sylvan Learning Centers, and we also intend to continue to acquire select franchised Sylvan Learning Centers.

Ÿ Increase Our NCLB Penetration.    We intend to expand our NCLB business further by leveraging our strong institutional presence and building Education Station into the leading brand in this emerging market.

Ÿ Grow Our Online Business.    We intend to grow our online customer base and offer our online programs through our other two segments.

Ÿ Extend Our Service Offerings.    We intend to continue to develop new programs based on the specific needs of our customers in each of our segments.

Ÿ Expand Use of the Sylvan Brand.    We believe that the Sylvan brand is one of our most valuable assets, and we will continue to look for opportunities to expand the use of this brand, including potentially licensing it to educational book and software publishers and for other educational products.

Limited Operating History

We have a limited operating history as an independent company, which may make our business difficult to evaluate. When evaluating our historical financial results, you should carefully consider that we revalued the assets and liabilities that we acquired from Laureate, and accordingly, these assets and liabilities have a different historical basis.

Our Acquisition by Apollo

We were formed as a Delaware corporation in March 2003 by affiliates of Apollo Advisors, L.P. (“Apollo”), together with certain members of our management, to acquire the pre-K-12 business of Laureate and certain of its subsidiaries. On June 30, 2003, our wholly owned subsidiary, Educate Operating Company, LLC, which we refer to as our “operating company,” purchased from Laureate and Sylvan Ventures, LLC (“Ventures”), a subsidiary of Laureate, substantially all of the operations comprising Laureate’s and Ventures’ pre-K-12 education business units, including eSylvan, Inc., which operates our Online Learning Services business, and Connections Academy, Inc., which operates virtual public and charter schools for K-8 students. Upon completion of the transactions, Laureate’s operations consisted principally of its post-secondary business units. For more information about our acquisition by Apollo, see “Certain Relationships and Related Transactions—Our Acquisition by Apollo.”

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As of March 31, 2004, affiliates of Apollo owned 85.5% of our outstanding shares of common stock on a fully diluted basis (or 54.8% after giving effect to this offering and 50.0% if the underwriters’ over-allotment option is exercised in full). We refer to Apollo as our “equity sponsor.”

We acquired Connections Academy, Inc. from a subsidiary of Laureate as part of our acquisition by Apollo. Our Board of Directors has directed management to sell Connections Academy, and we intend to sell it to certain of our existing stockholders prior to the consummation of this offering. Following this sale, we will have no ongoing involvement with Connections Academy other than a customary transition services agreement. We expect to retain an obligation to make payment to Laureate if Connections Academy exceeds specified levels of EBITDA following the sale.

Corporate Information

We are a holding company and all of our operations are conducted through our operating subsidiaries. Our principal executive offices are located at 1001 Fleet Street, Baltimore, Maryland 21202. Our telephone number is (410) 843-8000.

In order to provide meaningful historical financial information, we use pro forma consolidated financial information and combined financial information for different periods throughout this prospectus. The financial data presented in this prospectus for periods prior to July 1, 2003 is combined financial data of the pre-K-12 business of Laureate. As used in this prospectus, “pro forma” or “pro forma consolidated” means that the information presented gives effect to our acquisition of the pre-K-12 business from Laureate on June 30, 2003, as if that transaction had occurred as of January 1, 2003. Unless otherwise indicated, references to our full-year results of operations for 2003 contained in this prospectus describe our pro forma consolidated results of operations for 2003.

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The Offering

Issuer Educate, Inc.

Total common stock offered 15,000,000 shares

Common stock offered by Educate, Inc. 5,000,000 shares

Common stock offered by selling stockholders 10,000,000 shares

Underwriters’ option to purchase additional shares from the selling stockholders 2,250,000 shares

Common stock outstanding after this offering 41,800,000 shares

Use of proceeds We estimate that our net proceeds from this offering will be approximately $67.5 million. We intend to use our net proceeds from this offering to repay an equal amount of debt outstanding under our operating company’s secured credit facility, which we incurred in connection with our acquisition by Apollo. See “Use of Proceeds.” We will not receive any of the proceeds from the sale of shares by the selling stockholders.

Proposed NASDAQ National Market Symbol EEEE

Risk Factors For a discussion of certain risks relating to our business and an investment in our common stock, see “Risk Factors.”

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Summary Consolidated Financial Data

You should read the following summary consolidated financial data together with our historical and pro forma consolidated financial statements and the related notes, the combined financial statements and the related notes of our predecessor, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. References to our predecessor refer to the pre-K-12 business we acquired from Laureate.

The combined statement of operations data of our predecessor for the years ended December 31, 2001 and 2002 and the six months ended June 30, 2003, and our consolidated statement of operations data for the period from June 30, 2003 (date of inception) through December 31, 2003 are derived from financial statements audited by Ernst & Young LLP, independent registered public accounting firm, and are included elsewhere in this prospectus.

The combined statement of operations data of our predecessor for the three months ended March 31, 2003 and our consolidated statement of operations data for the three months ended March 31, 2004 are derived from unaudited interim financial statements which are included elsewhere in this prospectus and which, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of such financial statements. Quarterly financial information is not necessarily indicative of our annual results due to seasonality and other quarterly fluctuations that are inherent in our business.

The unaudited pro forma consolidated statement of operations data for the year ended December 31, 2003 and the three months ended March 31, 2003 are derived from our unaudited pro forma consolidated statements of income, which are included elsewhere in this prospectus. These pro forma financial statements give effect to our acquisition of the pre-K-12 business acquired from Laureate on June 30, 2003 as if such transaction occurred on January 1, 2003. Our unaudited consolidated pro forma financial data are based on currently available information and are not necessarily indicative of our financial position or results of operations had our acquisition by Apollo taken place on January 1, 2003, nor are they necessarily indicative of future results.

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SUMMARY CONSOLIDATED FINANCIAL DATA

(dollars in thousands, except per share data)

	Predecessor												Educate			Pro Forma						Educate
	Year Ended December 31						Three Months Ended March 31, 2003			Six Months Ended June 30, 2003			Period from June 30, 2003 (date of inception) through December 31, 2003			Year Ended December 31, 2003			Three Months Ended March 31, 2003			Three Months Ended March 31, 2004
Statement of Operations Data:	2001			2002
				(1)			(unaudited)						(2)			(unaudited)						(unaudited)
Revenues:
Learning Centers:
Company-owned centers	$	74,286		$	103,066		$	27,852		$	59,789		$	57,390		$	117,179		$	27,852		$	29,969
Franchise services		36,692			42,680			11,059			23,654			20,817			44,471			11,059			12,834
Total		110,978			145,746			38,911			83,443			78,207			161,650			38,911			42,803
Institutional Services		70,042			67,909			20,771			43,418			35,425			78,843			20,771			38,807
Online Learning Services		479			2,656			486			973			861			1,834			486			584
Total revenues		181,499			216,311			60,168			127,834			114,493			242,327			60,168			82,194
Costs and expenses:
Instructional and franchise operations costs		135,277			156,620			44,365			88,633			83,501			172,134			44,365			59,252
Marketing and advertising		13,575			18,918			5,234			10,337			9,191			19,528			5,234			6,643
Depreciation and amortization		10,445			7,898			1,825			4,221			3,567			6,569			1,492			1,786
General and administrative expenses		12,348			13,058			3,324			6,433			6,258			12,691			3,324			3,476
Total costs and expenses		171,645			196,494			54,748			109,624			102,517			210,922			54,415			71,157
Operating income		9,854			19,817			5,420			18,210			11,976			31,405			5,753			11,037
Interest expense, net		265			126			(11	)		21			(6,748	)		(13,211	)		(3,242	)		(3,205	)
Loss on sale of assets		(961	)		(306	)		(4	)		(9	)		—			(9	)		(15	)		—
Income before income taxes		9,158			19,637			5,405			18,222			5,228			18,185			2,496			7,832
Income tax expense		(9,267	)		(12,781	)		(3,221	)		(8,943	)		(2,056	)		(7,291	)		(1,008	)		(2,976	)
Income (loss) from continuing operations	$	(109	)	$	6,856		$	2,184		$	9,279		$	3,172		$	10,894		$	1,488		$	4,856
Earnings per common share from continuing operations
—basic													$	0.09		$	0.30		$	0.04		$	0.13
—diluted														0.09			0.30			0.04		$	0.13
Weighted average common shares outstanding
—basic														36,800			36,800			36,800			36,800
—diluted														36,800			36,800			36,800			37,340
Other Operating Data:
Number of learning centers: (3)
Company-owned		90			127			129			130			135			135			129			138
Franchised		810			822			834			847			862			862			834			878
Capital expenditures	$	9,286		$	7,251		$	933		$	2,991		$	3,736		$	6,727		$	933		$	2,179
Debt to equity ratio (5)														1.18			1.14						1.16
Interest coverage ratio (6)														1.7	x		2.3	x					3.2	x

	Educate
	March 31, 2004
Balance Sheet Data:	Actual		Pro Forma As Adjusted (4)
	(unaudited)
Cash and cash equivalents	$	16,264	$	16,264
Working capital		9,071		9,071
Total assets		372,235		372,235
Total long-term debt		167,462		99,992

(1) On January 1, 2002, our predecessor adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized. If Statement No. 142 had been effective for the year ended December 31, 2001, the reported income from continuing operations would have been approximately $1.2 million. On January 1, 2002, we acquired 30 franchised Sylvan Learning Centers for approximately $22.2 million. See Note 3 to the combined financial statements of our predecessor included elsewhere in this prospectus.

(2) On October 31, 2003, we acquired Progressus Therapy, Inc., a provider of professional physical, occupational and speech therapy services to schools for approximately $4.3 million. See Note 3 to our consolidated financial statements included elsewhere in this prospectus.

(3) Number of learning centers at end of respective period.

(4) The unaudited pro forma as adjusted consolidated balance sheet data adjusts the actual balances to give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the mid-point of the range set forth on the cover page of this prospectus, and the application of the net proceeds as described in “Use of Proceeds”.

(5) Debt to equity ratio is the ratio of outstanding debt to total owners’ equity for the respective periods.

(6) Interest coverage ratio is the ratio of operating income to consolidated interest expense for the respective periods.

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RISK FACTORS

Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all of the other information set forth in this prospectus. The following risks and those described elsewhere in the prospectus, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, future results and cash flow. If that occurs, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks Relating to Our Learning Center Segment

Our inability to adequately manage our growth could have an adverse effect on our operations.

We have increased the number of our company-owned Sylvan Learning Centers from 82 as of January 1, 2000 to 138 as of March 31, 2004. We intend to continue increasing the number of company-owned centers by opening new centers and acquiring franchised centers. We may not be able to integrate centers acquired from franchisees into our other operations without substantial costs, delays or other operational or financial problems. In addition, as our business grows, more resources will be required to support our operations, including hiring teachers, directors of education, center directors and area managers, particularly if this growth occurs outside of the 16 markets in which we now operate company-owned centers. Our inability to manage our anticipated growth may adversely affect the quality and consistency of our programs, our ability to integrate new personnel and our ability to capitalize on new business opportunities.

Actions of teachers, instructors and other personnel could lead to liability claims and damage to our reputation, which could cause us to incur substantial costs and strain our relationships with franchisees.

We could become liable for the actions of teachers and other personnel at our company-owned learning centers or other areas in which we provide services, including schools and students’ homes. In the event of accidents or injuries or other harm to students, we could face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for the injuries. A liability claim against us or any of our employees could adversely affect our reputation with our customers, which could adversely affect our enrollment and revenue. Even if unsuccessful, such a claim could create unfavorable publicity, cause us to incur substantial expenses and divert the time and attention of management. Unfavorable publicity resulting from a liability claim against us or any of our employees may also adversely affect our franchisees’ businesses, which could strain our relationships with franchisees.

Our business may be harmed by actions taken by our franchisees.

Our business is dependent upon our franchisees and the manner in which they operate their franchised centers under our licensed brand. If a franchisee were to engage in unauthorized or unlawful conduct, the general public may associate this conduct with our brand, and negative publicity associated with this conduct could affect the reputation and success of all of our centers. Our business

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may also be adversely affected if our franchisees do not operate their centers and provide tutoring services in a manner consistent with our standards and requirements or do not hire and train qualified teachers. Our license agreements with our franchisees do not require them to conduct background checks on prospective employees. In addition, a liability claim against a franchised center or any center personnel may result in unfavorable publicity for all of our learning centers, whether or not the claim is successful.

Our ability to grow may be hindered and our business may suffer if our franchisees do not adopt and effectively implement improved programs and business practices we develop.

We are dependent on the willingness of our franchisees to adopt and effectively implement improved programs and business practices we develop in order to increase franchised center-based revenues and resulting royalties paid to us. However, franchisees often are not required to adopt these practices and they may adopt and implement our programs and business practices more slowly than we anticipate, or not at all. Any of these delays or failures could result in lower franchised center-based revenues and royalties paid to us, thus limiting our growth.

Our failure to maintain good relationships with our franchisees could significantly reduce our revenue and income.

We derive significant revenue from franchised operations, which comprised 18% of our revenue in 2003. Our relationships with our franchisees may deteriorate in the future. Any deterioration in our relationship with our franchisees could significantly reduce our revenue and require management to direct their time and effort to rebuild strained relationships with franchisees. If management’s attention is focused on repairing relationships with franchisees instead of developing new programs and processes to increase revenue and income, our business and prospects may be adversely affected.

If we fail to sell licenses for new franchise territories, our financial performance and growth prospects may be adversely affected.

The growth of our business is dependent upon increasing the number of our franchised centers by selling licenses for new territories. Damage to our reputation and competition from other franchised supplemental education service providers may adversely affect our ability to sell licenses for additional franchise territories. If this were to occur, continued expansion would require the opening of a larger number of company-owned centers than we currently have planned which would require significantly more time and capital expenditures by us and could hinder or prevent our expansion.

The sale of licenses for new franchise territories could harm our relationship with existing franchisees.

Some or our franchisees presently benefit from being located adjacent to unlicensed territories. If we sell licenses for those unlicensed territories, the existing franchisees may have an adverse reaction, potentially straining our relationship with them.

We intend to open additional learning centers in targeted geographic areas, creating the risk that we may over-saturate a particular market.

As part of our growth strategy, we intend to open additional company-owned learning centers in areas that we believe have a low center density, as measured by centers per child. There can be no guarantee that any incremental revenue we realize from this strategy will exceed the increase in our operating costs resulting from opening and operating additional centers. If the incremental revenue generated by new centers is less than the added costs of opening and operating additional centers, our operating income will decrease.

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We rely on the accuracy of the unaudited financial information we receive from our franchisees, over which we do not have direct supervision or control and which we do not routinely audit.

Under their license agreements with us, our franchisees are required to report financial and other data to us, including their learning center revenues and results of operations. We rely on franchisee data to make important business decisions. However, we do not routinely audit the information that our franchisees report to us, and we do not have direct supervision over the reporting of our franchisees. Therefore, we are unable to ensure that the data reported by our franchisees is accurate. If the data reported by our franchisees is not accurate, it may cause determinations made by us in reliance on the reported data to be inaccurate and may result in less informed business decisions by management.

Franchise regulations could limit our ability to terminate or replace unproductive franchises, which could result in lower franchise royalties.

Applicable laws may delay or prevent us from terminating an unproductive franchise or withholding our consent to renew or transfer a franchise, which could result in lower franchise royalties. As a franchisor, we are subject to federal, state and international laws regulating the offer and sale of franchises. These laws also frequently apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise. Compliance with federal, state and international franchise laws can be costly and time consuming, and we cannot be certain that we will not encounter delays, expenses or other difficulties in this area. Further, the nature and effect of any future legislation or regulation of our franchise operations cannot be predicted.

The provision of NCLB services under the Ace It! or Sylvan brands by our franchisees may harm our reputation and negatively affect our financial condition.

Our franchisees will be able to provide NCLB services commencing in the 2004-2005 school year under the Ace It! or Sylvan brands. If our franchisees are unsuccessful in providing NCLB services, or are disqualified as providers of these services, the reputation and success of Education Station and our Sylvan Learning Center business could be adversely affected if consumers associate the provision of such services by our franchisees with the services provided through our Sylvan or Education Station businesses.

Economic, political and other risks associated with our European and Canadian centers could adversely affect our business.

Our European and Canadian centers are subject to a number of risks inherent to operating in foreign countries. For example, risks affecting our European and Canadian centers include:

Ÿ fluctuations in foreign currency exchange rates;

Ÿ differences or unexpected changes in regulatory requirements;

Ÿ foreign governments’ restrictive trade policies;

Ÿ the imposition of, or increase in, duties, taxes, government royalties or non-tariff trade barriers;

Ÿ exchange controls;

Ÿ challenges of operating in international markets with different cultural bases and consumer preferences; and

Ÿ increased dependence on local country managers.

Most of these risks are beyond our control. We cannot predict the nature or likelihood of any such events. However, if such an event should occur, it could adversely affect our business, financial condition and results of operations.

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Risks Relating to Our Institutional Services Segment

Our Institutional Services segment conducts business largely with local education authorities, the composition of which change from time to time. As a result, our relationship can be adversely affected, leading to reductions in business and harm to our reputation.

A substantial and growing portion of our revenue, 33% in 2003, is generated by our Institutional Services segment. This segment provides services to government agencies, primarily to school districts, and therefore is exposed to the risks associated with government contracting. Many of our contracts with school districts are school-year contracts subject to annual renewal at the option of the school district, and in many instances the school district can terminate or modify the contracts at their convenience. Any negative publicity, whether or not the reason for such publicity is within our control, could cause a school district to terminate or fail to renew a contract. Changes in the composition of local school boards or changes in school district administration may adversely affect a school district’s willingness to contract with us. In addition, any termination or non-renewal of a contract with a school district could have an adverse effect on our results of operations, and a termination or non-renewal caused by our failure to improve the poor academic performance of students enrolled in our programs could adversely effect our ability to secure contracts with other school districts.

Changes in Federal and state laws reducing or eliminating funding for third-party suppliers of supplemental education services could adversely affect our business.

Our Institutional Services segment relies almost exclusively on government-funded programs. The federal government and state governments may, at any time, reduce, or lower the rate of growth of, funding under the Elementary and Secondary Education Act (ESEA), the Individuals with Disabilities Education Act (IDEA) or similar programs. The U.S. Congress may modify or repeal the ESEA (currently reauthorized as the No Child Left Behind Act) or modify the IDEA, thus reducing the amount of federal money available to fund our programs. The Federal and state governments may eliminate or specifically limit the amount of funds spent on third-party supplemental education services. Any such reduction, limitation or elimination of funding could adversely affect our Institutional Services revenue.

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

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

The growth and development of our NCLB services is dependent on our ability to establish and maintain our presence in and quickly implement our programs in new markets.

Education Station is a new program in the Institutional Services segment that will provide NCLB services to eligible children. The growth and development of our Education Station program is dependent on our ability to hire and train an adequate number of qualified teachers, establish our presence and implement our programs at eligible schools in a short period of time. If we are unable to do so in a manner that is acceptable to our customers, they may terminate or not renew our relationship. As a result, we may incur significant start-up costs prior to our receipt of revenue if we are unable to roll out our Education Station program in the school district in a manner that is acceptable to our customers. If that occurs, our business, financial condition and results of operations may be adversely affected.

If we are not selected by parents as a provider of NCLB services or our Education Station program is otherwise unsuccessful, our reputation and the success of our other programs may be adversely affected.

Education Station will provide NCLB services through the development and implementation of new procedures and programs that differ significantly from the proven services we provide through our

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learning centers. Parents of eligible students have the option to choose the provider of NCLB supplemental education services from a list of state-approved providers. We may not be chosen by a sufficient number of these parents to cover our costs or to achieve the level of profitability we anticipate. In addition, any state may decide to disqualify us from continuing as a provider of NCLB services, whether or not the reasons for such disqualification are within our control. Consequently, Education Station may not be as successful as we expect. If this were to occur, our reputation and the success of our other businesses may be adversely affected if consumers associate Education Station with our Sylvan brand.

Risks Relating to Our Online Learning Segment

Our future success depends in part on our ability to expand our eSylvan business, which may not develop as expected. Conversely, if our eSylvan business grows more rapidly than we anticipate, we may have to make costly upgrades that may reduce our operating profit.

An important aspect of our strategy for growth is the expansion of our eSylvan business. A number of factors could limit the growth of this business. The Internet may not develop into an effective online educational delivery system, because of inadequate infrastructure, security and privacy concerns or student or parent preferences. Furthermore, the Internet is characterized by relatively low start-up costs and rapid technological change. Thus, we can expect competition from other online providers of educational services, and we may not have the capital resources necessary to compete with the rapidly changing technologies that are being, or may in the future be, developed by our competitors. For example, as broadband penetration grows, our competitors will not face the bandwidth constraints that our application was designed to overcome and, therefore, they may be able to develop better technology at lower cost and our current technology may become obsolete.

Conversely, if we succeed in achieving rapid growth in our eSylvan business, we will need to upgrade our programs and materials and increase our human resources, which may exceed our budgeted amounts. In addition, our existing infrastructure may not be able to handle adequately the increased volume of transactions that would result from increased growth, causing us to make significant expenditures to expand our infrastructure to keep up with demand. Our failure to successfully implement, improve and integrate new programs, materials, personnel and procedures could substantially limit the success of our eSylvan business.

Additional Risks Relating to Our Business and Industry

Our operating results may vary significantly from quarter to quarter as a result of seasonal and other variations to which our business is subject. This may result in volatility or adversely affect our stock price.

We experience seasonality in results of operations primarily as a result of changes in the level of student enrollments during the course of the school year and the duration of the school year. Also, we recognize franchise royalty revenue based upon our cash receipts from franchisees, in accordance with the terms of our franchise agreements. Because many parents prepay for their children’s programs at the time of enrollment, the timing of our franchise royalty revenues tends to correspond to student enrollment dates. In our company-owned center and other businesses, however, we recognize revenue as we deliver services. We typically generate the largest portion of our Learning Center and Institutional Services revenue in the second quarter, and we experience lower revenues from franchise royalties in the fourth quarter as a result of prepayments by customers to our franchisees in other quarters. As our institutional and learning center revenue grows at varying rates, these seasonal fluctuations may become more evident. As a result, we believe that quarter-to-quarter comparisons of our results of operations may not be a fair indicator and should not be relied upon as a measure of future performance.

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Our historical results of operations may not be indicative of future performance, which is difficult to forecast. We expect our results to vary from quarter to quarter.

We expect results of operations to fluctuate in response to factors in addition to seasonal fluctuations. These factors include the timing of receipt of payment from our customers, including those under government contracts funded under Title I and other legislation, changes in the percentage of customers prepaying in our franchised centers and the timing of revenue recognition of franchise license fees. Changes in the pattern of customer prepayments in our franchised centers would cause fluctuations of operating results because these changes impact our franchise royalty revenues. In the Institutional Services segment, there are often significant delays in payment by the school districts. Also, as we continue to develop our Education Station program, we anticipate that each year we will experience a significant increase in our costs in the third and fourth quarters of our fiscal year in order to market our services to parents of eligible children and to build the necessary infrastructure to provide these services in new markets. For example, we incur costs to build the necessary infrastructure based on our expectations of the number of students who will enroll in our program. However, we have no assurance that these students will actually attend the program. If they fail to attend, we will not receive sufficient revenue to offset our expenditures. Moreover, any revenue that we realize from the provision of services under NCLB may not materialize, if at all, until the first and second quarters of the following year because we are not paid until a parent selects us to provide NCLB services and the services have been performed.

We have a limited operating history as an independent company, which may make our business difficult to evaluate.

We commenced operations as an independent company in 2003. As a result, we have only a limited operating history as an independent company upon which you can evaluate our business and prospects. We will encounter risks, uncertainties and difficulties frequently experienced by other similarly situated companies, such as maintaining adequate internal controls and procedures and managing the expansion of our operations. If we do not successfully manage these risks, our business, financial condition and results of operations will be adversely affected.

We expect that new products and programs we develop will expose us to risks that may be difficult to identify until such products or programs are implemented.

We are currently developing, and in the future will continue to develop, new products and programs, the risks of which will be difficult to ascertain until these future programs are implemented. For example, we are developing new programs and procedures through which our Sylvan Learning Center franchisees may choose to offer NCLB services, under the name Ace It! or Sylvan. These new programs and procedures will differ significantly from the services our Sylvan Learning Center franchisees currently provide in their learning centers. Any negative events or results that may arise as we develop new products or programs may adversely affect our reputation, business, financial condition and results of operations.

New products and programs we develop may compete with our current programs.

We are presently developing, and will likely in the future develop, programs that compete with our existing programs. For example, as discussed above, our Sylvan Learning Center franchisees may offer NCLB services under the name Ace It! or Sylvan beginning in the 2004–2005 school year. These services will be similar to those offered by Catapult Learning under the Education Station program. We cannot assure you that the franchisees who choose to provide NCLB services, under the name Ace It! or Sylvan, will not compete directly with our Education Station program.

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Our success depends on our ability to recruit and retain necessary personnel.

Our success also depends, in large part, upon our ability to attract and retain highly qualified personnel. For example, our Progressus Therapy business must recruit qualified occupational therapists, physical therapists and speech language pathologists to administer the specialized services we provide. A shortage of qualified therapists and pathologists currently exists, which may inhibit us from satisfying demand and could limit our growth. In addition, as a result of higher elementary school enrollment and the retirement of veteran teachers, a shortage of teachers may develop over the next decade. Similar shortages have occurred in the past. We may have difficulty locating and hiring qualified teachers and retaining such personnel once hired.

We depend on key personnel, including R. Christopher Hoehn-Saric, Peter Cohen, Mary Foster, Jeffrey Cohen and Kevin Shaffer, to effectively operate our business. If any of our key personnel left our company and we failed to effectively manage a transition to new personnel, or if we fail to attract and retain qualified and experienced personnel on acceptable terms, our business, financial condition and results of operations could adversely be affected.

Our substantial indebtedness could adversely affect our financial condition and impact our business and growth prospects.

As of April 30, 2004, our total indebtedness was approximately $170 million. Our substantial indebtedness could have important consequences to you. For example, it could:

Ÿ require the use of all or a large portion of our cash to pay principal and interest on our operating company’s secured credit facility, which could reduce the availability of cash to fund working capital, capital expenditures and other business activities;

Ÿ increase our vulnerability to general adverse economic and industry conditions;

Ÿ limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

Ÿ restrict us from making strategic acquisitions or exploiting business opportunities;

Ÿ place us at a competitive disadvantage compared to our competitors that have less debt; and

Ÿ limit our ability to borrow additional funds, dispose of assets or pay cash dividends, if we choose to pay dividends in the future.

Furthermore, all of our indebtedness under our secured credit facility bears interest at variable rates. If these rates were to increase significantly, our interest expense would increase, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify.

The terms of our operating company’s current secured credit facility restrict us from engaging in many activities and require us to satisfy various financial tests, and we expect that any credit facilities that we obtain in the future will contain similar restrictions and requirements.

Our operating company, Educate Operating Company, LLC, has borrowed $170 million under a $200 million secured credit facility that contains covenants that restrict, among other things, our ability to incur additional debt, pay cash dividends, create liens, change our fundamental organization or lines of business, make investments and engage in transactions with affiliates and that contains events of default that are triggered, among other things, if there is a change of control of us or our subsidiaries and for certain changes in the composition of our Board of Directors, all of which may adversely affect our ability to grow and to pursue new business opportunities. The secured credit facility also requires us to maintain specific financial ratios. Events beyond our control could affect our ability to meet those

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financial ratios, and we cannot assure you that we will meet them. A breach of any of the covenants contained in our operating company’s secured credit facility could allow the lenders to declare all amounts outstanding under the secured credit facility to be immediately due and payable. We have pledged substantially all of our assets to the lenders as collateral under our operating company’s secured credit facility. The lenders could proceed against the collateral granted to them if our operating company is unable to meet its debt service obligations. If the amounts outstanding under our operating company’s secured credit facility are accelerated, we may be forced to restructure or refinance our obligations, obtain equity financing or sell assets, which we may be unable to accomplish in a timely manner, on terms satisfactory to us or at all. If we are unable to restructure or refinance our obligations, we may default under our obligations.

In order to replace our existing secured credit facility or raise additional capital, we and/or our operating company may seek to obtain one or more credit facilities in the future. We expect that any credit facilities we enter into in the future will contain restrictions and requirements similar to those described above.

Risks Relating to this Offering

Our controlling stockholders may take actions that conflict with your interests.

Immediately following this offering, 54.8% of our common stock on a fully diluted basis (or 50.0% if the underwriters’ over-allotment option is exercised in full) will be beneficially owned by affiliates of Apollo Advisors, L.P. Because of these holdings, and certain agreements we have entered into with Apollo, Apollo will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. Until such time that affiliates of Apollo no longer beneficially own at least 33% of our outstanding common stock and have sold at least one share of common stock other than in this offering, Apollo will have the right to nominate four designees to our Board of Directors and certain important matters will require the approval of the majority of directors nominated by Apollo. Apollo also will have the right to nominate additional directors to our Board of Directors, until such time that affiliates of Apollo no longer beneficially own at least 50% of our outstanding common stock and have sold at least one share of common stock other than in this offering. As a result, the directors nominated by Apollo will be able to control decisions affecting our capital structure. This control may have the effect of delaying or preventing changes in control or changes in management, and limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interest. A sale of a substantial number of shares of our stock by Apollo in the future could cause our stock price to decline.

Certain provisions of our charter documents and agreements and Delaware law could discourage, delay or prevent a merger or acquisition at a premium price.

Our certificate of incorporation and bylaws permit us to issue, without any further vote or action by the stockholders, up to 20,000,000 shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares, constituting the series and the designation of the series, the voting powers (if any) of the shares of such series, and the preferences and relative, participating, optional and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series. Our bylaws also require approval of a majority of directors nominated by Apollo for certain important matters including mergers and acquisitions. In addition, Apollo will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions and will have control over our management and policies. See “Management—Apollo Approval of Certain Matters.”

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Section 203 of the Delaware General Corporation Law, or the DGCL, also imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock. See “Description of Capital Stock—Provisions of Our Certificate of Incorporation and Bylaws and Delaware Law that May Have an Anti-Takeover Effect.”

These provisions may discourage, delay or prevent a merger or acquisition at a premium price.

There has been no prior market for our common stock, and an active trading market may not develop.

Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value and increase the volatility of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The price of our common stock may fluctuate substantially.

The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:

Ÿ actual or anticipated fluctuations in our results of operations;

Ÿ variance in our financial performance from the expectations of market analysts;

Ÿ conditions and trends in the end markets we serve;

Ÿ announcements of significant contracts by us or our competitors;

Ÿ changes in our pricing policies or the pricing policies of our competitors;

Ÿ legislation;

Ÿ the commencement or outcome of litigation;

Ÿ our sale of common stock or other securities in the future, or sales of our common stock by our principal stockholders;

Ÿ changes in market valuation or earnings of our competitors;

Ÿ the trading volume of our common stock;

Ÿ changes in the estimation of the future size and growth rate of our markets; and

Ÿ general economic conditions.

In addition, the stock market in general, and the NASDAQ National Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources, which could materially and adversely harm our financial condition and results of operations.

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We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future, except prior to the consummation of this offering in connection with the sale of Connections Academy. See “Certain Relationships and Related Transactions—Sale of Connections Academy.” Further, the payment of dividends by us is restricted by our operating company’s secured credit facility. See “Dividend Policy” for more information. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay.

Future sales of our common stock may depress our share price.

Based on the number of shares outstanding as of March 31, 2004, after this offering, we will have 41,800,000 shares of common stock outstanding. The 15,000,000 shares sold in this offering, or 17,250,000 shares if the underwriters’ over-allotment is exercised in full, will be freely tradable without restriction or further registration under federal securities laws unless purchased by our affiliates. The remaining shares of common stock outstanding after this offering will be available for sale in the public market as follows:

Number of Shares	Date of Availability for Sale
613,334	On the date of this prospectus
26,186,666	180 days after the date of this prospectus, although all of these shares will be subject to certain volume limitations under Rule 144 of the Securities Act.

The above table assumes the effectiveness of the lock-up agreements under which our executive officers, directors and certain holders of our common stock have agreed not to sell or otherwise dispose of their shares of common stock and that we do not waive compliance with our securities trading policy, which restricts employees that are not party to lock-up agreements from selling common stock for 180 days following the date of this prospectus. Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the underwriters may, at any time without notice, release all or any portion of the securities subject to the lock-up agreements.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales may occur, could cause the market price of our common stock to decline. After the lock-up agreements and other restrictions pertaining to this offering expire, additional stockholders, including our majority stockholders, will be able to sell their shares in the public market, subject to legal restrictions on transfer. As soon as practicable after the closing of this offering, we also intend to file a registration statement covering shares of our common stock issued or reserved for issuance under our stock option plan. In addition, under our registration rights agreement, some of our stockholders are entitled to registration rights. Subject to the terms of the lock-up agreements and our securities trading policy, registration of the sale of these shares of our common stock would generally permit their sale into the market immediately after registration. The registration rights of our stockholders could impair our ability to raise capital by depressing the price at which we could sell our common stock. We may also sell additional shares of common stock in subsequent public offerings, which may adversely affect market prices for our common stock. See “Shares Eligible for Future Sale” for more information.

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As a new investor, you will experience substantial dilution in the net tangible book value of your shares.

The initial public offering price of our common stock is considerably more than the net tangible book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will:

Ÿ pay a price per share that substantially exceeds the value of our assets after subtracting liabilities; and

Ÿ contribute 35.3% of the total amount invested to fund our company, but will receive only 12.0% of the shares of common stock outstanding after this offering.

To the extent outstanding stock options are exercised or future stock options are issued and exercised, there will be further dilution to new investors. See “Dilution” for more information.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements made in this prospectus are forward-looking statements. These forward-looking statements are based upon our current expectations and projections about future events. When used in this prospectus, the words “believe,” “anticipate,” “intend,” “estimate,” “expect, “will,” “should,” “may” and similar expressions, or the negative of such words and expressions, are intended to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking statements in this prospectus are primarily located in the material set forth under the headings “Prospectus Summary,” “Risk Factors,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are reasonable, we may not achieve these plans or objectives. You should read this prospectus completely and with the understanding that actual future results may be materially different from what we expect. We will not update forward-looking statements even though our situation may change in the future.

Specific factors that might cause actual results to differ from our expectations or may affect the value of our common stock include, but are not limited to:

Ÿ our inability to adequately manage our growth;

Ÿ liability claims brought against us;

Ÿ harmful actions taken by franchisees that are outside of our control;

Ÿ the failure of our franchisees to adopt and implement our improved programs and business practices we develop;

Ÿ our inability to sell licenses for new franchise territories;

Ÿ the potential over-saturation of our geographic markets;

Ÿ our reliance on the unaudited financial and other data we receive from our franchisees;

Ÿ the failure of our franchisees to successfully provide NCLB services;

Ÿ economic, political and other risks associated with our international operations;

Ÿ risks of conducting business with public entities;

Ÿ changes in federal and state laws reducing or eliminating funding for third-party suppliers of educational services;

Ÿ our failure to comply with applicable state and federal regulations;

Ÿ our inability to establish and maintain our presence in and implement our new programs in new markets;

Ÿ our failure to be selected by parents as a provider of No Child Left Behind supplemental services or the failure of our Education Station program;

Ÿ our inability to expand our eSylvan business;

Ÿ our inability to manage the growth of eSylvan;

Ÿ the seasonality of our operating results;

Ÿ that our historical results of operations may not be indicative of future performance;

Ÿ new products and programs we develop that may compete with our current programs;

Ÿ the impact our substantial indebtedness has on our growth prospects; and

Ÿ our inadvertent infringement on the intellectual property rights of others.

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ABOUT THIS PROSPECTUS

Throughout this prospectus, we use market data and industry forecasts and projections which we have obtained from market research, publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. Similarly, we believe that the surveys and market research others have performed are reliable, but we have not independently verified this information. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected results will be achieved. We derive some of the information contained in this prospectus from financial and other data reported by our franchisees. Our franchisees are contractually obligated to provide this financial and other data to us, but we do not routinely audit it.

This prospectus refers to brand names, trademarks, servicemarks and trade names of other companies and organizations, and these brand names, trademarks, servicemarks and trade names are the property of their respective holders.

Except as otherwise indicated, all share information in this prospectus is based on the number of shares outstanding on March 31, 2004 and:

Ÿ assumes an initial public offering price of $15.00 per share, the mid-point of the range set forth on the cover page of this prospectus;

Ÿ assumes completion of a 1 for 1.25 reverse-split of our common stock;

Ÿ excludes 3,372,800 shares of common stock subject to outstanding stock options with a weighted average exercise price of $3.71 per share;

Ÿ excludes 307,200 shares of common stock available for future grant or issuance under our 2003 Omnibus Stock Incentive Plan; and

Ÿ assumes no exercise of the underwriters’ over-allotment option.

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $67.5 million based on an assumed initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

We plan to use our net proceeds to repay approximately $67.5 million of indebtedness under our operating company’s secured credit facility. JPMorgan Chase Bank, an affiliate of J.P. Morgan Securities Inc., is a lender and administrative agent for the other lenders under the secured credit facility. Our operating company had outstanding borrowings under this facility of $170 million as of April 30, 2004, bearing interest at variable interest rates that are adjustable based on our performance (4.13% at April 30, 2004). We incurred the borrowings under this facility to fund our acquisition by Apollo.

DIVIDEND POLICY

We currently do not anticipate paying any cash dividends in the foreseeable future. Instead, we anticipate that all of our earnings, if any, in the foreseeable future will be used to repay debt, for working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including restrictions in our debt instruments, our future earnings, capital requirements, financial condition, future prospects and the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits. Other than the dividend described in the following paragraph, we are currently restricted from declaring or paying cash dividends pursuant to the terms of our operating company’s secured credit facility.

On June 29, 2004 we declared a dividend of $9 million. See “Certain Relationships and Related Transactions—Sale of Connections Academy.”

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CAPITALIZATION

The following table summarizes our capitalization as of March 31, 2004 on:

Ÿ an actual basis; and

Ÿ a pro forma basis to give effect to the payment of a $9 million dividend to our existing stockholders, as described under “Certain Relationships and Related Transactions—Sale of Connections Academy.”

Ÿ an as adjusted basis, after giving effect to the completion of this offering, including the application of our estimated net proceeds from this offering to repay indebtedness as described under “Use of Proceeds.”

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

	March 31, 2004
	Actual		Pro Forma		As Adjusted
	(dollars in thousands)
Cash and cash equivalents	$	16,264	$	7,264	$	7,264
Total long-term debt, less current portion	$	156,751		156,751	$	89,281
Stockholders’ equity:
Common stock, par value $0.01, 55,000,000 shares authorized, 36,800,000 shares issued and outstanding, 41,800,000 shares issued and outstanding as adjusted		368		368		418
Additional paid-in capital		137,336		134,128		201,548
Retained earnings		5,792		—		—
Accumulated other comprehensive income		1,200		1,200		1,200
Total stockholders’ equity		144,696		135,696		203,166
Total capitalization	$	301,447	$	292,447	$	292,447

The table above excludes the following shares of common stock:

Ÿ 3,372,800 shares issuable as of March 31, 2004 upon exercise of outstanding stock options at a weighted average price of $3.71 per share; and

Ÿ 307,200 shares available for future issuance under our 2003 Omnibus Stock Incentive Plan as of March 31, 2004.

Subsequent to March 31, 2004, we increased the number of shares available for issuance under the plan and issued 604,000 shares of restricted stock and granted options to purchase 305,200 shares of our common stock. 130,750 shares remain available for future issuance under our 2003 Omnibus Stock Incentive Plan and on                 , 2004, our Board of Directors adopted a new 2004 Omnibus Stock Incentive Plan, which allows the issuance of an additional                  shares.

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DILUTION

Dilution is the amount by which the initial public offering price paid by the purchasers of common stock in this offering exceeds the net tangible book value per share of common stock following this offering. Our pro forma net tangible book value per share represents our tangible assets, or total assets less intangible assets, less our total liabilities, divided by the number of shares of our common stock outstanding as of March 31, 2004, after giving effect to the payment of a dividend in the amount of $9 million to our stockholders in June 2004. As of March 31, 2004, our pro forma net tangible book value was approximately $(136.8) million, or $(3.72) per share of common stock. After giving effect to the sale of shares of common stock by us at the assumed initial public offering price of $15.00 per share, and after deducting the underwriting discounts, commissions and estimated offering expenses payable by us, our as adjusted pro forma net tangible book value at March 31, 2004 would have been approximately $(69.3) million, or $(1.66) per share of common stock. After giving effect to the offering, our pro forma as adjusted net tangible book value represents an immediate increase in the pro forma net tangible book value of $2.06 per share to existing stockholders and an immediate dilution in the pro forma as adjusted net tangible book value of $16.66 per share to the investors who purchase our common stock in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share				$	15.00
Pro forma net tangible book value per share at March 31, 2004	$	(3.72	)
Increase in pro forma net tangible book value per share attributable to this offering		2.06
As adjusted net tangible book value per share after this offering					(1.66	)
Dilution per share to new stockholders				$	16.66

The table below summarizes, as of March 31, 2004, the differences for our existing stockholders and investors in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid before deducting fees and expenses.

	Shares Issued			Total Consideration				Average Price Per Share
	Number	Percentage		Amount		Percentage
	(in thousands, except per share data)
Existing stockholders	36,800	88.0	%	$	137,704	64.7	%	$	3.74
New stockholders in this offering	5,000	12.0			75,000	35.3			15.00
Total	41,800	100.0	%	$	212,704	100.0	%

The share amounts in this table exclude 3,372,800 shares of our common stock that were subject to outstanding options as of March 31, 2004 at a weighted average exercise price of $3.71 per share of common stock. To the extent that any options are exercised, there will be further dilution to new investors. If all of our outstanding options as of March 31, 2004 had been exercised, the pro forma as adjusted net tangible book value per share after this offering would be $(1.26) per share, representing an immediate increase in pro forma net tangible book value of $2.46 per share to our existing stockholders and an immediate decrease in the net tangible book value to our new investors of $16.26.

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Selected Consolidated Financial Data

You should read the following selected consolidated financial data together with our historical and pro forma consolidated financial statements and the related notes, the combined financial statements and the related notes of our predecessor, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. References to our predecessor refer to the pre-K-12 business we acquired from Laureate.

The statement of operations data of our predecessor for the years ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001 are derived from our unaudited consolidated financial statements that are not included in this prospectus. The combined statement of operations data of our predecessor for the years ended December 31, 2001 and 2002 and the six months ended June 30, 2003, and our consolidated statement of operations data for the period from June 30, 2003 (date of inception) through December 31, 2003 are derived from financial statements audited by Ernst & Young LLP, independent registered public accounting firm, and are included elsewhere in this prospectus.

The combined statement of operations data of our predecessor for the three months ended March 31, 2003 and our consolidated statement of operations data for the three months ended March 31, 2004 are derived from unaudited interim consolidated financial statements, which are included elsewhere in this prospectus and which, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of such financial statements. Quarterly financial information is not necessarily indicative of our annual results due to seasonality and other quarterly fluctuations that are inherent in our business.

The unaudited pro forma consolidated statement of operations data for the year ended December 31, 2003 and the three months ended March 31, 2003 is derived from our unaudited pro forma consolidated statements of income which are included elsewhere in this prospectus. These pro forma financial statements give effect to our acquisition of the pre-K-12 business acquired from Laureate on June 30, 2003 as if such transaction occurred on January 1, 2003. Our unaudited consolidated pro forma financial data is based on currently available information and is not necessarily indicative of our financial position or results of operations had our acquisition by Apollo taken place on January 1, 2003, nor are they necessarily indicative of future results.

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SELECTED CONSOLIDATED FINANCIAL DATA

(dollars in thousands, except share, per share and other data)

	Predecessor																		Educate			Pro Forma						Educate
	Year Ended December 31												Three Months Ended March, 31 2003			Six Months Ended June 30, 2003			Period From June 30, 2003 (date of inception) Through December 31, 2003			Year Ended December 31, 2003			Three Months Ended March 31, 2003			Three Months Ended March 31, 2004
Statement of Operations Data:	1999			2000			2001			2002
										(1)			(unaudited)						(2)			(unaudited)						(unaudited)
Revenues:
Learning Centers:
Company-owned centers	$	53,721		$	58,730		$	74,286		$	103,066		$	27,852		$	59,789		$	57,390		$	117,179		$	27,852		$	29,969
Franchise services		35,038			37,375			36,692			42,680			11,059			23,654			20,817			44,471			11,059			12,834
Total		88,759			96,105			110,978			145,746			38,911			83,443			78,207			161,650			38,911			42,803
Institutional Services		66,099			69,345			70,042			67,909			20,771			43,418			35,425			78,843			20,771			38,807
Online Learning		—			16			479			2,656			486			973			861			1,834			486			584
Total revenues		154,858			165,466			181,499			216,311			60,168			127,834			114,493			242,327			60,168			82,194
Costs and expenses:
Instructional and franchise operations costs		112,848			130,047			135,277			156,620			44,365			88,633			83,501			172,134			44,365			59,252
Marketing and advertising		10,294			11,419			13,575			18,918			5,234			10,337			9,191			19,528			5,234			6,643
Depreciation and amortization		6,952			7,895			10,445			7,898			1,825			4,221			3,567			6,569			1,492			1,786
General and administrative expenses		9,402			10,802			12,348			13,058			3,324			6,433			6,258			12,691			3,324			3,476
Total costs and expenses		139,496			160,163			171,645			196,494			54,748			109,624			102,517			210,922			54,415			71,157
Operating income		15,362			5,303			9,854			19,817			5,420			18,210			11,976			31,405			5,753			11,037
Interest expense, net		(84	)		(71	)		265			126			(11	)		21			(6,748	)		(13,211	)		(3,242	)		(3,205	)
Loss on sale of assets		(45	)		(48	)		(961	)		(306	)		(4	)		(9	)		—			(9	)		(15	)		—
Income before income taxes		15,233			5,184			9,158			19,637			5,405			18,222			5,228			18,185			2,496			7,832
Income tax expense		(5,707	)		(7,944	)		(9,267	)		(12,781	)		(3,221	)		(8,943	)		(2,056	)		(7,291	)		(1,008	)		(2,976	)
Income (loss) from continuing operations	$	9,526		$	(2,760	)	$	(109	)	$	6,856		$	2,184		$	9,279		$	3,172		$	10,894		$	1,488		$	4,856
Earnings per common share from continuing operations
—basic																			$	0.09		$	0.30		$	0.04		$	0.13
—diluted																			$	0.09		$	0.30		$	0.04		$	0.13
Weighted average common shares outstanding
—basic																				36,800			36,800			36,800			36,800
—diluted																				36,800			36,800			36,800			37,340
Other Operating Data:
Number of Sylvan Learning Centers:(3)
Company-owned		82			82			90			127			129			130			135			135			129			138
Franchised		710			763			810			822			834			847			862			862			834			878
Capital expenditures	$	4,073		$	11,447		$	9,286		$	7,251		$	933		$	2,991		$	3,736		$	6,727		$	933		$	2,179
Debt to equity ratio(5)																				1.18			1.14						1.16
Interest coverage ratio(6)																				1.7	x		2.3	x					3.2	x

	December 31,								December 31,		March 31, 2004
Balance Sheet Data:	1999		2000		2001		2002		2003		Actual		Pro Forma As Adjusted
											(unaudited)
Cash and cash equivalents	$	3,095	$	4,217	$	6,861	$	4,909	$	20,226	$	16,264	$	16,264
Working capital		15,200		19,494		12,101		5,574		10,067		9,071		9,071
Total assets		105,911		111,814		105,478		137,966		362,195		372,235		372,235
Total long-term debt		249		172		84		293		167,865		167,462		99,992

(1) On January 1, 2002, our predecessor adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized. If Statement No. 142 had been effective beginning January 1, 1999, the reported income from continuing operations would have been approximately $10.3 million in 1999, $(1.6) million in 2000 and $1.2 million in 2001. On January 1, 2002, we acquired 30 franchised Sylvan Learning Centers for approximately $22.2 million. See Note 3 to the combined financial statements of our predecessor included elsewhere in this prospectus.

(2) On October 31, 2003, we acquired Progressus Therapy, Inc., a provider of professional physical, occupational, and speech therapy services to schools for approximately $4.3 million. See Note 3 to our consolidated financial statements included elsewhere in this prospectus.

(3) Number of learning centers at end of respective period.

(4) The unaudited pro forma as adjusted consolidated balance sheet data adjusts the actual balances to give effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the mid-point of the range set forth on the cover page of this prospectus, and the application of the net proceeds as described in “Use of Proceeds”.

(5) Debt to equity ratio is the ratio of outstanding debt to total owners’ equity for the respective periods.

(6) Interest coverage ratio is the ratio of operating income to consolidated interest expense for the respective periods.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following discussion gives effect to our acquisition of the pre-K-12 business of Laureate and certain of its subsidiaries as of June 30, 2003.

Overview

We believe we are a leading national provider of tutoring and other supplemental education services to pre-K-12 students. We operate through three business segments that offer distinct supplemental education services from which we earn revenues. Through our Learning Center segment, we deliver diagnostic, prescriptive tutoring programs, principally through a network of more than 1,000 franchised and company-owned learning centers in North America. We also provide tutoring, as well as other supplemental education services and special needs services, to public and private schools through government-funded contracts in our Institutional Services segment. Our Online Learning Services segment provides tutoring programs modeled after those offered in our Sylvan Learning Centers in an online environment.

We were formed as a Delaware corporation in March 2003 by affiliates of Apollo Advisors, L.P., to acquire the pre-K-12 education business units of Laureate and Sylvan Ventures, LLC (“Ventures”), one of its subsidiaries. Our acquisition of the pre-K-12 business of Laureate and Ventures was completed on June 30, 2003. The aggregate purchase price was approximately $282 million, consisting of cash, a subordinated note issued to Laureate (which has since been repaid with the proceeds of our new secured credit facility), the surrender of Laureate and Ventures securities held by affiliates of Apollo and a deferred portion of the purchase price of $2.3 million. In addition, we are required to pay Laureate up to $10.0 million of additional consideration if Connections Academy exceeds specified levels of EBITDA any time prior to December 31, 2007.

On March 26, 2004, our Board of Directors directed management to sell Connections Academy within the next 12 months. We expect to retain the obligation to pay Laureate the additional consideration described above following the sale. We expect to enter into a transition services agreement with Connections Academy after the sale. The operations of Connections Academy are classified as discontinued operations as a result of our Board’s decision to sell it and our expected absence of continuing involvement in the business to be sold.

Simultaneously with the closing of our acquisition by Apollo, our operating company entered into a $130 million secured credit facility with a syndicate of lenders. The secured credit facility consisted of a $110 million term loan facility and a $20 million revolving credit facility. We funded the cash portion of the purchase price through the $110 million term loan facility and a $20 million equity contribution from our equity sponsor and certain members of our management team. We also sold additional shares of our common stock to our equity sponsor in exchange for certain Laureate and Ventures securities held by our equity sponsor. We contributed these securities to our operating company, which in turn surrendered the securities to Laureate and Ventures as a portion of the purchase price for our acquisition by Apollo.

In April 2004, our operating company entered into a new secured credit facility with a syndicate of lenders. The new secured credit facility consists of a $170 million term loan facility and a $30 million revolving credit facility. Our operating company borrowed the full $170 million under the term loan facility primarily to repay all amounts outstanding under the subordinated note issued to Laureate in our acquisition by Apollo and to refinance borrowings under the old secured credit facility. As of April 30, 2004, we had incurred no borrowings under the revolving credit facility.

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Our consolidated financial statements reflect our financial position as of December 31, 2003 and the results of operations and cash flows for the period June 30, 2003 (the date of our inception) to December 31, 2003, and the financial position of the pre-K-12 business of our predecessor entity, as of December 31, 2002 and the combined results of operations and cash flows for the years ended December 31, 2001 and 2002 and for the period January 1, 2003 to June 30, 2003. Educate, Inc. had no operating activity prior to our acquisition by Apollo on June 30, 2003. The financial data presented below for periods prior to July 1, 2003 is combined financial data of the pre-K-12 business of Laureate. As used in this prospectus, “pro forma” or “pro forma consolidated” means that the information presented gives effect to our acquisition of the pre-K-12 business from Laureate on June 30, 2003 as if that transaction had occurred as of January 1, 2003.

For purposes of this management’s discussion and analysis, we compare the combined results of operations of our predecessor for the years ended December 31, 2001 and 2002 to the unaudited pro forma consolidated results of operations for the year ended December 31, 2003. We also compare our unaudited results of operations for the three months ended March 31, 2004 to the unaudited pro forma results of operations for the three months ended March 31, 2003. Our pro forma consolidated results of operations for the year ended December 31, 2003 are not comparable in certain respects to the results of operations of our predecessor for the years ended December 31, 2002 and 2001 as a result of our application of purchase accounting to the assets and liabilities that we acquired. Our operations and our predecessor’s operations were substantially the same during these periods, except for the effects on depreciation, amortization and interest expense resulting from our acquisition of the pre-K-12 business of Laureate and our financing of our acquisition by Apollo. Our depreciation and amortization expense will differ from the amounts reported by our predecessor because we recorded our property and equipment and intangible assets at fair value upon the acquisition of our business from our predecessor. In addition, we financed the acquisition of our business by borrowing $167.3 million, whereas our predecessor had insignificant amounts of debt. You should read our “Unaudited Pro Forma Consolidated Statements of Income” included elsewhere in this prospectus for additional information on the effects of our acquisition of the business from our predecessor on our operating results.

Some of the information contained in this section and elsewhere in this prospectus, including information with respect to our plans and strategies for our business, includes forward-looking statements. Our historical and expected financial performance is influenced by several important trends.

Ÿ In our Learning Center segment, revenues have increased and are expected to continue to increase due to several factors. Since January 1, 2000, the number of franchised learning centers has increased by 168 from 710 to 878 at March 31, 2004, contributing to our revenue growth through licensing fees on the sales of franchise territories and increased royalties. In addition, the number of company-owned centers has grown by 56 from 82 to 138 during the same period, principally through the acquisition of franchised centers and, to a lesser extent, the opening of new company-owned centers. We actively seek to increase our revenues by focusing on key variables, such as advertising response rates, hourly rates and hours per student. Some of the strategies that we have employed include improving the effectiveness of our advertising message, recommending diagnostic tests in multiple subjects, improving our consultative sales processes, enhancing financing options for our customers and increasing the frequency of sessions to promote more rapid student progress.

Ÿ We have experienced and will continue to experience fluctuations in our same center sales results. In 2002, in an effort to improve our students’ academic results and increase our revenue and operating profits, we implemented a sales strategy in our company-owned centers to sell multiple programs at higher hourly rates. This strategy, in combination with improved marketing and enhanced financing options for our customers, led to higher same center

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revenues in our company-owned centers by significantly increasing average revenues per student despite a decrease in the number of absolute new enrollments per center. In 2003, we refined this strategy as we worked to achieve the optimal balance between program length and number of new enrollments. We did this by improving our consultative sales process to more closely tailor recommended program length to a family’s particular circumstances. Along with the implementation of this sales strategy, we focused increased attention on enhancing operating income in our company-owned centers through improved labor management methods, cost containment and other operating efficiencies. The combination of our sales strategy and cost management initiatives resulted in a significant increase in operating income and operating margin of our company-owned centers from 2001 to 2003. We expect our franchisees will also adopt our sales strategy over time, and we expect to receive higher royalties as a result.

Ÿ In our Institutional Services segment, our long-standing relationships with our institutional customers and the expansion of our service offerings have been the key drivers of our revenue growth. Although many of our contracts with institutional customers are school-year contracts subject to annual renewal at the option of the institutional customer, we have had and continue to have high rates of repeat business in this segment. For example, more than 90% of our top 25 clients based on revenue in our school services business line for the 1998-1999 school year have renewed their contracts in each subsequent year and remain our clients today. These long-standing relationships enable us to market additional services to existing customers without significant incremental sales and marketing expenses. We anticipate that these high levels of contract retention will continue. In addition, in 2002, we launched our Education Station business to provide NCLB supplemental education services to eligible students in school districts.

Ÿ Our total company revenues have also increased due to selected acquisitions of businesses other than franchised centers. In the Institutional Services segment, our acquisition of Progressus Therapy in October 2003, a provider of speech, physical and occupational therapy to special needs students, allows us to extend the breadth of services we provide to our institutional customers. In the Learning Center segment, our acquisition of Ivy West Educational Services, Inc. in May 2000 allows us to provide tutoring services for the SAT and other standardized tests to students in their homes and in our Sylvan Learning Centers. We expect these businesses to continue to contribute to revenue and operating income growth.

Ÿ Our revenue growth has led to growth in our operating income. Our operating margin has also increased as we have increased revenues per student, reduced costs, including those of our Online Learning Services segment, and increased scale. In the future, our operating margin may decline as we acquire franchise centers and recognize the full revenues and cost of these centers on a consolidated basis instead of recognizing franchise royalties alone. In addition, as we introduce new programs, associated startup costs may temporarily depress our operating margin.

Ÿ Our revenues and operating income are characterized by significant seasonal fluctuations. See “Seasonality and Other Quarterly Fluctuations” below.

In order to properly incentivize our employees, we have continued the practice of granting options to our key employees. At the time of our acquisition by Apollo, we granted options to purchase 3.4 million shares of our common stock to members of our management team and other key employees. During 2004, we granted 604,000 shares of restricted stock and options to acquire in the aggregate an additional 305,200 shares as of June 29, 2004 at prices less than the estimated fair value of our common stock; therefore, we will incur $10.3 million of stock compensation expense over the periods the awards vest in accordance with our accounting policies for stock-based compensation arrangements. See Note 15 to our consolidated financial statements, included elsewhere in this prospectus. We intend to make future grants of stock and stock options to our key employees.

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Components of Revenues and Expenses

Revenues.    We operate through three business segments that offer distinct supplemental education services from which we earn revenues. Our Learning Center segment earns revenues principally by tutoring students in our company-owned learning centers and from franchise services fees. Our franchise services revenue consists principally of monthly franchise royalty fees, and also includes licensing fees for the sales of franchise territories, and sales of learning programs and related materials to franchised learning centers. Our Institutional Services segment earns revenue principally from school-year contracts to provide supplemental remedial services to public and non-public schools. Our Online Learning segment earns revenue from the delivery of supplemental education services to students through the Internet. Our revenue recognition policies are discussed more fully in the section below entitled “Critical Accounting Policies and Estimates” and in Note 2 to our consolidated financial statements included elsewhere in this prospectus. In order to provide a more meaningful basis for comparison of same center growth for our customers in company-owned and franchised centers, we also analyze same center cash receipt growth of our company-owned Sylvan Learning Centers, which is calculated based upon the receipt of payment rather than delivery of services. Accordingly, it is more comparable to growth in franchised same center royalties, which are based on franchisee cash receipts. We also believe that same center cash receipt growth is a reasonably good indicator of our expected same center revenue growth for company-owned centers over the following two quarters, the period over which the services are typically delivered.

Instructional and Franchise Operations Costs.    Our instructional and franchise operations costs include company-owned center operating costs, principally comprised of labor costs for instructors and center management personnel, facility rent expense and instructional materials and supplies. We also include in this caption the costs of managing our extensive network of franchised learning centers, which consists principally of labor costs. Instructional costs associated with our Institutional Services and Online Learning Services segments also consist primarily of labor costs to provide our services.

Marketing and Advertising.    We incur significant marketing and advertising costs to market our services to our customers in each segment. These costs are expensed when incurred.

Depreciation and Amortization.    Depreciation and amortization are the expenses we record each period from depreciating our property and equipment over estimated useful lives that range from two to ten years. We also amortize certain intangible assets that we acquired from our predecessor on June 30, 2003 over periods not exceeding five years. Prior to 2002, our predecessor also amortized goodwill it had recorded from acquiring certain businesses. Beginning in 2002, the goodwill of our predecessor and goodwill we recorded upon the acquisition of our predecessor is no longer amortized because of changes to accounting principles generally accepted in the United States.

General and Administrative Expenses.    Our general and administrative expenses are general management and related administrative costs that we incur to manage our segments. These costs consist of labor costs associated with our executive, accounting, human resource, legal and information technology staffs. Also included in general and administrative expenses are professional fees, insurance and rent associated with our centralized management functions. We do not allocate our general and administrative expenses to our three segments when determining segment profit.

Interest Expense.    Interest expense consists principally of interest expense related to the $167.3 million of debt that we incurred when we acquired our predecessor. Our predecessor did not incur significant interest expense as it financed its activities from cash flows from operations and capital contributions from Laureate.

Income Tax Expense.    We incur income tax expense related to our consolidated domestic operations and our operations in Europe that are taxed principally in Germany. Our predecessor operated the business comprising the Online Learning Services segment through a subsidiary that filed separate income tax returns. This subsidiary of our predecessor incurred significant operating losses

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that did not result in recorded income tax benefits for our predecessor because their realization was not reasonably assured. Consequently, the historical results of operations for our predecessor reflects unusually high effective income tax rates. See the notes to the combined financial statements of our predecessor for additional information regarding the computation of our predecessor’s income tax expense.

Loss From Discontinued Operations.    In March 2004, we committed to sell the common stock of our subsidiary Connections Academy, Inc. Because this subsidiary has discrete operations in which we will have no further continuing involvement after the sale, and because we are committed to completing the sale within one year, we have classified the operating results of Connections Academy as a separate component of our consolidated operating results in our financial statements and the financial statements of our predecessor for all periods presented. See Note 6 to our consolidated financial statements for additional information about Connections Academy and our accounting policies in connection with the pending sale of this subsidiary.

Seasonality and Other Quarterly Fluctuations

	2003 Pro Forma												2004
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			First Quarter
	(Dollars In Millions)
Revenues:
Learning Center	$	38.9		$	44.5		$	43.4		$	34.9		$	42.8
Institutional Services		20.8			22.6			10.0			25.4			38.8
Online Learning Services		0.5			0.5			0.4			0.4			0.6
Total Revenues		60.2			67.6			53.8			60.7			82.2
Percentage of revenues1		25	%		28	%		22	%		25	%
Operating income		5.8			13.6			5.6			6.4			11.0
Income from continuing operations		1.5			6.2			1.5			1.7			4.9

¹ Represents percent of 2003 pro forma revenues.

Like other companies that provide tutoring and other supplemental education services, we are subject to seasonality in our revenue streams that can affect our results of operations. This seasonality arises from a number of factors, primarily driven by the timing of school semester cycles. Our quarterly results also have been affected by our license agreements with franchisees that require the payment of royalties to us based on a percentage of their cash receipts, a significant portion of which consist of prepayments by customers for services to be provided by our franchises more than a month in the future.

First Quarter.    In our Learning Center segment, we experience increased enrollments as a result of the initiation of advertising and increased parental focus on their children’s performance associated with the receipt of academic results from the first part of the school year. Our royalties increase as our franchisees begin to receive advance payment for services to be provided in the summer time period. In our Institutional Services segment, we deliver services under NCLB and other programs during this quarter.

Second Quarter.    In our Learning Center segment, we experience a higher level of revenues as we benefit from our continued investment in advertising, delivery of services in our company-owned centers and increased receipts of franchise royalties due to prepayment for summer programs. In our Institutional Services segment, we complete delivery of our NCLB and other institutional services in conjunction with the ending of the school year.

Third Quarter.    The third quarter marks the peak delivery of services in our Learning Center segment. We recognize revenue as we deliver these services in our company-owned centers.

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However, with respect to our franchised centers, our royalties decline as the cash receipts our franchisees receive from their customers decline from peak second quarter levels. Due to summer vacation, we do not provide many services in our Institutional Services segment during this period, which results in the lowest segment revenue for the year. However, we gain significant visibility for the upcoming year because the majority of our institutional contracts are renewed during the third quarter.

Fourth Quarter.    In our Learning Center segment, enrollments are at their lowest levels of the year as a result of lower advertising expenditures, students taking a greater number of vacations during the holiday season and parental optimism towards their children’s improved school performance associated with the beginning of a new school year. In addition, we experience lower revenues from franchise royalties in the fourth quarter as a result of prepayments by our franchisees’ customers in earlier quarters. In our Institutional Services segment, we incur significant start-up costs in connection with preparation of our NCLB programs.

Other.    The timing of school year contracts, advertising spending and critical enrollment periods can affect our revenues at any time during the year.

As a result of the foregoing factors, we believe that quarter-to-quarter comparisons of our results of operations may not be a fair indicator and should not be relied upon as a measure of our future performance.

Results of Operations

The following table provides an overview of the consolidated results of our continuing operations:

	Year ended December 31,									Quarter ended March 31,
	2001			2002			2003			2003			2004
	(Predecessor)						(Pro Forma)			(Pro Forma)
	(Dollars In Millions)
Revenues	$	181.5		$	216.3		$	242.3		$	60.2		$	82.2
Operating income		9.9			19.8			31.4			5.8			11.0
Operating margin		5	%		9	%		13	%		10	%		13	%

Comparison of results for the three months ended March 31, 2004 to pro forma results for the three months ended March 31, 2003.

	Three Months Ended March 31, 2003		Three Months Ended March 31, 2004		Variance
	(Pro Forma)
	(Dollars In Millions)
Revenues
Learning Center:
Franchise services	$	10.1	$	11.7	16	%
Company-owned centers		23.2		24.2	4	%
European		5.6		6.9	23	%
		38.9		42.8	10	%
Institutional Services:
School Services		20.3		21.5	6	%
Special Needs		—		5.7	—
NCLB		0.5		11.7	NM	(1)
		20.8		38.8	87	%
Online Learning Services		0.5		0.6	20	%
Total		60.2		82.2	37	%

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	Three Months Ended March 31, 2003			Three Months Ended March 31, 2004
	(Pro Forma)
	(Dollars In Millions)
Business Metrics:
Franchise centers operating information:
Same center royalty growth(2)		12	%		9	%
Total franchisee royalties(3)	$	7.8		$	8.8
Company-owned centers operating information:
Same center revenue growth(2)		12	%		0	%
Same center cash receipt growth(2)(4)		11	%		4	%

	As of March 31, 2003	As of March 31, 2004	Variance
Number of Sylvan Learning Centers(5)
Franchise	834	878	5	%
Company-owned	129	138	7	%
Total	963	1,016	6	%

(1) NM means that the calculation is not meaningful.

(2) “Same center” amounts, for both company-owned and franchised centers, include the results of centers for the identical months for each period presented in the comparison, commencing with the 13th full month the center has been operating as either a company-owned or franchised center, as the case may be. Same center growth is presented as the aggregate growth for franchise or company-owned centers, as the case may be, during the period.

(3) “Total franchisee royalties” represents the amount of all royalties paid by franchisees during the applicable period. Franchisee royalty rates range from 6% to 9% of revenues, with an average of approximately 8%.

(4) Company-owned centers are contractually obligated to pay an 8% royalty to one of our subsidiaries. This revenue is eliminated in consolidation. “Same center cash receipt growth” of North American company-owned centers represents the change in the amount of this royalty reported by company-owned same centers in one period as compared with the comparable period in the prior year. The use of this metric enables a more meaningful comparison of same company-owned center growth to same franchised center royalty growth. The difference between same center revenue growth and same center cash receipt growth is a change in deferred revenues of (1%) and 4% for the three months ended March 31, 2003 and 2004, respectively.

(5) Number of Sylvan Learning Centers at period end.

Revenues.    Our revenue increase was primarily driven by significant growth of the NCLB program; the acquisition of Progressus Therapy; franchised center royalty growth in the Learning Center business; and acquisitions of additional company-owned learning centers.

Learning Center—Revenues from company-owned learning centers increased primarily as a result of the acquisition of nine company-owned centers from franchise owners, which contributed $1.4 million. Our company-owned same center revenues were flat in the first quarter of 2004 due to the refinement of our consultative sales process, which we discuss in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” above, in the third quarter of 2003. However, our company-owned centers experienced same center cash receipt growth of 4% during the first quarter of 2004. We believe that same center cash receipt growth for a two-quarter period is a reasonably good indicator of our expected same center revenue growth for company-owned centers in the subsequent quarter, the period over which most of the services are typically delivered. For 2004, we expect that full year company-owned same center revenue growth will be only slightly

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positive. Franchise services revenues increased as a result of the addition of 44 franchised centers ($0.9 million) and 9% franchise same center royalty growth ($0.7 million), which was driven by the success of our advertising programs and increased program length per student. We believe that in 2004, our franchise same center royalty growth will be more in line with historical 2003 results, because our advertising expenditures were less efficient at reaching our target audience due to unexpectedly high media rates. European revenues, reflecting both company-owned center and franchise results, increased due to company-owned center growth and the effects of a $1.0 million benefit from a favorable exchange environment. Revenues for the Learning Center segment represented 52% of our total revenues for the period ended March 31, 2004.

Institutional Services—Revenues increased as a result of significant growth in our NCLB supplemental service program ($11.2 million), which began during the 2002-2003 school year; revenues from our special needs business ($5.7 million) which we acquired in October 2003; and 6% growth in our school services business line, the traditional portion of our Institutional Services segment business. Revenue for the Institutional Services segment accounted for 47% of our total revenues for the period ended March 31, 2004.

Online Learning Services—Revenues increased due to higher enrollments and the pilot introduction of institutional service offerings. Revenue for the Online Learning Services segment represented 1% of our total revenues for the period ended March 31, 2004.

	Three Months Ended March 31, 2003			Three Months Ended March 31, 2004			Variance
	(Pro Forma)
	(Dollars In Millions)
Segment Operating Costs
Learning Center	$	29.4		$	32.2		10	%
Institutional Services		18.4			33.4		82	%
Online Learning Services		3.0			1.7		(43	)%
Total Segment Operating Costs		50.8			67.3		32	%
Segment Profit
Learning Center		9.5			10.6		12	%
Institutional Services		2.4			5.4		125	%
Online Learning Services		(2.5	)		(1.1	)	56	%
Total Segment Profit		9.4			14.9		59	%
Corporate Expenses
Corporate depreciation and amortization expenses		0.4			0.4		—
General administrative expenses		3.3			3.5		5	%
Interest expense (net)		3.2			3.2		—
Income tax expense		1.0			3.0		200	%
Total Corporate Expenses		7.9			10.0		27	%
Income from continuing operations		1.5			4.9		226	%
Segment Operating Costs as a Percent of Revenue
Learning Center		76	%		75	%
Institutional Services		88	%		86	%
Online Learning Services		600	%		283	%
Total Operating Costs as a Percent of Revenue		84	%		82	%
Segment Profit Margin
Learning Center		24	%		25	%
Institutional Services		12	%		14	%
Online Learning Services		(500	%)		(183	%)
Total Segment Profit Margin		16	%		18	%

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Segment Operating Costs.    Segment operating costs increased primarily due to the delivery of NCLB services and the acquisition of Progressus Therapy. Total segment operating costs as a percentage of total revenues decreased to 82% in the 2004 period from 84% in the 2003 period.

Learning Center—Segment operating costs represented 75% of segment revenue for the 2004 period, compared to 76% for the 2003 period. Franchise expenses increased $1.3 million as a result of franchise support services. Company-owned center expenses increased $0.4 million due primarily to instructional costs associated with nine additional company-owned centers. European expenses related to Schülerhilfe increased by $1.1 million driven by higher costs to support revenue growth and an unfavorable impact of $0.8 million from exchange rate movements.

Institutional Services—Segment operating costs decreased to 86% of segment revenue for the 2004 period, from 88% for the 2003 period. Costs increased primarily due to the acquisition of Progressus Therapy ($5.4 million) and the expansion of our new NCLB businesses ($7.4 million). Costs as a percentage of revenues declined primarily as a result of the substantial increase in NCLB revenue while start-up and marketing costs were partially incurred in prior periods.

Online Learning Services—The decline in segment operating costs was a result of an operating plan to improve performance of the segment implemented in April 2003. Pursuant to the plan, we temporarily enrolled fewer students in our eSylvan programs, which enabled us to reduce eSylvan’s full time work force by 33%. We also redeployed capital to develop new software applications and to improve certain operational processes. These measures were aimed at improving the margins of our eSylvan business. A charge of $0.3 million for severance costs was recorded in the first quarter of 2003 in connection with the plan.

Segment Profit Margin.    Total segment profit margin improved to 18% in the 2004 period from 16% in the 2003 period, driven by improvement in all three of our segments. The Catapult profit margin improvement from 12% to 14% was a result of profitability of the NCLB programs ($2.1 million). The $1.4 million reduction in the Online Learning Services operating loss reflects the effects of our operating plan, which led to a decline in loss margins from (500%) to (183%). The improvement in the operating margin of the Learning Center segment from 24% to 25% resulted from increased franchisee royalties and improved operations of company-owned Sylvan Learning Centers. As a percentage of operating revenues, general and administrative expenses decreased to 5% for the 2004 period, compared to 6% for the 2003 period, as a result of cost control efforts during periods of strong revenue expansion.

Corporate Expenses.    Interest expense remained consistent at $3.2 million in the 2004 and 2003 period. We expect future quarterly interest expense to decline below $2.0 million on a quarterly basis after reflecting the impact of this offering. Our effective income tax rate was 38% for the three months ended March 31, 2004, compared to 40% for the three months ended March 31, 2003.

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Comparison of pro forma results for the year ended December 31, 2003 to predecessor results for the years ended December 31, 2002 and 2001.

	Year Ended December 31,
	2001			2002			Variance		2003			Variance
									(Pro forma)
	(Dollars In Millions)
Revenues
Learning Center:
Franchise services	$	33.8		$	39.5		17	%	$	40.6		3	%
Company-owned centers		62.3			88.9		43	%		98.8		11	%
European		14.9			17.3		16	%		22.3		29	%
		111.0			145.7		31	%		161.7		11	%
Institutional Services
School Services		70.0			67.9		(3	)%		70.1		3	%
Special Needs		—			—		—			3.2		—
NCLB		—			—		—			5.5		—
		70.0			67.9		(3	)%		78.8		16	%
Online Learning Services		0.5			2.7		454	%		1.8		(34	)%
Total		181.5			216.3		19	%		242.3		12	%
Business Metrics:
Franchise centers operating information:
Same center royalty growth(1)		9	%		17	%				7	%
Total franchise royalties(2)	$	23.8		$	27.9		17	%	$	31.7		13	%
Company-owned centers operating information:
Same center revenue growth (1)		9	%		13	%				6	%
Same center cash receipt growth(1)(3)		9	%		20	%				4	%
Number of Sylvan Learning Centers (4)
Franchise		810			822		1	%		862		5	%
Company-owned		90			127		41	%		135		6	%
Total		900			949		5	%		997		5	%

(1) “Same center” amounts, for both company-owned and franchised centers, include the results of centers for the identical months for each period presented in the comparison, commencing with the 13th full month the center has been operating as either a company-owned or franchised center, as the case may be. Same center growth is presented as the aggregate growth for franchise or company-owned centers, as the case may be, during the period.

(2) “Total franchisee royalties” represents the amount of all royalties paid by franchisees during the applicable period. Franchisee royalty rates range from 6% to 9% of revenues, with an average of approximately 8%.

(3) Company-owned centers are contractually obligated to pay an 8% royalty to one of our subsidiaries. This revenue is eliminated in consolidation. “Same center cash receipt growth” of North American company-owned centers represents the change in the amount of this royalty reported by company-owned same centers in one period as compared with the comparable period in the prior year. The use of this metric enables a more meaningful comparison of same company-owned center growth to same franchised center royalty growth. The difference between same center revenue growth and same center cash receipt growth is a change in deferred revenues of 7% and (2%) for the years ended December 31, 2002 and 2003, respectively.

(4) Number of Sylvan Learning Centers at period end.

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Revenues.    Revenue increases over these periods were primarily driven by acquisitions of previously franchised Sylvan Learning Centers; same center revenue growth in the Learning Center business; initiation of new NCLB service programs; acquisition of Progressus Therapy; and the initial rollout of our Online Learning Services tutoring services.

Learning Center—During 2003, revenues from company-owned centers increased due to the acquisition of eight centers from franchisees ($1.8 million) and same center revenue growth of 6% ($4.2 million). The same center revenue growth was driven largely by the same factors that drove revenue growth in 2002. Franchise services revenues increased as a result of 40 additional franchised centers ($1.8 million) and 7% same center royalty growth ($1.9 million), primarily a result of an increase in the number of students and higher revenues per student. This franchise services growth was offset by a reduction in product sales of $2.6 million due to timing of franchise program releases. European revenues, reflecting both company-owned centers and franchise results, increased due to company-owned center growth and the effects of a $3.7 million benefit from favorable foreign currency exchange rate movement. During 2002, revenues from company-owned centers increased due to the acquisition of 37 company-owned centers from franchisees and same center revenue growth of 20%. The same center revenue growth was driven by the success of our advertising campaign and enhanced financing options in conjunction with the implementation of our sales strategy at the beginning of 2002. We anticipate that the rate of center acquisitions will increase in 2004 from that in 2003, but not to the level we experienced in 2002. Franchise services revenues increased as a result of 12 additional franchised centers and 17% franchised same center royalty growth.

Institutional Services—During 2003, revenues increased as a result of significant growth in our NCLB supplementary service program ($5.5 million), which began in the 2002-2003 school year, the acquisition of Progressus Therapy ($3.2 million) in October 2003 and modest growth in our school services program. During 2002, revenues decreased due to our focus on building our NCLB business and our decision to renew fewer higher cost public school contracts in order to focus our efforts on our NCLB business.

Online Learning Services—During 2003, revenues decreased due to the operating plan implemented in April 2003. The initial rollout of eSylvan occurred in 2001 and initial growth rates in 2002 were strong but do not allow for a meaningful comparison.

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	Year Ended December 31,
	2001			2002			Variance	2003			Variance
								(Pro forma)
	(In Millions)
Segment Operating Costs
Learning Center	$	84.9		$	108.7		28 %	$	116.3		7 %
Institutional Services		59.3			58.6		(1)%		72.5		24 %
Online Learning Services		13.7			14.9		9 %		7.8		(48)%
Total Segment Operating Costs		157.9			182.2		15 %		196.6		8 %
Segment Profit
Learning Center		26.1			37.0		42 %		45.4		23 %
Institutional Services		10.7			9.3		(13)%		6.3		(32)%
Online Learning Services		(13.2	)		(12.2	)	8 %		(6.0	)	51 %
Total Segment Profit		23.6			34.1		44 %		45.7		34 %
Corporate Expenses
Corporate depreciation and amortization expenses		1.4			1.2		(14)%		1.5		25 %
General administrative expenses		12.3			13.1		7 %		12.7		(3)%
Interest (income) expense, net		(0.3	)		(0.1	)	(66)%		13.2		—
Other non-operating expense		1.0			0.2		(80)%		0.0		NM
Income tax expense		9.3			12.8		38 %		7.3		(43)%
Total Corporate Expenses		23.7			27.2		15 %		34.7		28 %
Income (loss) from continuing operations		(0.1	)		6.9		NM		10.9		59 %
Segment Operating Costs as a Percentage of Revenue
Learning Center		76	%		75	%			72	%
Institutional Services		85	%		86	%			92	%
Online Learning Services		2740	%		552	%			433	%
Total Operating Costs as a Percentage of Revenue		87	%		84	%			81	%
Segment Profit Margin
Learning Center		24	%		25	%			28	%
Institutional Services		15	%		14	%			8	%
Online Learning Services		(2640	%)		(452	%)			(333	%)
Total Segment Profit Margin		13	%		16	%			19	%

NM means that the calculation is not meaningful.

Segment Operating Costs.    Total segment operating costs as a percentage of total revenues decreased over the three years from 87% in 2001 to 84% in 2002 and again to 81% in 2003.

Learning Center—Segment operating costs represented 72% of segment revenue for 2003, compared to 75% for 2002 and 76% for 2001. Company-owned Sylvan Learning Center costs increased over the period primarily due to expenses incurred related to the additional franchised learning centers acquired and costs associated with servicing higher revenues at existing company-owned centers. Franchise services expenses decreased $1.2 million in 2003 primarily related to lower education product costs of $2.1 million offset by an increase of $0.9 million related to services needed to support the expanding franchise network. European expenses related to Schülerhilfe increased by $4.0 million in 2003 and $0.8 million in 2002 due to increased marketing and sales costs and foreign exchange movements of $3.1 million in 2003 and $0.8 million in 2002.

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Institutional Services—Segment operating costs increased to 92% of segment revenue for 2003, compared to 86% in 2002 and 85% in 2001. This 2003 increase was primarily due to the acquisition and transition of Progressus Therapy ($3.1 million) and costs incurred related to start-up, development, marketing and training for the NCLB business ($7.7 million). The 2002 increase was due principally to the start-up costs related to the development of our NCLB business.

Online Learning Services—Segment operating costs decreased for 2003 as a result of the operating plan implemented in 2003. A charge of $0.4 million for severance costs was recorded in 2003 in connection with this plan. 2002 expenses increased by $1.2 million over 2001 as a direct result of costs related to the initial rollout of the eSylvan product.

Segment Profit Margin.    The Learning Center margin improvement over the period from 24% in 2001 to 25% in 2002 and to 28% in 2003 is due primarily to a significant improvement in company-owned center performance. Institutional Services margins have declined from 15% in 2001 to 14% in 2002 and 8% in 2003 primarily as a result of costs of $7.8 million associated with the start-up and marketing of NCLB programs during 2003. Online Learning Services operating losses as a percentage of revenues have declined significantly over the period as the costs of developing the business were incurred primarily in 2001 and 2002. Progress has been made on cost reduction and improving student level profitability which combined to result in a $6.2 million reduction of operating losses in 2003. As a percentage of operating revenues, general and administrative expenses decreased to 6% in 2003, compared to 7% in 2002 and 8% in 2001 as a result of administrative cost control even as total revenues are increasing significantly.

Corporate Expenses.    Interest expenses increased by $13.1 million for the year ended 2003 compared to the year ended 2002, primarily due to interest costs related to the financing of our acquisition by Apollo. We expect that after giving effect to this offering and the use of proceeds described in this prospectus as if each had occurred on January 1, 2004, our interest expense for 2004 would be less than $5 million. Our effective tax rate was 40% in 2003, 65% in 2002 and 102% in 2001. Our predecessor operated the business comprising the Online Learning Services segment through a subsidiary that filed separate income tax returns. This subsidiary incurred significant operating losses that did not result in recorded income tax benefits because their realization was not reasonably assured, and the effect of this organizational structure resulted in unusually high effective income tax rates for the periods our business was operated by our predecessor. See the notes to the combined financial statements of our predecessor for additional information regarding the computation of our predecessor’s income tax expense.

Liquidity and Capital Resources

	Period from June 30, 2003 (date of inception) through December 31, 2003			Three Months Ended March 31, 2004
	(In Millions)
Beginning Cash Balance	$	—		$	20.3
Operating Activities—Continuing Operations		10.6			0.2
Operating Activities—Discontinued Operations		(3.7	)		1.6
Investing Activities		(119.4	)		(2.9	)
Financing Activities		132.4			(1.0	)
Effect of exchange rates		0.4			(0.4	)
Ending Cash Balance (including $1.5 million in discontinued operations at March 31, 2004)	$	20.3		$	17.8

Historically, we have generated significant cash flows from our operations which have allowed us to meet our working capital needs and fund a portion of the cash we require to make investments in

39

property and equipment, open new company-owned centers, and acquire franchised learning centers and other businesses. More recently, the cash flows we have generated from operations have also been used to service debt we incurred in June 2003 upon the acquisition of the pre-K-12 business from Laureate.

Our working capital requirements are minimized because in our largest segment, the Learning Center segment, our company-owned learning centers generally receive advance payments for services and our franchisees are required to pay us royalties on a monthly basis. Our working capital needs are greater in our Institutional Services segment because our customers are principally public school districts that pay us in arrears, often 60 days or longer after we perform our services. As our revenues in this segment increase as a result of the expected expansion of our NCLB business, our working capital requirements will also increase. For example, for the three-month period ended March 31, 2004, our cash flows from continuing operations declined to $0.2 million from $5.1 million in the comparable 2003 period, principally because of increases in accounts receivable in the Institutional Services segment.

For the years ended December 31, 2001 and 2002, our cash flows from continuing operations were $18.1 million and $19.8 million, respectively. The increase of $1.7 million was attributable primarily to an increase in income from continuing operations before non-cash charges of $6.1 million in 2002, offset by changes in working capital. For the year ended December 31, 2003, including the cash flows of our predecessor for the first half of the year, our cash flows from continuing operations increased to $35.2 million. This $15.4 million increase over the comparable 2002 period is attributable to an increase in income from continuing operations before non-cash charges of $5.4 million, and growth in our accounts payable and accrued expenses by approximately $13.0 million. Our accounts payable and accrued expenses increased at December 31, 2003 due to accrued employee bonuses, increased spending on advertising and marketing, and costs we incurred in 2003 in readiness for our NCLB business.

Our investing activities have historically consisted of investments in property and equipment and acquisitions of franchised learning centers and other businesses. As a component of a larger company, prior to June 30, 2003, we were able to obtain any needed capital from investments that Laureate made in our business. Because we are no longer a part of Laureate, our ability to make future acquisitions and investments in property and equipment will be dependent on the cash flows we generate from our operations and our ability to obtain additional capital.

In connection with our inception on June 30, 2003, we used $110.8 million of cash to acquire the pre-K-12 business from Laureate. We also used $4.6 million of cash subsequently to acquire Progressus Therapy and other businesses and purchased $3.7 million of property and equipment. We financed the cash component of the purchase price from borrowings on our $110.0 million credit facility and $30.0 million of capital from our investors. During the first quarter of 2004, we invested an additional $2.2 million in property and equipment to meet the needs of our expanding operations.

On April 27, 2004, we refinanced the borrowings under our credit facility and the subordinated note we issued to Laureate in connection with the acquisition of the pre-K-12 business from the proceeds of a new seven-year, $170.0 million term loan. Borrowings under the term loan and a $30.0 million revolving credit facility bear interest at a rate of LIBOR plus 3%, subject to rate reductions tied to reduced leverage ratios. As of April 30, 2004, we had made no borrowings under the revolving credit facility.

We believe that cash flow from operations, available cash and existing credit facilities will be sufficient to meet our operating requirements, including expansion of our existing business, acquisition of centers, funding of eSylvan investments and operating costs for the next year. Our future capital

40

requirements will depend on many factors, including our rate of revenue growth, center acquisitions and new company-owned center development, the expansion of sales and marketing activities, the timing of introductions of new services and enhancements to existing programs. We expect that we will, from time to time, continue to consider opportunities in the educational services industry for potential acquisitions of companies that complement our overall business strategy. Although we consider various acquisitions from time to time, no acquisitions are presently probable.

Contingent Matters

The following tables reflect our contractual obligations and other commercial commitments as of March 31, 2004 (as adjusted for the new secured credit facility entered into on April 27, 2004):

	Payments Due by Period
	Total		Remainder of 2004		2005-2006		2007-2008		2009 and after
	(in thousands)
Contractual Obligations
Long-Term Debt	$	174,115	$	2,076	$	4,659	$	4,664	$	162,716
Leased Center, Office Space, and Equipment		37,490		9,927		16,753		6,427		4,383
Total Contractual Cash Obligations	$	211,605	$	12,003	$	21,412	$	11,091	$	167,099

	Amount of Commitment Expiration Per Period
	Total Amounts Committed		Remainder of 2004		2005-2006	2007-2008		2009 and after
	(in thousands)
Other Commercial Commitments
Guarantees	$	278	$	278	—		—	—
Standby Letters of Credit		710		—	—		710	—
Total Commercial Commitments	$	988	$	278	—	$	710	—

We have guaranteed certain bank loans of franchisees related to financing the purchase of educational programs and other purchased instructional material. Of the $1.0 million of available credit under this program, $0.3 million was outstanding at March 31, 2004. These guarantees are secured by the assets of the business of the individual franchisee utilizing this financing arrangement.

We have an option to repurchase specified Sylvan Learning Centers at predetermined multiples of operating results. The exercise of the option would not have a material effect on our financial position or results of operations.

We are required to utilize a portion of the proceeds of this offering to repay a portion of our outstanding secured credit facility. See “Use of Proceeds.”

We are required to pay Laureate up to $10.0 million of additional consideration for our acquisition by Apollo if Connections Academy exceeds specified levels of EBITDA at any time prior to December 31, 2007. We expect to retain this obligation following our anticipated sale of Connections Academy. Any payment of the obligation will result in a loss from discontinued operations in the period when and if the obligation is determined to be payable.

International Exposure

Our Learning Center segment has operations outside the United States, primarily in Germany. These international operations subject us to political uncertainties, currency devaluations and national

41

regulations affecting the provision of educational services. Accordingly, our revenues and income in any period may be impacted by international developments outside our control.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We base our estimate on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our consolidated financial statements. The following discussion addresses our critical accounting policies, which are those that require management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue Recognition

Learning Center

Revenues from our Learning Center segment consist predominately of fees we earn from providing educational services to students through company-owned learning centers and royalties we collect from our franchised learning centers.

Fees for the services we provide in company-owned centers are based on the number and type of sessions that students purchase, and we recognize these fees as we deliver the sessions. Students often prepay us for multiple sessions that they purchase, and we record any undelivered sessions as deferred revenue. These prepayments are refunded if at a later date the student notifies us that the prepaid sessions will not be used.

Franchisees pay us a monthly royalty fee based on their cash receipts, which are based on the number and type of sessions that students purchase. These royalty fees are generally payable by the fifteenth day of the following month. We recognize these fees in the month they are earned if collectibility is reasonably assured. At the end of each month, we make estimates of royalties earned based on periodic business updates from our franchisees and extensive historical data we maintain of monthly royalties reported by each franchised learning center. We record these royalties as revenue and accounts receivable at each balance sheet date and later make adjustments to the actual amounts when officially reported by our franchisees, generally within fifteen days of the month earned. Historically, our adjustments to estimated royalties have been insignificant. For the six months ended December 31, 2003, our average monthly adjustment was approximately $120,000.

Institutional Services

Revenues from our institutional services segment consist principally of revenues from contracts with school districts receiving funds under federal and state-based programs to provide supplemental education services. These contracts typically have a term of one year or less. For contracts that specify a fixed fee per student for services over a stated period, we recognize revenue ratably over the contractual service period, because our services are provided in approximately equal proportions over

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the contract term. Other contracts in this segment provide for fees payable to us for services on an hourly basis at a specified hourly rate. We recognize revenue under these contracts as we deliver the services.

Allowance for Doubtful Accounts

Our assets include receivables from franchisees related to royalties and product sales which are collected typically in less than one month and receivables from schools districts which typically have a collection cycle in excess of 60 days. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We calculate the allowance based on a specific analysis of past due balances and also consider historical trends of write-offs. We review our past due balances monthly and write-off those that are deemed uncollectable. Actual collection experience has not differed significantly from our estimates, due primarily to credit and collections practices and the financial strength of our customers. Accounts and notes receivable balances due from franchisees are secured by the assets of the franchisee’s business. Other accounts receivable balances, primarily due from governmental agencies, are not collateralized.

Amortization of Intangibles and Indefinite Lived Assets

At March 31, 2004, our total assets include approximately $272.5 million of goodwill and other intangible assets, representing approximately 188% of our net assets. We recorded approximately $264.5 million of goodwill and other intangible assets when we acquired the pre-K-12 business of Laureate on June 30, 2003. The purchase price allocated to these acquired assets was determined based on an independent appraisal.

Our intangible assets include more than $200 million of franchise rights and tradenames that have an indefinite life. We determined that these assets have an indefinite life because there are no significant legal, regulatory, or contractual provisions that limit the useful life, after considering the likely exercise of provisions that enable renewal or extension of the asset’s contractual life without substantial cost. In addition, we determined that the effects of obsolescence, demand, competition, and other economic factors are not factors that are expected to significantly affect the useful life of the assets.

Intangible assets with indefinite lives are not amortized, but rather are tested for impairment annually, and whenever an impairment indicator is identified. The impairment test requires the determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss is recognized for an amount equal to the difference, and the intangible asset is then carried at its new fair value. Fair value is determined using estimates of discounted cash flows. The fair value of our franchise rights and tradenames is determined based on estimates of future royalties that we expect to receive from our learning centers over an extended period, discounted using the rate of return required for investments of like risk. Estimates of future royalties that we will earn likely will change over time as we perform our impairment assessments. Even if the estimate of future royalties does not decrease, the fair value of these assets may be adversely affected by increases in interest rates and the applicable discount rate.

At March 31, 2004, we had approximately $51.6 million of goodwill. Goodwill is initially measured as the excess of the cost of a business we acquired over the fair value of the identifiable net assets. We do not amortize goodwill, but rather review its carrying value for impairment annually, and whenever an impairment indicator is identified. The goodwill impairment test involves a two-step approach. Under the first step, we determine the fair value of each reporting unit to which goodwill has been assigned. The reporting units for purposes of the impairment test are our major operating subsidiaries, as these are the components of the business for which discrete financial information is

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available and our segment managers regularly review the operating results of those components. We estimate the fair value of each reporting unit by estimating the present value of the reporting unit’s future cash flows, and then compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss. Under the second step, we calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit as determined in the first step. The implied fair value of goodwill is then compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, we recognize an impairment loss equal to the difference.

Currently, over 82% of our goodwill is included in our Learning Center segment, which is our most profitable and stable reporting segment. If the estimated cash flows from the reporting units comprising our Learning Center segment were to decline, due to the effects of increased competition or reduced demand or other factors, we could incur a material goodwill impairment charge.

New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board, or FASB, issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses the financial accounting and reporting for certain costs associated with exit or disposal activities. Statement No. 146 requires that these costs be recorded at their fair value when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The provisions of Statement No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Our adoption of the new standard in 2003 did not have a material effect on our consolidated financial statements.

In December 2003, the FASB issued its revised Interpretation No. 46, Consolidation of Variable Interest Entities. The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. The Interpretation requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities of is entitled to receive a majority of the entity’s residual returns or both. The revised requirements of Interpretation No. 46 are effective for our March 31, 2004 interim financial statements. Upon adoption in 2004, there was no impact on the consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks, which exist as a part of our ongoing business operations, and we use derivative financial instruments, where appropriate, to manage these risks. As a matter of policy, we do not engage in trading or speculative transactions. Refer to Note 2 within Notes to Consolidated Financial Statements for further information on accounting policies related to derivative financial instruments.

Foreign Currency Risk

In 2003, approximately 10% of our revenues were derived from customers outside the United States. Most of this business is transacted through international subsidiaries, generally in the local currency that is considered the functional currency of that foreign subsidiary. Expenses are also incurred in the foreign currencies to match revenues earned and minimize our exchange rate exposure to operating margins. A hypothetical 10% adverse change in average annual foreign currency movements would have decreased both net income and cash flows for the quarter ended March 31, 2004 by $0.1 million. We are also exposed to fluctuations in the value of foreign currency investments

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in subsidiaries and cash flows related to repatriation of these investments. We generally view our investment in foreign subsidiaries as long-term. The effects of a change in foreign currency exchange rates on our net investment in foreign subsidiaries are reflected in other comprehensive income (loss). A hypothetical 10% average change in depreciation in functional currencies relative to the U.S. dollar would have resulted in a decrease in our net investment in foreign subsidiaries of approximately $1.6 million at March 31, 2004.

Interest Rate Risk

We hold cash and cash equivalents in high quality, short-term, fixed income securities. Consequently, the fair value of our cash and cash equivalents would not be significantly impacted by either a 100 basis point increase or decrease in interest rates.

We are exposed to interest rate volatility with regard to future issuances of fixed rate debt and existing and future issuance of variable rate debt. Primary exposures include movements in U.S. Treasury rates, London Interbank Offered Rates (LIBOR) and commercial paper. We currently have an interest rate swap in place to reduce interest rate volatility associated with our secured credit facility, and to achieve a desired proportion of variable versus fixed rate debt.

Note 7 of the Notes to Consolidated Financial Statements of Educate, Inc. provides information on our significant indebtedness. The total notional amount of interest rate swap at March 31, 2004 was $40.0 million, representing a settlement obligation of $0.7 million. Assuming average variable rate debt levels, a one percentage point increase in interest rates would have increased interest expense by approximately $0.2 million in the quarter ended March 31, 2004 and $0.4 million in the six-month period ended December 31, 2003.

All the potential impacts noted above are based on sensitivity analysis performed on our financial position at March 31, 2004. Actual results may differ materially.

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BUSINESS

Overview

We believe we are a leading national provider of tutoring and other supplemental education services to pre-kindergarten through twelfth grade, or pre-K-12, students. For over 25 years, we have provided trusted, personalized instruction to our students. We operate through three business segments that served more than 250,000 students in 2003.

Ÿ Our Learning Center segment develops and delivers trusted, personalized tutoring programs primarily through a network of more than 1,000 franchised and company-owned learning centers in North America operating under the Sylvan brand name, which we believe is the most highly recognized brand name in the supplemental education services industry.

Ÿ Our Institutional Services segment provides tutoring, as well as other supplemental education services and special-needs services, to eligible students in public and private schools through government-funded contracts under the Catapult Learning and other brand names.

Ÿ Our Online Learning Services segment provides tutoring programs modeled after those provided in our Sylvan Learning Centers in an online environment. These services, provided primarily under the eSylvan brand name, use a technologically sophisticated, internet-based application that enables teachers and students to talk and interact real-time over a dial-up or broadband connection.

Our Sylvan Learning Centers are staffed by trained teachers who deliver high quality education programs that are personalized for each student based upon the results of extensive diagnostic testing. These centers are leading a significant shift in the provision of pre-K-12 supplemental education services, away from the traditional model in which individual tutors provide in-home homework help to students. We seek to instill in each student our “Learning Feels Good” philosophy through a motivational program that inspires students to achieve their objectives, builds self-confidence and strengthens each student’s enthusiasm for learning. Our Sylvan Learning Centers guarantee that each math and reading student will achieve at least one grade level equivalent of improvement within the first 36 hours of instruction.

Based on our market research, we believe that 93% of women within our target demographic recognize the Sylvan brand name. Our long history of successfully providing tutoring services and our substantial investments in advertising and direct marketing on national, regional and local levels have contributed to consumers’ recognition of the Sylvan brand. We have found television advertising, such as our current, award-winning “This Moment Brought to You by Sylvan” advertising campaign, to be especially effective at delivering an emotionally compelling message to consumers. This campaign has won both an ECHO Award from the Direct Marketing Association and an EFFIE from the New York American Marketing Association.

We have experienced significant growth in our business over the last five years. We expect that all three of our business segments will continue to benefit from increased national attention on the quality of pre-K-12 education. We believe that parents have become more proactive in seeking education services that supplement their children’s education and are increasingly willing to pay for these services. In addition, over the past ten years, the supplemental education services market has benefited from increased spending in both public and private schools. Further, increased education spending by governmental authorities has enjoyed continued bipartisan support. We believe these market forces have contributed to our substantial growth.

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Business Segments

Learning Center

Our Learning Center segment develops and delivers trusted, personalized tutoring programs to students in grades pre-K-12 through a network of more than 1,000 franchised and company-owned learning centers in North America operating under the Sylvan brand name and more than 950 European franchised and company-owned learning centers. As of March 31, 2004, there were 138 company-owned and 876 franchised centers operating in North America, and 232 company-owned centers and 718 franchised centers operating in Germany and Austria. During 2003, the Learning Center segment generated revenues of $161.7 million, representing 67% of our total revenues.

North American Learning Centers

Our Sylvan Learning Centers provide supplemental, remedial and enrichment instruction, primarily in reading and mathematics, and to an increasing extent, writing, study skills and test preparation. Our programs feature an extensive series of standardized diagnostic tests, personalized instruction, a student motivational program and ongoing involvement of parents and their children’s regular school teacher. High brand awareness of the Sylvan name and our targeted advertising

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programs motivate parents to inquire about our services on behalf of their children, primarily by telephone or the Internet. Our corporate call center, regional call centers or franchise operators respond to these inquiries and seek to convince parents of the value of our services and to make an appointment for a diagnostic assessment. One of our company-trained educators performs these tests, which include the California Achievement Test, a nationally-recognized diagnostic test, which identifies particular skill gaps of each student. We then use these assessments to create a personalized learning plan for the student.

Our students generally enroll in a 60 to 120 hour program with instruction three to four times per week for one to two hours per visit. Each teacher typically works with up to three students at a U-shaped table designed to facilitate the learning experience. Within this setting, a teacher works with each of the students individually in turn while the other two students work independently on their own programs. Each teacher is trained in using our proprietary learning systems, which address the particular skill gaps identified in the diagnostic testing. Students generally work with multiple teachers throughout their course of instruction. We also incorporate a motivational program using tokens redeemable for novelties and toys to inspire students to achieve their objectives, build self-confidence and strengthen their enthusiasm for learning. We measure and evaluate each student’s progress after every 36 hours of instruction, hold parent conferences after every 12 hours of a student’s program, and schedule periodic updates with the student’s regular school teachers during the program. Our Sylvan Learning Centers guarantee that each math and reading student will achieve at least one grade level equivalent of improvement within the first 36 hours of instruction or the student will receive 12 hours of additional instruction for free.

The cost to a student of an education program is dependent upon his or her individual needs. The program costs approximately $2,300 to $4,500, with the actual amount dependent upon the price per hour for tutoring and the number of hours of tutoring provided. Consumers may pay for the program in advance or prepay on a monthly basis using cash or a credit or debit card. Many of our customers also use third-party financing programs offered by recommended vendors.

We also provide tutoring services for the SAT and other standardized tests in our Sylvan Learning Centers using materials developed by our subsidiary, Ivy West Educational Services, Inc. Ivy West instructors also provide one-on-one tutoring and test preparation services to students in their homes through a staff of over 1,000 instructors.

During 2003, our North American Learning Center operations generated revenues of $139.4 million, representing 58% of our total revenues.

Our North American Learning Center operations are comprised of franchised centers and company-owned centers.

Franchised Centers.    Franchising is a core element of our business strategy. As of March 31, 2004, there were 876 franchised Sylvan Learning Centers located in North America, including 790 in the United States and 86 in Canada. During 2003, we expanded our franchised network of Sylvan Learning Centers by 40. In 2003, we generated $40.6 million in revenues from our franchised North American Learning Center operations, representing 17% of our total revenues. We generate income from franchising activities primarily through royalties, which are calculated as a fixed percentage of franchisee cash receipts. We generate additional licensing fees from the sale of new franchise territories, within which a franchisee is allowed to open learning centers, and from sales of learning materials and other materials to franchisees.

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Our franchise agreement grants the franchisee a license to operate Sylvan Learning Centers and to use Sylvan’s trademarks within a specified territory. Our franchise agreements generally have an initial term of ten years, subject to unlimited additional ten-year extensions at the franchisee’s option under the same terms and conditions. The license fees and royalty rates vary depending upon the demographics of the territory. If a franchisee proposes to sell a franchised center, we have the right to acquire the franchised center on the same terms as the proposed buyer.

We actively manage our franchise system to enhance our brand and maintain a consistent, high quality of service. Franchisees must obtain our approval for the location and design of learning centers and for all advertising. Franchisees must also operate their learning centers in accordance with our methods, standards and specifications. We monitor educational quality at our franchised centers through a variety of procedures, including access to pre- and post-diagnostic test data for students of our franchisees. Each franchisee is required to purchase from us certain diagnostic and instructional materials, student record forms, parental information booklets and explanatory and promotional brochures developed by us. We specify requirements for other items necessary for operation of a learning center, such as computers, instructional materials and furniture, and we offer our franchisees the opportunity to purchase these items from preferred vendors. Generally franchisees provide us with periodic business updates and must submit monthly financial and operating data to us. We require franchisees and their employees to attend a one-week initial training program and to pass a certification examination in our learning center operations and educational programs. We also offer franchisees continuing training each year through a number of different methods. We employ field operations managers to provide assistance to franchisees in marketing, education and operations, technology implementation and business development. These employees also facilitate regular communications between franchisees and us and assist us in assuring a consistently high quality of service in each Sylvan Learning Center.

Our franchisees are true owner-operators, as evidenced by the fact that 73% of our franchisees own only one or two centers and no franchisee owns more than 20 centers. We believe that this allows franchise owners to remain focused and committed to the success of their centers.

Company-Owned Centers.    As of March 31, 2004, we operated 138 company-owned Sylvan Learning Centers in 16 U.S. markets. During 2003, we increased the number of company-owned centers by eight. In 2003, our company-owned North American Learning Center operations generated revenues of $98.8 million, representing 41% of our total revenues. Company-owned learning centers enable us to test and refine new educational programs, marketing plans and learning center management procedures before offering these programs and procedures to our franchisees. Our company-owned centers serve as best practice models where significant operational and educational improvements can be developed and implemented quickly. On average, company-owned centers have higher sales per center than franchised centers primarily due to higher average revenue per student. In 2003, our company-owned learning centers generated average sales per center of $680,000 and we received royalties from our franchisees that imply average cash receipts per franchised center of $453,000.

European Learning Centers

Our European learning center business, which we acquired in 1998, operates under the Schülerhilfe name. Schülerhilfe has provided after school tutoring, consisting primarily of homework support, to primary and secondary students in Germany and Austria for over 30 years. As of March 31, 2004, Schülerhilfe operated 232 company-owned learning centers and 668 franchised centers in Germany, and 50 franchised centers in Austria. Schülerhilfe generates revenue primarily from the operation of company-owned centers and the receipt of monthly fixed fees from franchisees. As in our Sylvan Learning Centers, the aim of Schülerhilfe’s center-based tutoring is for students to improve their

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grades and develop their self-confidence. Schülerhilfe provides tutoring in a number of subjects, including German, math, English, Latin, French, chemistry, and biology, using the individual child’s own textbooks. After an initial consultation, students visit a Schülerhilfe center after school for at least two 90 minute sessions per week. Students work with teachers on addressing their skill gaps using a combination of school work, homework, and Schülerhilfe curriculum. Sessions are taught in small groups of five or fewer students per teacher. On average, parents pay €120 per month for eight sessions. In 2003, Schülerhilfe generated revenues of $22.3 million, representing 9% of our total revenues.

Institutional Services

Since 1993, Catapult Learning, formerly known as Sylvan Education Solutions, has provided supplemental instruction programs primarily in reading and math to students in schools, school districts and private educational entities (primarily parochial schools) across the country. These programs encompass a wide variety of education services that supplement and expand those provided by these institutions. Our services are typically provided on location at the client school or a conveniently located community organization’s facility. These services are funded by federal, state and local governments. While funding for our programs comes from a variety of sources, there are two federal government programs that are significant sources of funds for the services that we offer: Title I of the Elementary and Secondary Education Act (most recently reauthorized as NCLB) and the Individuals with Disabilities Education Act (IDEA). Title I funds are provided by the Federal government to address the needs of educationally and economically disadvantaged students in public and private schools. IDEA funds are provided by the Federal government to address the needs of students identified for special education.

The largest component of our Catapult Learning business is small group instruction to pre-K-12 students who have been identified by their school as requiring these services. Also, through our recent acquisition of Progressus Therapy, Inc., we have become a national provider of outsourced speech, occupational and physical therapy to children with special educational needs in schools. In addition, we offer a variety of additional programs and services that cater to the specific needs of our institutional partners, such as summer school programs, early childhood development programs and special education services. In New Jersey, for example, we operate completely outsourced pre-kindergarten programs for local school districts. The services that we provide to institutions are typically governed by school-year contracts subject to annual renewal that have had and continue to have high rates of repeat business.

Within our Institutional Services segment, we have developed a new program, Education Station, to provide tutoring services mandated under NCLB. Under this Act, if a school misses its adequate yearly progress goals for three consecutive years, the school’s district must set aside a portion of the Title I funds it receives and must use those funds to support school choice or pay for tutoring for low income students who qualify under NCLB, at the parents’ option. Parents of eligible children who opt for free tutoring choose a provider of tutoring services from a list approved by the state, which must include third-party providers.

In the 2002-2003 school year, our Institutional Services segment served more than 70,000 students in more than 850 locations. In 2003, our Institutional Services segment generated revenues of $78.9 million, representing 33% of our total revenues. We believe that the increasing willingness of school districts and private schools to utilize third parties to provide supplemental education and specialized support services to the students in their schools, and the increases in Title I spending, the enactment of NCLB and access to IDEA funding and state education funds, provide us with significant opportunities for continued growth.

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Online Learning Services

eSylvan offers online tutoring programs modeled after those provided in our Sylvan Learning Centers. These online programs use a technologically sophisticated, internet-based application that enables teachers and students to talk and interact real-time over a dial-up or broadband connection. eSylvan’s programs are provided to students primarily in second through ninth grades. As of March 31, 2004, eSylvan was owned approximately 93% by us, with the remaining 7% interest owned by a majority of our North American franchisees. Under almost all of our license agreements with franchisees, we have the exclusive right to provide online tutoring services to students, subject to payment of a reverse royalty. By providing instructional services at home, eSylvan makes the tutoring process more convenient for both the student and the parent, especially in rural or highly congested areas where access to a learning center is less convenient. eSylvan’s online program generally comprises 40 to 60 hours of instruction, with a price per hour similar to that charged in our Sylvan Learning Centers. The average student attends two one-hour sessions per week. Customers can either pay in advance or elect to have their credit or debit card automatically charged at the end of each month. eSylvan’s academic directors also schedule parent conferences periodically during the program. Each of eSylvan’s teachers must complete a formalized training program prior to his or her initial student session. This ensures that the quality of eSylvan’s services are consistent from teacher to teacher and allows eSylvan to offer the same type of guarantee offered to parents by our Sylvan Learning Centers.

eSylvan’s service offerings are supported by a technological infrastructure developed to provide effective interaction over the Internet for students and teachers and an operational support environment for effective business operation. eSylvan’s learning environment was developed to operate completely over a dial-up modem connection to the Internet. Each student and teacher is supplied with an audio headset, a microphone, and a digital pen and whiteboard system. Students and teachers gain access to our online program by entering our secure web site where information on learning programs is presented. Once registered for a learning program, students interact with teachers in real time through an audio/visual session, where existing technologies permit simultaneous voice and data transmission over the Internet connection. This learning environment permits the teacher to control a tutoring session for up to three students per session. Teachers can present curriculum-associated content on a whiteboard that appears on the student’s computer and that both parties can simultaneously reference and annotate. The whiteboard may also be used without content so that either party in the session can use freeform drawing tools for illustration purposes.

As of March 31, 2004, we had spent approximately $46.6 million to fund the development and operations of our eSylvan business since commencing operations in June 2000, with $2.5 million spent in the nine months ended March 31, 2004. eSylvan had approximately 1,300 students enrolled in its online programs as of March 31, 2004, and generated $1.8 million of revenue in 2003. Since its inception, eSylvan has focused its marketing strategy on leveraging our proprietary learning system and the Sylvan brand, and creating various cross-marketing opportunities between eSylvan, Sylvan Learning Centers and Catapult Learning. In addition to delivering its tutoring services directly to individual students, eSylvan is also conducting pilots to test delivery of these services to Sylvan Learning Center students through the Sylvan Online program and to a limited number of school districts through the Catapult Learning Online program.

Industry Overview

We believe the pre-K-12 education services industry is large, growing and fragmented and that the overall size of this industry has significant potential to grow as a result of a number of factors. These factors include favorable demographics, increasing parental dissatisfaction with the quality of public education, an increasingly competitive educational system and the heightened focus on school

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performance due to the continued failure of many students to achieve basic skills. According to the U.S. Department of Education, enrollment in elementary and secondary schools rose 20% between 1985 and 2003 to more than 54 million students and is expected to rise by an additional two million students between 2003 and 2013. We believe these trends will drive demand in both the public and private sectors for the types of supplemental education services that we provide.

Private Sector Demand.    Parental demand for supplemental education services is growing due to parents’ dissatisfaction with the quality of public pre-K-12 education. We believe that the demand for private pre-K-12 tutoring services has grown, and will continue to grow, as children face additional federally-mandated standardized tests throughout their pre-K-12 years, and a growing number of qualified students vie for positions at top colleges. At the same time, the monetary value of a college degree is increasing, as evidenced by U.S. Census Bureau data. In 2001, holders of a bachelor’s degree earned 89 percent more on average than those with only a high school diploma, as compared with 57 percent more on average in 1981. In addition, many schools have ended the practice of social promotion and now require students to pass end-of-year exams to advance to the next grade. These high stakes tests create additional pressures on students’ school performance. We believe that all of these factors will increase private sector demand for supplemental education services.

Public Sector Demand.    In the 2000-2001 school year, the most recent year for which the U.S. Department of Education has published data, the total K-12 expenditures by U.S. governmental entities for purchased instructional services was approximately $6 billion. The size of that market has increased since the 2000-2001 school year due in part to the adoption of federal legislation. The most recent major federal legislation, NCLB, increased federal funding for supplemental education services by 33% from $8.8 billion in 2001 to $11.7 billion in 2003. NCLB also enacted sweeping changes, such as requiring a school district to set aside funds to support school choice and supplemental educational services, including tutoring provided by third parties, if a school in the district fails to achieve its adequate yearly progress goals for three consecutive years. We believe these changes will drive demand for the types of supplemental education services we provide. In particular, NCLB increased the accountability of public school districts for poor student performance, increased the emphasis on results-based student improvements, instituted penalties for continued poor school performance, and increased the availability of private educational alternatives for low income students.

NCLB also provides for more alternatives to public schools, and a heightened focus on results and school accountability represent a likely catalyst for increased funding for outsourced services. Funding for outsourced programs and services comes from a variety of sources, including federal, state and local governments. The federal government provides funds through two main programs, Title I of the Elementary and Secondary Education Act and IDEA. Title I funding has grown 33% since 2001 to $11.7 billion in 2003, and IDEA funding has grown 35% since 2001 to $10.0 billion in 2003.

Our Strengths

Leading Market Position and Powerful Sylvan Brand Name.    We believe that our broad geographic reach and trusted, personalized method of instruction have enabled us to become a leading national player in a highly fragmented market. Based upon our market research, we believe the Sylvan brand is the most highly recognized brand name in the supplemental education services industry and that it enjoys 93% brand awareness among women within our target demographic. This high brand awareness is driven in part by our and our franchisees’ significant annual investment in advertising, estimated at an average of $50 million per year in each of the last three years.

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High Quality Instruction and Broad Service Offering.    In our Sylvan Learning Centers, we differentiate ourselves through our proprietary learning systems that consistently produce positive results for our customers. Our high quality instruction, diversity of services and dedication to customer service reinforce our reputation as a trusted source of quality instruction. Our programs measure academic progress over time, and we guarantee that each math and reading student will achieve at least one grade level equivalent of improvement within the first 36 hours of instruction or additional tutoring is provided at no cost.

We also provide a wide variety of educational and specialized supplemental services to schools, school districts and private educational entities across the country through our Institutional Services segment. In addition, we have developed and are delivering an internet-based application to individual consumers that enables teachers and students to talk and interact in real-time.

Highly Effective Marketing.    We have a sophisticated marketing strategy that helps us to maintain a high level of brand awareness. Over the last five years, our marketing strategy has resulted in approximately one out of every three inquiries leading to an enrollment in our Sylvan Learning Centers. Our advertising campaign is heavily weighted towards television, which is a highly effective medium for reaching our target audience due to the emotionally compelling message it can convey. We believe that our current, award-winning “This Moment Brought to You by Sylvan” advertising campaign has been especially effective at delivering our message to consumers. We advertise year-round and test our advertising to improve effectiveness. We also coordinate national advertising campaigns for the Sylvan system through a national advertising committee. Coordinated advertising and marketing enable us to communicate a consistent brand image at both the national and local levels.

Strong Institutional Relationships.    Since 1993, we have provided supplemental instruction programs to schools, school districts and private educational entities (primarily parochial schools) through our Institutional Services segment. As an established provider in the institutional market, we have positioned ourselves to take advantage of the government’s increased focus and spending on supplemental education services. Although most of our contracts with school districts are school-year contracts subject to annual renewal, we have had and continue to have high rates of repeat business with our institutional customers. We have developed a new program, Education Station, to provide tutoring services mandated under NCLB. In the 2003-2004 school year, our NCLB business served approximately 16,700 students, compared to approximately 2,900 students in the 2002-2003 school year.

Strong Learning Center Franchise Model.    Franchising allows us to grow revenue with limited capital expenditures. We seek to maintain the quality and consistency of our offering and branding through the careful selection of franchisees, comprehensive franchisee training, and the system-wide implementation of proven policies and procedures. Once selected, franchisees and their employees are required to attend initial training in learning center operations and proprietary educational programs. We also offer franchisees additional training each year. Our franchising model provides us with local business partners who typically reside in and are active in their communities, thereby enhancing our advertising with local community relations activities. Since January 1, 2000, we have added 168 franchised centers, significantly contributing to our growth. Our company-owned centers also support our franchises by serving as “best practice” models where significant operational and educational improvements can be developed and implemented quickly. Successful programs can then be rolled out to our franchisees.

Our franchise system is characterized by high demand for franchises, and low franchisee concentration and turnover. Our franchisee selection process is highly competitive, attracting on average 4,000 applicants for new territories each year. We seek franchisees who prefer to be active

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owner-operators. We have a low franchise center closing rate of approximately 1% over each of the last five years. We also maintain a very low franchisee ownership concentration, with 73% of our franchisees owning only one or two centers, and no franchisee owning more than 20 centers.

Outstanding Track Record of Growth and Financial Performance.    We have demonstrated significant growth in our business from 1999 to 2003. Our revenue increased from $154.9 million in 1999 to $242.3 million in 2003 and our operating income grew from $15.4 million in 1999 to $31.4 million in 2003, representing a compound annual growth rate of 12% in revenues and 20% in operating income. For the same period, net income increased from $9.5 million to $10.9 million, reflecting the increase in operating income, offset by increases in interest expense of $13.2 million and taxes of $1.6 million in 2003 as compared to 1999. We have continued to experience significant growth. Our revenues increased from $60.2 million for the three months ended March 31, 2003 to $82.2 million for the three months ended March 31, 2004, and our operating income increased from $5.8 million for the three months ended March 31, 2003 to $11.0 million for the three months ended March 31, 2004. For the same period, net income increased from $1.5 million for the three months ended March 31, 2003 to $4.9 million for the three months ended March 31, 2004, offset by additional taxes of $2.0 million in the first quarter of 2004 as compared to the first quarter of 2003. Although our business remains strong, we do not expect growth to continue at the same rate experienced in the first quarter of 2004.

Experienced Management Team.    We have a strong and experienced management team with significant experience at Educate and the predecessor business, as well as expertise in marketing, finance, government and operations. The members of our senior management team have an average of seven years of experience with us. Our Chairman and Chief Executive Officer, R. Christopher Hoehn-Saric, has been with us since 1991.

Business Strategy

Our goal is to strengthen our position as a leading provider of tutoring and other supplemental education services. To further this goal, certain members of our management and affiliates of Apollo Advisors, L.P. acquired substantially all of the pre-K-12 business of Laureate. This acquisition has enabled us to focus our efforts and financial resources exclusively on developing and growing our business, whose revenues represented approximately 36% of Laureate’s revenues in 2002, the year prior to acquisition. Prior to our acquisition by Apollo, we were focused on providing similar pre-K-12 services but operated under a much larger company which had more of a post secondary focus. Our strategy includes the following elements:

Ÿ Drive Organic Learning Center Growth.    We intend to drive same center sales and operating income growth by improving the effectiveness of our marketing, increasing revenues per student and controlling costs. To achieve these goals, we intend to continue our high levels of advertising and product expansion and innovation.

Ÿ Expand Our Sylvan Learning Center System.    We believe there is significant potential to establish new Sylvan Learning Centers, particularly in markets that are underserved:

Ÿ We expect to add approximately 35 to 45 franchised centers to our system per year, thereby expanding our system with limited capital expenditures by us.

Ÿ We intend to continue to increase the number of company-owned centers through selected acquisitions of Sylvan Learning Centers operated by franchisees and the opening of new company-owned centers in certain markets.

Ÿ We intend to pilot a strategy where we will rapidly increase the density of company-owned learning centers in a few select metropolitan areas where we have a low center density, as measured by center per child.

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Ÿ Increase Our NCLB Penetration.    As schools fail to meet their adequate yearly progress goals, we expect the market for the provision of supplemental education services under NCLB to grow. We intend to expand our NCLB business further by leveraging our strong institutional presence to build Education Station into the leading brand in this emerging market. We are also developing a new small group instructional program that allows our franchisees to participate in the provision of NCLB services beginning in the 2004–2005 school year.

Ÿ Grow Our Online Business.    We believe that internet-based tutoring programs represent an attractive growing market opportunity. We believe our significant investment in developing our technologically sophisticated, internet-based application for second through ninth grade reading and math instruction, together with our six years of experience in marketing and delivering these services to students, positions us to take advantage of this growing market. We intend to increase this competitive advantage by expanding our content, improving our current online applications and adding new products and services to the applications we currently provide. We plan to offer our online products through all three of our segments.

Ÿ Extend Our Service Offerings.    We intend to continue to develop new programs based on the specific needs of our customers in each of our segments. For example:

• In our Learning Center segment, we are developing summer skills workshops and other complementary services to reach a broader group of students. We are also developing a new small group instructional program that allows our franchisees to participate in the provision of NCLB services beginning in the 2004–2005 school year.

• In our Institutional Services segment, we believe that we have a significant opportunity to increase our market share by selling additional services to our existing institutional customers, expanding our customer base and broadening the scope of our institutional services. We intend to utilize our existing relationships to promote new service offerings to existing customers through selected acquisitions of other businesses, such as the Progressus Therapy acquisition.

• In our Online Learning Services segment, we are working on a program to extend eSylvan services to include high school math instruction.

Ÿ Expand Use of the Sylvan Brand.    The Sylvan brand is one of our most valuable assets. We intend to continue to expand use of our brand and grow our business as opportunities arise. We plan to continue the historically high levels of marketing expenditures made by us and our franchisees to grow our market share and to maintain year-round marketing programs. We also intend to focus on opportunities to expand the use of this brand by potentially licensing it to educational book and software publishers and for other educational products. This approach should increase our already strong brand equity by enhancing brand image and consumer accessibility.

Connections Academy

Our subsidiary, Connections Academy, Inc., operates virtual public and charter schools for K-8 students. We acquired Connections Academy, Inc. from a subsidiary of Laureate as part of our acquisition by Apollo. Our Board of Directors has directed management to sell Connections Academy to certain of our existing stockholders prior to the consummation of this offering. One or more of our executive officers may serve as board members of Connections Academy after the sale.

The Board’s determination was based on several factors. As a provider of primary education services through virtual public and charter schools, Connections Academy will be subject to uncertain and potentially significant government regulation that is more unpredictable and extensive than the government regulation to which our other businesses are subject. In addition, as a newly formed company, we expect that Connections Academy will experience net losses for the next several years. Following this sale, we will have no ongoing involvement with Connections Academy other than a

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customary transition services agreement. We expect to retain the obligation to make payment to Laureate if Connections Academy exceeds specified levels of EBITDA following the sale.

On June 29, 2004, we declared a dividend to our existing stockholders in the amount of $9 million. We anticipate that substantially all of the dividend may be used by these stockholders to fund the working capital needs of Connections Academy.

Our Equity Sponsor

As of March 31, 2004, affiliates of Apollo Advisors, L.P. (“Apollo”) owned 85.5% of our outstanding shares of common stock on a fully diluted basis (or 54.8% after giving effect to this offering and 50.0% if the underwriters’ over-allotment option is exercised in full). We refer to Apollo as our “equity sponsor.” Apollo was founded in 1990 and is among the most active private investment firms in the United States in terms of both number of investment transactions completed and aggregate dollars invested. Since its inception, Apollo has managed the investment of an aggregate of approximately $14 billion in equity capital in a wide variety of industries, both domesically and internationally.

Sales and Marketing

Learning Center

Philosophy

We have positioned ourselves as a provider of tutoring services that inspire students to achieve their objectives, build self-confidence and strengthen each student’s enthusiasm for learning by instilling our “Learning Feels Good^™” philosophy. We developed our philosophy through qualitative and quantitative consumer research of women within our target audience. We have used consumer research to identify the most compelling message as well as the benefits and features that are most relevant and believable to our target audience.

Marketing

We believe our investment in advertising is driving a high level of brand awareness and growth in favorable consumer perceptions about our brand. Our marketing strategy relies primarily on direct response marketing. Our marketing materials are designed to generate a response from consumers, usually in the form of a call to one of our learning centers. This direct marketing strategy allows us to quantitatively and qualitatively test the effectiveness of various aspects of our marketing campaigns by measuring consumer response and making appropriate modifications to the campaign to improve consumer response. We believe that this empirical approach to marketing allows us to make more effective use of each media vehicle and to improve the return on our marketing investment.

We have found television advertising, such as our current, award-winning “This Moment Brought to You by Sylvan” advertising campaign, to be especially effective at delivering an emotionally compelling message to consumers. Accordingly, we commit a majority of our advertising funds to television advertising. The remaining advertising expenditures are comprised of local spending mainly on direct mail, print or public and community relations. As part of our quantitative and qualitative analysis, each year we test the performance of our newly developed advertising materials in select markets and compare the results to the benchmarks set by the best performing advertising materials in our previous campaigns to determine if the new material will be used throughout the system. In each year since 2001, when we began national quantitative testing of our advertising materials, each year’s new materials have been significantly more effective than the benchmarks set by our prior campaigns.

Our marketing is coordinated across three tiers, the national marketing fund, regional cooperative marketing funds, and local marketing. Substantially all franchised and company-owned centers pay a

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monthly fee into the national marketing fund, which is jointly managed by representatives of the company and the franchise community, while regional cooperative marketing funds are managed by members of the region, and local funds are managed individually by franchisees or company-owned center management. These three tiers use a combination of marketing channels, including television, print and grassroots public and community relations, such as appearances at public school parent assemblies, local street fairs and festivals, and other community events sponsored by local civic and religious groups. We maintain a consistent and targeted advertising message across each of these tiers and in each of the marketing channels through the centralized development and distribution of all advertising material used, including the materials used by franchisees and company-owned centers in local markets, and through specific recommendations to our franchisees of the appropriate mix of marketing channels.

Institutional Services

Our Institutional Services segment seeks to understand the needs of a particular institution and develops specific programs to address those needs within the scope of available funding. Our institutional services are marketed primarily through direct, personal contact with superintendents of school districts, school principals and other key decision makers at targeted institutions by our relationship managers and sales force. Through these sales efforts, we seek to maintain and expand our relationships with existing institutional customers. This focus on our existing relationship allows us to market additional supplemental services to them, which is less expensive than new client development efforts. Our institutional services are also marketed to new institutional customers by our nine full time sales people who leverage our track record of success to foster relationships with new institutional customers. In addition, the management of Catapult Learning spends a significant amount of time presenting at numerous conferences and trade shows catering to education professionals to increase its profile in the education community.

We employ a wide variety of consumer marketing strategies to market our Education Station program to parents, including radio, print, direct mail and grassroots public and community relations. In an effort to build the name recognition of our newly-developed Education Station program, we have made, and will continue to make, significant marketing expenditures.

Online Learning Services

Our online services are marketed through online marketing campaigns. eSylvan has established a network of providers of web-based advertising and is constantly working to refine this network to ensure that it is reaching the highest quality audience at the lowest possible cost. As the eSylvan student base is expanded, we believe eSylvan will gain more referrals from current and former students. eSylvan also intends to pursue cross-promotional opportunities with existing and former Sylvan Learning Center and Catapult Learning customers.

Employees

As of March 31, 2004, we had a total of 1,832 full-time and 7,174 part-time U.S. employees, of whom 4,649 were employed in our Learning Center segment; 4,089 were employed in our Institutional Services segment; 153 were employed in our Online Learning Services segment and 115 were employed in corporate services functions. Additionally, we had 655 Schülerhilfe employees of whom 80 were full-time and 575 were part time. None of our employees is a party to any collective bargaining or similar agreement with us. We consider our relationships with our employees to be good.

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Properties

In our Learning Center segment, there were 138 company-owned Sylvan Learning Centers operating in the U.S., as of March 31, 2004. All of our company-owned Sylvan Learning Centers are located on premises with short term leases (typically three years) that generally comprise approximately 3,000 square feet. As of March 31, 2004, we had 876 franchised Sylvan Learning Centers operating in North America. All of our franchised Sylvan Learning Centers are located on premises leased or owned by the individual franchisee. Within our Schülerhilfe operations, there were approximately 232 company-owned centers operating in Germany and 668 franchised locations operating in Germany and 50 franchised locations operating in Austria as of March 31, 2004. All company-owned Schülerhilfe centers are located on leased premises that typically comprise approximately 1,500 square feet. All of Schülerhilfe’s franchised centers are located on premises leased or owned by individual franchisees. No single center is material to our operations.

As of March 31, 2004, our Sylvan Learning Center locations consisted of the following:

United States and Territories	Company-Owned Centers	Franchised Centers	Total	United States and Territories	Company-Owned Centers	Franchised Centers	Total
Alabama	5	14	19	New Jersey	2	22	24
Alaska	—	3	3	New Mexico	—	5	5
Arizona	—	11	11	New York	—	37	37
Arkansas	—	5	5	North Carolina	—	44	44
California	27	69	96	North Dakota	—	3	3
Colorado	—	15	15	Ohio	—	43	43
Connecticut	—	12	12	Oklahoma	—	6	6
Delaware	3	—	3	Oregon	—	12	12
Florida	15	47	62	Pennsylvania	10	31	41
Georgia	14	24	38	Rhode Island	1	3	4
Hawaii	—	2	2	South Carolina	—	14	14
Idaho	—	3	3	South Dakota	—	2	2
Illinois	—	33	33	Tennessee	—	19	19
Indiana	—	21	21	Texas	22	34	56
Iowa	—	11	11	Utah	4	3	7
Kansas	—	8	8	Virginia	6	25	31
Kentucky	—	10	10	Washington	—	26	26
Louisiana	—	20	20	West Virginia	—	6	6
Maine	—	2	2	Wisconsin	—	20	20
Maryland	11	15	26	Guam	—	1	1
Massachusetts	11	10	21	Puerto Rico	—	2	2
Michigan	—	38	38
Minnesota	6	10	16	Total	138	790	928
Mississippi	—	5	5
Missouri	—	20	20	Canada	—	86	86
Montana	—	5	5	Hong Kong	—	2	2
Nebraska	—	8	8
Nevada	—	6	6
New Hampshire	1	5	6

We maintain our corporate headquarters at 1001 Fleet Street in Baltimore, Maryland. Our corporate headquarters is used by all three of our business segments. At our corporate headquarters, we sublease 57,471 square feet of office space from Laureate. The initial term of the sublease for our headquarters expires on August 30, 2011.

We sublease one other property from Laureate that is used in support of each of our business segments. The property is located at 506 S. Central in Baltimore, Maryland and consists of 25,997 square feet. The sublease for the 506 S. Central property expires on November 30, 2006 and is renewable for three additional periods totaling 13 years at our discretion.

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We lease 11,990 square feet of space in Elkridge, Maryland that serves as a call center for our Sylvan Learning Centers. The lease expires on December 31, 2005 and is renewable for two additional three-year terms at our discretion. Schülerhilfe leases approximately 12,000 square feet of office space in Gelsenkirchen, Germany, which serves as its corporate headquarters.

Competition

While we face competition in each of our business segments, the markets for the Learning Center and Institutional Services segments are very fragmented and penetrations are low. We are aware of only five direct national corporate competitors in our North American Learning Center business: Huntington Learning Centers, Inc., Kumon Educational Institutes, The Princeton Review, Kaplan Educational Centers and SCORE! Education Centers. With the exception of Kumon Educational Institutes, which is comprised of a large number of locations mostly operated in facilities primarily used by other organizations, we believe these competitors operate fewer learning centers and provide services within a smaller geographic area than we do. In most areas served by our Learning Center segment, competition also exists from individual tutors and local learning centers. Learning Center competition focuses on education quality, convenient location of franchised businesses and price. Schülerhilfe’s primary competition consists of Studienkries, a slightly-larger national provider of tutoring services in Germany, smaller regional tutoring chains and individual local tutors.

In our Institutional Services business, competition is primarily based on education quality, reputation and price. We compete with individuals that provide tutoring services to institutional customers, state and local education agencies that provide supplemental education services and national providers of supplemental education services, such as Kaplan K12 Services and The Princeton Review. We also compete with state-approved providers of tutoring services with respect to our No Child Left Behind supplemental education services. Most providers of No Child Left Behind services are individuals and smaller companies that do not have our national presence. In addition, we are aware of several other entities that currently provide Title I and state-based programs on a contract basis for students attending parochial and private schools. Progressus Therapy primarily competes with large regional companies that provide speech, occupational and physical therapy to children with special educational needs in large metropolitan areas such as Los Angeles and Chicago. However, there are few providers of these specialized services on a national scale.

In our Online Learning Services segment, we compete against smaller companies that participate in the online tutoring market. We also compete with individual home tutors who typically serve higher income families. We expect that some existing “bricks and mortar” educational services companies, and others, will begin to develop and distribute their services over the Internet in the near future. We believe that our services differ significantly from those currently offered by these companies. As Internet and broadband services become more widely deployed in the pre-K-12 market, we expect new and as yet unidentified companies to enter the market.

Government Regulation

Franchise Regulation.    Various state authorities as well as the Federal Trade Commission (“FTC”) regulate the sales of franchises in the United States. The FTC requires that franchisors make extensive disclosures to prospective franchisees but does not require registration. A number of states require registration and prior approval of the franchise-offering document. In addition, many states have “franchise relationship laws” or “business opportunity laws” that limit the ability of a franchisor to

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terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our franchising operations have not been materially adversely affected by existing regulation, we cannot assure you that we will not be adversely affected in the future nor can we predict the effect of any future legislation or regulation.

Our international franchise agreements and franchise operations are regulated by various foreign laws, rules and regulations. To date, these laws have not precluded us from selling franchise licenses in any given territory and have not had a material adverse effect on our operations.

Title I.    Title I eligible school districts are responsible for implementing Title I and carrying out their educational programs. Title I regulations, as well as provisions of Title I itself, direct Title I eligible districts to satisfy obligations including, among others, involving parents in their children’s education, evaluating and reporting on student progress, providing equitable services and other benefits to eligible non-public school students in the district and other fiscal requirements. In contracting with school districts to provide Title I services, we are, and will continue to be, subject to various Title I requirements and may become responsible to the school district for carrying out specific functions required by law. For example, we have responsibility for introducing program content adequate to achieve certain educational gains and maintaining the confidentiality of student records. Our failure to adhere to Title I requirements or to carry out regulatory responsibilities undertaken by contract may result in contract termination, financial liability or other sanctions.

Intellectual Property

We have federal trademark registrations for the words “Sylvan,” “Sylvan Learning Center,” and “eSylvan” and distinctive logos, along with various other trademarks, patents and servicemarks and have applications pending for a number of other distinctive phrases, including “Catapult Learning,” “Education Station,” “Progressus,” and “Progressus Therapy, Inc.” We cannot predict whether our trademark and service mark applications will be approved. We cannot assure you that our existing or future trademarks, patents or servicemarks will provide meaningful protection. We also have obtained foreign registrations of Sylvan in over 50 countries. Our License Agreement grants our franchisees the right to use certain of our trademarks and servicemarks in connection with operation of a franchised learning center subject to certain quality control and other provisions.

Legal Proceedings

From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition or results of operation.

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MANAGEMENT

The following table sets forth certain information regarding our directors and executive officers as of April 30, 2004.

Name	Age	Position(s)
R. Christopher Hoehn-Saric	41	Chief Executive Officer; Chairman of Board of Directors
Peter Cohen	49	President and Chief Operating Officer
Kevin Shaffer	41	Chief Financial Officer
Mary Foster	49	President, Learning Center segment
Jeffrey Cohen	38	President, Institutional Services segment
Laurence Berg	37	Director
Cheryl Gordon	48	Director
Michael Gross	42	Director
Aaron Stone	31	Director

R. Christopher Hoehn-Saric became our Chief Executive Officer in July 2003 and Chairman of our Board of Directors in April 2004. Prior to that time, in February 2000, Mr. Hoehn-Saric assumed the leadership position of Ventures, the incubator subsidiary of our predecessor, Laureate, as Chairman and Chief Executive Officer and served in that capacity until our acquisition by Apollo. Beginning in April of 1993, he served as Chairman of the Board of Laureate and as co-Chief Executive Officer of Laureate beginning in December 1995. He also served as Laureate’s president from 1988 to 1993 and has been a member of Laureate’s Board of Directors since 1986.

Peter Cohen became our President and Chief Operating Officer in July 2003. In February 2000, Mr. Cohen assumed the position of President and Chief Operating Officer of Laureate and served in that position until our acquisition by Apollo. Mr. Cohen joined Laureate in 1996 as President of the Sylvan Learning Centers division. From 1994 to 1996, Mr. Cohen served as chief executive officer of The Pet Practice, Inc., a national chain of branded pet hospitals.

Kevin Shaffer became our Chief Financial Officer in July 2003. Previously, he served as Vice-President of Finance and Corporate Controller of Laureate beginning in June 1999 and served in that capacity until our acquisition by Apollo. Prior to joining Laureate, Mr. Shaffer was an executive with Ernst & Young LLP, providing audit and consulting services to clients in a variety of industries from 1984 to 1999.

Mary Foster became the President of our Learning Center segment in July 2003. Previously, Ms. Foster joined Laureate in January 2001 as President of its Sylvan Learning Centers division and served in that capacity until our acquisition by Apollo. Prior to joining Laureate, Ms. Foster held a senior management position with Riverside Corporation as Senior Vice President of Sales and Marketing from 1999 to 2001. Prior to that, from 1993 to 1998, Ms. Foster was President of Ethel M Chocolates.

Jeffrey Cohen became the President of our Institutional Services segment, formerly known as Sylvan Education Solutions, in July 2003. He previously served in that role with Laureate from August 2001 to July 2003. Prior to joining Laureate, from February 1998 until July 2001, Mr. Cohen was with Prometric, Inc., a provider of computer-based assessment and examination services, serving first as the Vice President of Prometric’s Academic, Professional and Corporate Services Business Unit and later as the Senior Vice President for Business Unit Management. Mr. Cohen also served as a political appointee in the Clinton Administration.

Laurence Berg has served as one of our directors since March 2003 and served as Chairman of our Board of Directors from March 2003 to April 2004. Mr. Berg is a senior partner of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the Apollo Investment

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Funds, a series of private securities investment funds, where he has worked since 1992. Prior to joining Apollo, Mr. Berg was a member of the Mergers and Acquisition Group at Drexel Burnham Lambert. Mr. Berg is also a director of AMC Entertainment Inc., Hayes Lemmerz International, Inc., Rent-A-Center, Inc. and Laureate.

Michael Gross has served as one of our directors since April 2004. Mr. Gross is a senior partner and co-founder of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the Apollo Investment Funds, a series of private securities investment funds, where he has worked since 1990. Mr. Gross also is Chief Executive Officer and a director of Apollo Investment Corporation, a publicly traded closed-end investment company and affiliate of Apollo Advisors, L.P. Mr. Gross currently serves on several boards of directors, including Allied Waste Industries, Inc., Pacer International, Inc., SkyTerra Communications, Inc., Saks, Inc. and United Rentals, Inc. Mr. Gross is a founding member, and serves on the executive committee, of the Youth Renewal Fund, is the Chairman of the Board of the Mt. Sinai Children’s Center Foundation, serves on the Board of Trustees of the Trinity School and on the corporate advisory board of the University of Michigan Business School.

Aaron Stone has served as one of our directors since April 2004. Mr. Stone is a principal of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the Apollo Investment Funds, a series of private securities investment funds, where he has worked since 1997. Prior to joining Apollo, Mr. Stone was a member of the Mergers and Acquisition Group at Smith Barney, Inc.

Cheryl Gordon has served as one of our directors since June 2004. Ms. Gordon is a partner of Apollo Advisors, L.P., where she has worked since 2002. Ms. Gordon was the Chief Executive Officer of Rothschild Asset Management from 1995 to April 2000. She served as Senior Managing Director for Rothschild North America from 1993 until 2000. She is a Governor for the Iowa State University Board of Governors. Ms. Gordon is also a member of the Dean’s Advisory Council, Iowa State University College of Business. Ms. Gordon is a director and chairperson of the Investment Committee for the Iowa State University Foundation. She is Trustee of the Mount Sinai Medical Center.

Board Composition

Our Board of Directors currently consists of five members. Our Board of Directors is elected annually, and each director holds office for a one-year term. Pursuant to the terms of his employment agreement, Mr. Hoehn-Saric is entitled to be nominated to serve as Chairman of the Board of Directors. Unless affiliates of Apollo beneficially own less than a majority of our common stock and have sold at least one share of our common stock other than in this offering, Apollo has the right to require the board of directors to be expanded and to nominate two directors to fill these vacant seats.

In order to ensure compliance with the independence requirements of the NASDAQ National Market, the composition of our Board of Directors may change prior to and following the offering. It is our intention to be in full and timely compliance with all applicable rules of the NASDAQ National Market and applicable law, including with respect to the independence of our directors. We intend to avail ourselves of the transition periods provided for under the applicable rules of the NASDAQ National Market for issuers listing in conjunction with their initial public offering. We also intend to avail ourselves of the NASDAQ “controlled company exception,” which, so long as affiliates of Apollo continue to hold a majority of our common stock, eliminates the requirements that we have a majority of independent directors on our Board of Directors and that our compensation and nominating and corporate governance committees be comprised entirely of independent directors. Even though we may not maintain a majority of independent directors on our Board of Directors, we intend to establish and maintain audit, compensation and nominating and corporate governance committees comprised entirely of independent directors, consistent with the transition periods of the NASDAQ rules.

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Apollo Approval of Certain Matters

The approval of a majority of the members of our Board of Directors, which must include the approval of the majority of the directors affiliated with Apollo, is required by our bylaws under certain circumstances. These include, as to us and each of our subsidiaries:

Ÿ amendment, modification or repeal of any provision of the certificate of incorporation, bylaws or similar organizational documents in a manner that adversely affects Apollo;

Ÿ the redemption, purchase or acquisition of any of our securities or those of our subsidiaries;

Ÿ the issuance of additional shares of any class of capital stock (other than the grant of options or the issuance of shares upon the exercise of options);

Ÿ the payment or declaration of any dividend or other distribution, with respect to any shares of any class or series of capital stock;

Ÿ a consolidation or merger with or into any other entity, or transfer (by lease, assignment, sale or otherwise) of all or substantially all of our assets to another entity;

Ÿ a complete or partial liquidation, dissolution, winding-up, recapitalization, reclassification or reorganization;

Ÿ a split, combination or reclassification of any shares of capital stock;

Ÿ a disposition of any assets in excess of $5 million in the aggregate;

Ÿ consummation of any acquisition of the stock or assets of any other entity involving consideration in excess of $5 million in the aggregate;

Ÿ entering into certain transactions with affiliates;

Ÿ the incurrence of indebtedness aggregating more than $5 million, except for borrowings under a revolving credit facility that has previously been approved or is in existence (with no increase in maximum availability) on the date of closing of this offering;

Ÿ change in our chief executive officer; and

Ÿ change in size of our Board of Directors.

This provision of our bylaws shall terminate at such time as affiliates of Apollo no longer beneficially own at least 33% of our outstanding common stock and have sold at least one share of our common stock other than in this offering.

Board Committees

Our Board of Directors has the authority to appoint committees to perform certain management and administration functions. Our Board of Directors currently has an audit committee, a compensation committee and a nominating and corporate governance committee. The composition of the board committees will comply, when required, with the applicable rules of the NASDAQ National Market and provisions of the Sarbanes-Oxley Act of 2002.

The audit committee selects, on behalf of our Board of Directors, an independent public accounting firm to be engaged to audit our financial statements, discusses with the independent auditors their independence, reviews and discusses the audited financial statements with the independent auditors and management and recommends to our Board of Directors whether the audited financial statements should be included in our Annual Reports on Form 10-K to be filed with the SEC.             , an independent director, is the chairman of our audit committee, and the other members of our audit committee are              and             . Our Board of Directors has determined that              is an “audit committee financial expert” under the requirements of NASDAQ and the SEC. We intend to avail ourselves of the transition periods provided for under the applicable NASDAQ

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Marketplace Rules for issuers listing in conjunction with their initial public offering and expect to replace              with an independent director within 90 days after consummation of the offering and to replace              with an independent director within one year after consummation of the offering. Following these actions, the audit committee will consist of three members, all of whom will be independent directors.

The compensation committee reviews and either approves, on behalf of our Board of Directors, or recommends to the Board of Directors for approval (1) the annual salaries and other compensation of our executive officers and (2) individual stock and stock option grants. The compensation committee also provides assistance and recommendations with respect to our compensation policies and practices and assists with the administration of our compensation plans.             , an independent director, is the chairman of our compensation committee, and the other members of our compensation committee are              and             . We intend to avail ourselves of the transition periods provided for under the applicable NASDAQ Marketplace Rules for issuers listing in conjunction with their initial public offering and expect to replace              on the compensation committee with an independent director within 90 days following the consummation of this offering and to replace              with an independent director within one year following the consummation of this offering. Following these actions, the compensation committee will consist of three members, all of whom will be independent directors.

The nominating and corporate governance committee assists our Board of Directors in fulfilling its responsibilities by identifying and approving individuals qualified to serve as members of our Board of Directors, selecting director nominees for our annual meetings of stockholders, evaluating the performance of our Board of Directors and developing and recommending to our Board of Directors corporate governance guidelines and oversight with respect to corporate governance and ethical conduct.             , an independent director, is the chairman of our nominating and corporate governance committee, and the other members of our nominating and corporate governance committee are              and             . We intend to avail ourselves of the transition periods provided for under the applicable NASDAQ Marketplace Rules for issuers listing in conjunction with their initial public offering and expect to replace              on the nominating and corporate governance committee with an independent director within 90 days following the consummation of this offering and to replace              with an independent director within one year following the consummation of this offering. Following these actions, the nominating and corporate governance committee will consist of three members, all of whom will be independent directors.

Compensation Committee Interlocks and Insider Participation

Mr. Berg and Mr. Stone each served as officers of our company in 2003. Mr. Berg and Mr. Stone resigned as officers in July 2003. None of our executive officers serves as a director or member of the compensation committee of another entity, one of whose executive officers serves on our Board of Directors or compensation committee.

Compensation of Directors

For the year ended December 31, 2003, the individuals serving on the Board of Directors who were not our employees did not receive any compensation so long as they were affiliated with, or had a financial interest in, us.

After consummation of this offering, we intend to pay our non-employee directors an annual retainer of $              as fees related to their service on our Board of Directors and an additional annual retainer of $              for each committee on which they serve as a member.

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We intend to promptly reimburse all directors for reasonable expenses incurred to attend meetings of our Board of Directors or committees. In addition, non-employee directors are eligible to receive an option grant to purchase shares under our 2004 Omnibus Stock Incentive Plan.

Between May 13 and June 23, 2004, our non-employee directors were granted options to purchase 80,000 shares of our common stock at an exercise price of $5.06.

Executive Compensation

The following summary compensation table sets forth information concerning the cash and non-cash compensation during 2003 earned by, awarded to or paid to our chief executive officer and the remaining four most highly compensated executive officers as of December 31, 2003. We refer to these officers as our “named executive officers” in other parts of this prospectus.

Summary Compensation Table

	2003 Annual Compensation					Long Term Compensation
						Awards	Payouts
Name and Principal Position	Salary ($)		Bonus ($)		Other Annual Compensation ($)(1)	Securities Underlying Options	LTIP Payouts ($)	All Other Compensation ($)(2)
R. Christopher Hoehn-Saric; Chairman & CEO, Educate, Inc.	$	385,000	$	412,500		1,380,000		6,000
Peter Cohen; President & COO, Educate, Inc.	$	325,726	$	347,600		424,000		6,000
Mary Foster; President, Learning Center segment	$	262,500	$	167,300		320,000		6,000
Jeffrey H. Cohen; President, Institutional Services segment	$	231,423	$	170,000		260,000		5,509
Donna Dixon; Senior VP Operations	$	178,190	$	118,800		60,000		5,907

(1) The aggregate dollar amount of perquisites or other personal benefits for our named executive officers did not exceed the lesser of (a) $50,000 and (b) 10% of the total salary and bonus reported by such named executive officer for such fiscal year.

(2) Represents matching contributions made by us on behalf of the named executive officers under our 401(k) plan.

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Option Grants in Last Fiscal Year

The following table sets forth information regarding stock options we granted during the fiscal year ended December 31, 2003 to the named executive officers. Potential realizable values are net of exercise price before taxes, and are based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future stock price growth.

	Individual Grants
Name	Number of Securities Underlying Options Granted	Percent of Total Options Granted to Employees During Fiscal Year Ended December 31, 2003		Exercise Price Per Share		Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
							5%		10%
R. Christopher Hoehn-Saric(1)	1,380,000	40	%	$	3.71	7/01/2013	$	3,221,894	$	8,165,141
Peter Cohen(2)	424,000	12	%	$	3.71	7/01/2013	$	989,943	$	2,508,710
Mary Foster(2)	320,000	9	%	$	3.71	7/01/2013	$	747,127	$	1,893,366
Jeffrey H. Cohen(2)	260,000	8	%	$	3.71	7/01/2013	$	607,041	$	1,538,360
Donna Dixon(2)	60,000	2	%	$	3.71	7/01/2013	$	140,086	$	355,006

(1) The options granted to Mr. Hoehn-Saric vest and become exercisable as to 1/36 of the shares subject to the options at the end of each full month following the date of grant; provided, however, that if a “change of control” occurs, the options will become immediately vested and exercisable in full.

(2) The options granted to the named executive officers other than Mr. Hoehn-Saric vest and become exercisable as to 1/48 of the shares subject to the options at the end of each full month following the date of grant; provided, however, that if a “change of control” occurs, the options will become immediately vested and exercisable in full.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

The following table sets forth information on unexercised options to purchase our common stock granted to the named executive officers and held by them as of December 31, 2003. No options were exercised during fiscal year 2003.

Name	Shares Acquired on Exercise	Value Realized	Number of Securities Underlying Unexercised Options at December 31, 2003		Value of Unexercised In- The-Money Options at December 31, 2003 (1)
			Vested	Unvested	Vested	Unvested
R. Christopher Hoehn-Saric	—	—	230,000	1,150,000	2,596,125	12,980,625
Peter Cohen	—	—	53,000	371,000	598,238	4,187,663
Mary Foster	—	—	40,000	280,000	451,500	3,160,500
Jeffrey H. Cohen	—	—	32,500	227,500	366,844	2,567,906
Donna Dixon	—	—	7,500	52,500	84,656	592,594

(1) There was no public trading market for our common stock as of December 31, 2003. Accordingly, these values have been calculated in accordance with the rules of the Securities and Exchange Commission based on an assumed initial public offering price of $15.00 per share, less the applicable exercise price per share, multiplied by the underlying shares.

Stock Option Plans

2003 Omnibus Stock Incentive Plan.    The 2003 Omnibus Stock Incentive Plan was adopted by our Board of Directors on June 30, 2003 and approved by our stockholders on the same date for the benefit of our officers, directors, employees, consultants and advisors. This plan provides for the grant of stock options and restricted stock. An award may consist of one arrangement or benefit or two or

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more of them in tandem or in the alternative. An aggregate of 3,680,000 shares of common stock is reserved for issuance under this plan. As of March 31, 2004, we had granted options to purchase an aggregate of 3,460,000 shares of common stock under this plan. Subsequent to March 31, 2004, we increased the number of shares available for issuance under this plan and issued 604,000 shares of restricted stock and options to purchase 305,200 shares of our common stock. 130,750 shares remain available for future issuance under this plan. We will not be granting awards pursuant to this plan following the offering.

In the event of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting our common stock, an equitable substitution or proportionate adjustment shall be made in (i) the aggregate number of shares reserved for issuance under this plan, (ii) the kind, number and option price of shares subject to outstanding options granted under this plan, and (iii) the kind, number and purchase price of shares subject to outstanding awards of restricted stock as may be determined in good faith by the administrator of the plan. The administrator may make such other substitutions or adjustments as may be determined in good faith and may provide for the cancellation of any outstanding awards and payment in cash or other property therefor.

2004 Omnibus Stock Incentive Plan.    The 2004 Omnibus Stock Incentive Plan was adopted by our Board of Directors on             , and approved by our stockholders on             , for the benefit of our officers, directors, employees, consultants and advisors. An aggregate of              shares of common stock is reserved for issuance under this plan, plus an annual increase to be added automatically on the first day of our fiscal year (beginning in 2005) equal to the lesser of (i)              shares or (ii)             percent of the number of outstanding shares on the last day of the immediately preceding fiscal year. This plan provides for the issuance of stock-based incentive awards, including stock options, stock appreciation rights, restricted stock, deferred stock, and performance shares. An award may consist of one arrangement or benefit or two or more of them in tandem or in the alternative. Under this plan, awards covering no more than              shares may be granted to any participant in any one year.

This plan will initially be administered by our Board of Directors, although it may be administered by either our Board of Directors or any committee of our Board of Directors (the board or committee being sometimes referred to as the “plan administrator”). The plan administrator may interpret this plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of this plan. This plan permits the plan administrator to select the officers, directors, key employees, advisors and consultants (including directors who are also employees) who will receive awards, to determine the terms and conditions of those awards, including but not limited to the exercise price, the number of shares subject to awards, the term of the awards, the vesting schedule applicable to awards, and to amend the terms and conditions of outstanding awards, including, but not limited to reducing the exercise price of such awards, extending the exercise period of such awards and accelerating the vesting schedule of such awards.

We may issue two types of stock options under this plan: incentive stock options (“ISOs”), which are intended to qualify under the Internal Revenue Code of 1986, as amended (the “Code”), and non-qualified stock options (“NSOs”). The option price of each ISO granted under this plan must be at least equal to the fair market value of a share of common stock on the date the ISO is granted.

Stock appreciation rights (“SARs”) may be granted under this plan either alone or in conjunction with all or part of any stock option granted under this plan. An SAR granted under this plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value (at the date of exercise) of a share of common stock over a specified price fixed by the plan administrator.

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Restricted stock, deferred stock and performance shares may be granted under this plan. The plan administrator will determine the purchase price, performance period and performance goals, if any, with respect to the grant of restricted stock, deferred stock and performance shares. Participants with restricted stock and preferred shares generally have all of the rights of a stockholder. With respect to deferred stock, during the deferral period, subject to the terms and conditions imposed by the plan administrator, the deferred stock units may be credited with dividend equivalent rights. If the performance goals and other restrictions are not attained, the participant will forfeit his or her shares of restricted stock, deferred stock and/or performance shares.

In the event of a merger, consolidation, reorganization, recapitalization, stock dividend or other change in corporate structure affecting the number of issued shares of common stock, the plan administrator may make an equitable substitution or proportionate adjustment in the number and type of shares authorized by this plan, the number and type of shares covered by, or with respect to which payments are measured under, outstanding awards and the exercise prices. In addition, the plan administrator, in its discretion, may terminate all awards with payment of cash or in-kind consideration.

The terms of this plan provide that the plan administrator may amend, suspend or terminate this plan at any time, provided, however, that some amendments require approval of our stockholders. Further, no action may be taken which adversely affects any rights under outstanding awards without the holder’s consent.

Deferred Compensation Plan

Educate, Inc. Deferred Compensation Plan.    We sponsor the Educate, Inc. Deferred Compensation Plan, a non-tax-qualified plan in which selected members of management or our Board of Directors may elect to make pre-tax deferrals of up to 85% of their annual base salary and 100% of any bonuses, annual incentive compensation and/or long term incentive compensation or board of director’s fees. In addition, the Deferred Compensation Plan allows us to make matching contributions equal to the amount that would have been made to the participant’s account under the Educate, Inc. 401(k) Plan if such plan did not limit compensation. To receive such matching contribution, the participant must have made 401(k) salary reduction contributions to the 401(k) plan and made at least a five thousand dollar contribution to the Deferred Compensation Plan for the applicable year. A participant’s interest in such matching contributions vest in accordance with the vesting schedule set forth in the 401(k) plan; provided, however that the unvested matching contributions will be considered one hundred percent vested if the participant dies while an active participant, retires due to total disability, retires once he or she has attained age fifty-five and completed at least ten years of service, or terminates in connection with a change in control. We may also make additional discretionary matching contributions that vest pursuant to the vesting schedule set forth by the plan administrator. A participant’s deferrals and matching contributions, if any, are credited to a bookkeeping account and accrue earnings and losses as if held in certain investments selected by the participant. Amounts credited to a participant’s account will generally be distributed in accordance with the participant’s deferral election, or if earlier, in the February following a participant’s termination, death or total disability. Our Deferred Compensation Plan is unfunded, and participants are unsecured general creditors of Educate, Inc. as to their accounts.

Employment Agreement

We entered into an employment agreement with Mr. Hoehn-Saric on June 30, 2003. Mr. Hoehn-Saric’s agreement has a term of three years, which will automatically be extended by one year beginning on the third anniversary of the agreement, unless either party provides written notice that it does not wish to extend the term. The agreement provides for an annual base salary of $400,000 per year that is subject to annual increases by the Board or the compensation committee thereof. Mr.

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Hoehn-Saric is eligible to receive annual performance bonuses of 100% of his base salary based upon our attainment of certain earnings before interest, taxes, depreciation and amortization goals. Mr. Hoehn-Saric was granted options to purchase 1,380,000 shares of our common stock pursuant to the Plan, with a per share exercise price equal to $3.71. These options vest as to 1/36 of the shares subject to the options at the end of each full month following the date of grant, and vest in full in the event of a change of control. The agreement also provides for Mr. Hoehn-Saric to be automatically nominated to serve as Chairman of our Board of Directors.

In the event Mr. Hoehn-Saric’s employment with us is terminated as a result of his death or total disability, he will be entitled to all amounts of accrued but unpaid base salary and benefits through the date of such termination and the bonus that he would have been entitled to had he worked the full year during which his death or total disability occurred. In the event Mr. Hoehn-Saric’s employment with us is terminated by us other than for cause, death or total disability or by Mr. Hoehn-Saric for good reason on or prior to June 30, 2006, he will be entitled to (i) his base salary until the later of the first anniversary of the date of termination or June 30, 2006 (the “Termination Payment Period”), (ii) the bonus that he would have been entitled to had he worked the full year during which the termination occurred, (iii) continue to participate in, and be covered under, our group life, disability, sickness, accident and health insurance programs on the same basis as other of our executives until the end of the Termination Payment Period, and (iv) his options will automatically vest and be exercisable as to the greater of the then vested shares or 920,000 shares, effective as of the day immediately preceding his termination date, and the options will remain outstanding and exercisable for the longer of six (6) months or the duration provided in the Plan and/or his option agreement. In the event Mr. Hoehn-Saric’s employment with us is terminated by us other than for cause, death or total disability or by Mr. Hoehn-Saric for good reason after June 30, 2006, he will be entitled to (i) his base salary until the later of the first anniversary of the date of termination or the expiration of the agreement without giving effect to any further extensions, (ii) the bonus that he would have been entitled to had he worked the full year during which the termination occurred, (iii) continue to participate in, and be covered under, our group life, disability, sickness, accident and health insurance programs on the same basis as other of our executives through the first anniversary of the date of termination, and (iv) have his options automatically vest and be exercisable as to the greater of the then vested shares or 920,000 shares, effective as of the day immediately preceding his termination date, and, the options will remain outstanding and exercisable for the longer of six (6) months or the duration provided in the Plan and/or his option agreement.

Mr. Hoehn-Saric’s agreement provides that if the benefits payable to him would be subject to the imposition of the excise tax under Section 4999 of the Code, the amount of his benefits will be reduced to the highest amount that may be paid by us or another entity without subjecting such benefits to the excise tax; provided, however, no benefit reduction will apply if Mr. Hoehn-Saric would, on a net after tax basis, receive less benefits than if the benefits were not so reduced.

Mr. Hoehn-Saric’s agreement also contains non-competition and non-solicitation provisions effective through the term of the agreement, and, unless his employment is terminated by us as a result of his death or disability, until the later of the first anniversary of the date of termination or June 30, 2006 (the first anniversary if his agreement is terminated following a change of control).

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Stockholders’ Agreement

In June 2003, we and certain holders of our common stock became parties to a stockholders’ agreement. Upon the consummation of this offering, the provisions of the stockholders’ agreement will automatically terminate.

Issuance of Common Stock to Executives

On June 30, 2003, we sold an aggregate of 368,126 shares of common stock to certain of our employees. The consideration received by us for each share sold was $3.98. The following executive officers purchased shares of common stock on June 30, 2003: Christopher Hoehn-Saric—167,503 shares; Peter Cohen—60,307 shares; Kevin Shaffer—37,692 shares; Mary Foster—12,564 shares; and Jeffrey Cohen—6,282 shares.

On May 13, 2004, we granted restricted stock awards to five of our executive officers covering an aggregate of 604,000 shares of our common stock for a purchase price per share equal to $0.01 pursuant to the terms and conditions of our 2003 Omnibus Stock Incentive Plan. The restricted stock is immediately vested but may not be directly or indirectly sold, assigned, transferred, pledged, hypothecated, monetized or otherwise disposed of for a period of three years from the date of grant, which period will be extended until five years from the date of termination of employment in the event the executive officer’s employment is terminated by us for cause or by the executive officer other than for good reason. In the event we do not consummate this offering prior to December 31, 2004, we have the right, but not the obligation, to repurchase the shares subject to the restricted stock awards at a per share price equal to the per share purchase price plus any withholding taxes the executive officer paid with respect to each such share. This right terminates immediately upon consummation of this offering.

Registration Rights Agreement

We have entered into a registration rights agreement with affiliates of Apollo Advisors, L.P. that provides that, in addition to this offering, at any time after the 180-day period following the consummation of this offering, these holders may demand that we effect up to three registrations on a long form registration statement and an unlimited number of registrations on short form registration statements, subject to certain conditions and limitations. The parties to the registration rights agreement will be entitled to request that the demand registrations be effected as a shelf registration for offerings on a delayed or continuous basis under Rule 415 under the Securities Act. In addition, the registration rights agreement includes piggyback registration rights, which permits affiliates of Apollo to require us to register shares of their common stock if we are filing a registration statement for ourselves or another party, including in this offering. The agreement also includes customary suspension, underwriter “cut-back,” indemnification and contribution provisions.

Sale of Connections Academy

Our Board of Directors has directed management to sell Connections Academy to some or all of our existing stockholders. The terms of the sale, which are expected to be determined in the second quarter, will be set forth in an agreement between us and the acquiring stockholders. The transaction will be approved by our Board of Directors after review of an independent valuation. On June 29, 2004, we declared a dividend of $9 million. See “Business—Connections Academy.”

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Our Acquisition by Apollo

On June 30, 2003, our wholly owned subsidiary, Educate Operating Company, LLC, which we refer to as our “operating company,” purchased from Laureate and Ventures, a subsidiary of Laureate, substantially all of the operations comprising Laureate’s and Ventures’ pre-K-12 education business units, including eSylvan, Inc. and Connections Academy, Inc. Upon completion of the transactions, Laureate’s operations consisted principally of its post-secondary business units.

The aggregate purchase price for the acquisition consisted of cash, a subordinated note issued to Laureate (which has since been repaid with the proceeds of our new secured credit facility) and the surrender of Laureate and Ventures securities held by our equity sponsor. See “Business—Our Equity Sponsor.” We are also required to pay Laureate a deferred portion of the purchase price and, if Connections Academy exceeds specified levels of EBITDA any time prior to December 31, 2007, additional consideration. See “Business—Sale of Connections Academy.”

In connection with our acquisition by Apollo, we also acquired the Sylvan brand and the rights to, among others, all of the Sylvan trademarks and servicemarks. We agreed to license to Laureate the right to use the Sylvan name for 12 months. Pursuant to the agreement, Laureate must cease its use of the Sylvan name on or before June 30, 2004.

Subject to certain limitations, Laureate agreed to indemnify us and our operating company for losses arising from, among other things, breaches of representations and warranties, breaches of covenants and certain liabilities relating to the pre-K-12 education business arising prior to the closing date as well as any losses payable in connection with certain patent infringement claims. Simultaneously with the closing of our acquisition by Apollo our operating company entered into a $130 million secured credit facility with a syndicate of lenders. The secured credit facility consisted of a $110 million term loan facility and a $20 million revolving credit facility. We funded the cash portion of the purchase price with our secured credit facility and a $20 million equity contribution primarily from our equity sponsor and certain members of our management team. We also sold additional shares of our common stock to our equity sponsor in exchange for certain Laureate and Ventures securities held by our equity sponsor. We contributed these securities to our operating company, who in turn surrendered the securities to Laureate and Ventures as a portion of the purchase price for the acquisition.

On April 27, 2004, our operating company entered into a new secured credit facility with a syndicate of lenders. The new secured credit facility consists of a $170 million term loan facility and a $30 million revolving credit facility. Our operating company borrowed the full $170 million under the term loan facility to repay all amounts outstanding under the subordinated note issued to Laureate in our acquisition by Apollo and to refinance borrowings under the old secured credit facility. As of April 30, 2004, we had incurred no borrowings under the revolving credit facility.

Nomination Agreement

We have entered into an agreement with Apollo pursuant to which Apollo will have the right, at any time until affiliates of Apollo no longer beneficially own at least 50% of our outstanding common stock and have sold at least one share of common stock other than in this offering, to require us to increase the size of our Board of Directors by two and to fill those vacancies with directors nominated by Apollo. Until such time that affiliates of Apollo no longer beneficially own at least 33% of our outstanding common stock and have sold at least one share of common stock other than in this offering, Apollo will have the right to nominate four designees to our Board of Directors, and certain important matters will require the approval of the majority of directors nominated by Apollo.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table shows information with respect to the beneficial ownership of our common stock as of June 28, 2004, and as adjusted to reflect the sale of common stock being offered in this offering, for:

Ÿ each person, or group of affiliated persons, known to us to own beneficially 5% or more of our outstanding common stock;

Ÿ each of our directors;

Ÿ each of our named executive officers;

Ÿ all of our directors and officers as a group; and

Ÿ each selling stockholder.

Percentage ownership before the offering is based on shares of common stock outstanding as of June 28, 2004, subject to the assumptions set forth below. Percentage ownership after the offering is based on 41,800,000 shares of common stock outstanding immediately after the closing of this offering. Beneficial ownership is determined in accordance with the rules of the SEC. Except as indicated by footnote and subject to community property laws where applicable, to our knowledge, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are exercisable as of June 28, 2004, or will become exercisable within 60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person.

	Shares Beneficially Owned Prior to the Offering			Maximum Number of Shares Offered in this Offering	Percentage Ownership After this Offering		Maximum Number of Shares being Sold in the Over- Allotment Option, if Any	Shares Beneficially Owned After the Offering if the Underwriters’ Over-Allotment Option is Exercised in Full
Name of Beneficial Owner (1)	Number of Shares	Percent						Number of Shares	Percentage Ownership
Selling stockholders:
Apollo Advisors IV, L.P.(2)(3)	34,287,197	91	%	9,550,139	58	%	2,148,781	22,588,277	53	%
SSB Capital Partners (Master Fund) I, LP(4)	1,615,104	4	%	449,861	3	%	101,219	1,064,024	3	%
Greater than 5% Stockholders, Directors and Named Executive Officers:
Laurence Berg (3)(5)(15)	34,307,197	91	%	9,550,139	58	%	2,148,781	22,608,277	53	%
Cheryl Gordon (3)(6)(16)	34,307,197	91	%	9,550,139	58	%	2,148,781	22,608,277	53	%
Michael Gross (3)(7)(15)	34,307,197	91	%	9,550,139	58	%	2,148,781	22,608,277	53	%
Aaron Stone (3)(8)(15)	34,307,197	91	%	9,550,139	58	%	2,148,781	22,608,277	53	%
R. Christopher Hoehn-Saric (9)(10)	1,224,187	3	%	—	3	%	—	1,224,187	3	%
Peter Cohen (11)	211,974	*		—	*		—	211,974	*
Mary Foster (12)	129,897	*		—	*		—	129,897	*
Jeffrey Cohen (13)	98,115	*		—	*		—	98,115	*
Donna Dixon(14)	17,500	*		—	*		—	17,500	*
All executive officers and directors as a group	36,048,870	94	%	9,550,139	61	%	2,148,781	24,349,950	57	%

* Represents beneficial ownership of less than 1% of the outstanding shares of common stock.

(1) Unless otherwise indicated, the address for each of the individuals listed below is: c/o Educate, Inc., 1001 Fleet Street, Baltimore, Maryland 21202.

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(2) Represents shares held by Apollo Sylvan, LLC and Apollo Sylvan II, LLC, two special purpose entities created in connection with our acquisition of the pre-K-12 business of Laureate. Apollo Investment Fund IV, L.P. is the managing member of Apollo Sylvan, LLC and Apollo Overseas Partners IV, L.P. serves as managing member of Apollo Sylvan II, LLC. Apollo Advisors IV, L.P. is the general partner of Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. Messrs. Leon Black and John Hannan are directors and principal executive officers of the general partner of Apollo Advisors IV, L.P., and each expressly disclaim beneficial ownership of the indicated shares.

(3) c/o Apollo Advisors, L.P., Two Manhattanville Road, Purchase, New York 10577.

(4) SSB Capital Partners (Master Fund) I, L.P., is a Delaware limited partnership. The General Partner of SSB Capital Partners (Master Fund) I, L.P. is SSBPIF GP Corp., a Delaware corporation, and an indirect wholly-owned subsidiary of Citigroup Inc. It has the power to direct SSB Capital Partners (Master Fund) I, L.P. as to the voting and disposition of shares held by SSB Capital Partners (Master Fund) I, L.P. The business address of SSB Capital Partners (Master Fund) I, L.P. and SSBPIF GP Corp. is 388 Greenwich Street, New York, NY 10013. The business address for Citigroup Inc. is 399 Park Avenue, New York, NY 10022.

(5) Includes shares of common stock beneficially owned by Apollo Advisors IV, L.P. as to which Mr. Berg, a director of the company and senior partner of Apollo Advisors IV, L.P., expressly disclaims beneficial ownership.

(6) Includes shares of common stock beneficially owned by Apollo Advisors IV, L.P. as to which Ms. Gordon, a director of the company and partner of Apollo Advisors, L.P. expressly disclaims beneficial ownership.

(7) Includes shares of common stock beneficially owned by Apollo Advisors IV, L.P. as to which Mr. Gross, a director of the company and senior partner of Apollo Advisors IV, L.P. expressly disclaims beneficial ownership.

(8) Includes shares of common stock beneficially owned by Apollo Advisors IV, L.P. as to which Mr. Stone, a director of the company and principal of Apollo Advisors IV, L.P., expressly disclaims beneficial ownership.

(9) Includes: (i) 41,880 shares of common stock that Mr. Hoehn-Saric holds as trustee of the CHS Trust; and (ii) 125,640 shares of common stock that Mr. Hoehn-Saric holds as trustee of the RCHS Trust #9.

(10) Mr. Hoehn-Saric was granted 1,380,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of his stock option agreement, his options vest and become exercisable as to 1/36 of the options at the end of each full month after June 30, 2003. As of June 28, 2004, 460,000 options had vested and another 76,667 options were to vest within 60 days. Also includes 520,000 restricted shares of our common stock Mr. Hoehn-Saric was awarded on May 13, 2004.

(11) Mr. Peter Cohen was granted 424,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of his stock option agreement, his options vest and become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003. As of June 28, 2004, 106,000 options had vested and another 17,667 options were to vest within 60 days. Also includes 28,000 restricted shares of our common stock Mr. Peter Cohen was awarded on May 13, 2004.

(12) Ms. Foster was granted 320,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of her stock option agreement, her options vest and become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003. As of June 28, 2004, 80,000 options had vested and another 12,333 options were to vest within 60 days. Also includes 24,000 restricted shares of our common stock Ms. Foster was awarded on May 13, 2004.

(13) Mr. Jeffrey Cohen was granted 260,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of his stock option agreement, his options vest and become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003. As of June 28, 2004, 65,000 options had vested and another 10,833 options were to vest within 60 days. Also includes 16,000 shares of restricted stock Mr. Jeffrey Cohen was awarded on May 13, 2004.

(14) Ms. Dixon was granted 60,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of her stock option agreement, her options vest and become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003. As of June 28, 2004 15,000 options had vested and another 2,500 options were to vest within 60 days.

(15) On May 13, 2004, Messrs. Berg, Gross and Stone each were granted 20,000 options to purchase common stock. As of June 28, 2004, all of the option had vested.

(16) On June 23, 2004, Ms. Gordon was granted 20,000 options to purchase common stock. As of June 28, 2004, all of the option had vested.

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DESCRIPTION OF CAPITAL STOCK

The following is a description of our capital stock and the material provisions of our certificate of incorporation, bylaws and other agreements to which we and our stockholders are parties, in each case upon the closing of this offering. The following is only a summary and is qualified by applicable law and by the provisions of the certificate of incorporation, bylaws and other agreements, copies of which are available as set forth under the caption entitled “Where You Can Find More Information.”

General

As of March 31, 2004, 36,800,000 shares of our common stock were issued and outstanding, and there were approximately 22 holders of our common stock. Following this offering, our certificate of incorporation will provide that our authorized capital stock will consist of an aggregate of 120,000,000 shares of common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value $0.01 per share, and we will have an aggregate of 41,800,000 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. Each such outstanding share of our common stock will be validly issued, fully paid and non-assessable. In addition, at such time, 3,372,800 shares of our common stock will be reserved for issuance upon exercise of outstanding options.

Common Stock

Voting.    The holders of our common stock are entitled to one vote for each outstanding share of common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Stockholders are not entitled to vote cumulatively for the election of directors.

Dividend Rights.    Subject to the dividend rights of the holders of any outstanding series of preferred stock, holders of our common stock are entitled to receive ratably such dividends and other distributions of cash or any other right or property as may be declared by our Board of Directors out of our assets or funds legally available for such dividends or distributions.

Liquidation Rights.    In the event of any voluntary or involuntary liquidation, dissolution or winding up of our affairs, holders of our common stock would be entitled to share ratably in our assets that are legally available for distribution to stockholders after payment of liabilities. If we have any preferred stock outstanding at such time, holders of the preferred stock may be entitled to distribution and/or liquidation preferences. In either such case, we must pay the applicable distribution to the holders of our preferred stock before we may pay distributions to the holders of our common stock.

Conversion, Redemption and Preemptive Rights.    Holders of our common stock have no conversion, redemption, preemptive, subscription or similar rights.

Preferred Stock

Following this offering, our certificate of incorporation will authorize our Board of Directors, subject to limitations prescribed by law, to issue up to 20,000,000 shares of preferred stock in one or more series without further stockholder approval. The board will have discretion to determine the rights, preferences, privileges and restrictions of, including, without limitation, voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of, and to fix the number of shares of, each series of our preferred stock. Accordingly, our Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest.

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Limitations on Directors’ Liability

Our certificate of incorporation and bylaws contain provisions indemnifying our directors and officers to the fullest extent permitted by law. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors which may, in some cases, be broader than the specific indemnification provisions contained under Delaware law.

In addition, as permitted by Delaware law, our certificate of incorporation provides that no director will be liable to us or our stockholders for monetary damages for breach of certain fiduciary duties as a director. The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of certain fiduciary duties as a director, except that a director will be personally liable for:

Ÿ any breach of his or her duty of loyalty to us or our stockholders;

Ÿ acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law;

Ÿ the payment of dividends or the redemption or purchase of stock in violation of Delaware law; or

Ÿ any transaction from which the director derived an improper personal benefit.

This provision does not affect a director’s liability under the federal securities laws.

To the extent that our directors, officers and controlling persons are indemnified under the provisions contained in our certificate of incorporation, Delaware law or contractual arrangements against liabilities arising under the Securities Act, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Provisions of Our Certificate of Incorporation and Bylaws and Delaware Law that May Have an Anti-Takeover Effect

Certificate of Incorporation and Bylaws

Certain provisions in our certificate of incorporation and bylaws summarized below may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.

Following the completion of this offering, our certificate of incorporation and bylaws will contain provisions that will permit us to issue, without any further vote or action by the stockholders, up to 20,000,000 shares of preferred stock in one or more series and, with respect to each such series, to fix the number of shares constituting the series and the designation of the series, the voting powers (if any) of the shares of the series, and the preferences and relative, participating, optional and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of such series.

The foregoing proposed provisions of our certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the

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effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management.

Delaware Takeover Statute

We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any “business combination” (as defined below) with any “interested stockholder” (as defined below) for a period of three years following the date that such stockholder became an interested stockholder, unless: (1) prior to such date, the Board of Directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) on consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (3) on or subsequent to such date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 ²/3% of the outstanding voting stock that is not owned by the interested stockholder.

Section 203 of the Delaware General Corporation Law defines “business combination” to include: (1) any merger or consolidation involving the corporation and the interested stockholder; (2) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (3) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (4) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (5) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person.

Apollo Approval Required under Certain Circumstances

See the discussion under the heading “Management—Apollo Approval of Certain Matters” relating to circumstances under which more than a simple majority of our Board of Directors may be required to approve certain matters.

The NASDAQ National Market

An application has been made for quotation on the NASDAQ National Market under the symbol “EEEE”.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is LaSalle Bank National Association.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock, and a significant public market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares of our outstanding common stock and shares of our common stock issued upon exercise of outstanding options, in the public market after this offering could adversely affect the prevailing market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.

Sale of Restricted Shares and Lock-Up Agreements

Upon the closing of this offering, we will have outstanding 41,800,000 shares of common stock, based upon our shares outstanding as of March 31, 2004.

Of these shares, the 15,000,000 shares of common stock sold in this offering, or 17,250,000 shares if the underwriters’ over-allotment option is exercised in full, will be freely tradable without restriction under the Securities Act, unless purchased by affiliates of our company, as that term is defined in Rule 144 under the Securities Act.

The remaining 26,800,000 shares of common stock were issued and sold by us in private transactions, and are eligible for public sale if registered under the Securities Act or sold in accordance with Rules 144, 144(k) or 701 of the Securities Act. However, 26,270,426 of these remaining shares of common stock are held by officers, directors, and existing stockholders who are subject to lock-up agreements for a period of 180 days after the date of this prospectus.

Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the underwriters may, at any time without notice, release all or any portion of the securities subject to the lock-up agreements. We have been advised by Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated that, when determining whether or not to release shares from the lock-up agreements, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated will consider, among other factors, the stockholder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated have advised us that they have no present intention to release any of the shares subject to the lock-up agreements prior to the expiration of the lock-up period.

As of the date of this prospectus, up to 613,334 of the remaining shares may be eligible for sale in the public market. Beginning 180 days after the date of this prospectus, 26,186,666 of these remaining shares will be eligible for sale in the public market, although all of these shares will be subject to certain volume limitations under Rule 144.

Rule 144

In general, Rule 144 allows a stockholder (or stockholders where shares are aggregated) who has beneficially owned shares of our common stock for at least one year and who files a Form 144 with the SEC to sell within any three month period commencing 90 days after the date of this prospectus a number of those shares that does not exceed the greater of:

Ÿ 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or

Ÿ the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of the Form 144 with respect to such sale.

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Sales under Rule 144, however, are subject to specific manner of sale provisions, notice requirements, and the availability of current public information about our company. We cannot estimate the number of shares of common stock our existing stockholders will sell under Rule 144, as this will depend on the market price for our common stock, the personal circumstances of the stockholders, and other factors.

Rule 144(k)

Under Rule 144(k), in general, a stockholder who has beneficially owned shares of our common stock for at least two years and who is not deemed to have been an affiliate of our company at any time during the immediately preceding 90 days may sell shares without complying with the manner of sale provisions, notice requirements, public information requirements, or volume limitations of Rule 144. Affiliates of our company, however, must always sell pursuant to Rule 144, even after the otherwise applicable Rule 144(k) holding periods have been satisfied.

Rule 701

Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.

As of June 28, 2004, 51,266 shares of our outstanding common stock had been issued in reliance on Rule 701 as a result of exercises of stock options.

Options

In addition to the 41,800,000 shares of common stock outstanding, immediately after this offering, as of March 31, 2004, there were outstanding options to purchase 3,372,800 shares of our common stock. As soon as practicable after the closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock issued (including shares of restricted stock) or reserved for issuance under our 2003 and 2004 Omnibus Incentive Plans. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise by the holders, subject to vesting restrictions with us, contractual lock-up restrictions, our securities trading policy and/or market stand-off provisions applicable to each option agreement that prohibit the sale or other disposition of the shares of common stock underlying the options for a period of 180 days after the date of this prospectus without the prior written consent from us or our underwriters.

Registration Rights

Upon the consummation of this offering, certain affiliates of Apollo will have the right to register their remaining shares of common stock pursuant to a registration rights agreement. In addition, these holders will have piggyback registration rights, pursuant to that agreement. See “Certain Relationships and Related Transactions.”

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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a summary of the material United States federal income tax consequences of the purchase, ownership, and disposition of our common stock by an investor that, for United States federal income tax purposes, is not a “United States person” as defined below (a “Non-U.S. Holder”). This summary is based upon United States federal income tax law in effect on the date of this prospectus, which is subject to change or different interpretations, possibly with retroactive effect. This summary does not discuss all aspects of United States federal income taxation which may be important to particular investors in light of their individual investment circumstances, such as common stock held by investors subject to special tax rules (e.g., financial institutions, insurance companies, broker-dealers, and domestic and foreign tax-exempt organizations (including private foundations)) or to persons that will hold our common stock as part of a straddle, hedge, conversion, constructive sale, or other integrated security transaction for United States federal income tax purposes or that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this summary does not discuss any (1) United States federal income tax consequences to a Non-U.S. Holder that (A) is engaged in the conduct of a United States trade or business, (B) is a nonresident alien individual who is (or deemed to be) present in the United States for 183 or more days during the taxable year, or (C) owns actually and/or constructively more than 5% of the fair market value of our common stock and (2) state, local, or non-United States tax considerations. This summary assumes that investors will hold our common stock as a “capital asset” (generally, property held for investment) under the Internal Revenue Code of 1986, as amended. Each prospective investor is urged to consult his tax advisor regarding the United States federal, state, local, and non-United States income and other tax considerations of an investment in our common stock, including as a result of changes to United States federal income tax law after the date of this prospectus.

For purposes of this summary, a “United States person” is, for United States federal income tax purposes, (1) an individual who is a citizen or resident of the United States, (2) a corporation, partnership, or other entity created in, or organized under the laws of, the United States or any state or political subdivision thereof, (3) an estate the income of which is includible in gross income for United States federal income tax purposes regardless of its source, or (4) a trust (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that was in existence on August 20, 1996, was treated as a United States person on the previous day, and elected to continue to be so treated.

If a partnership holds our common stock, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common stock, you should consult your tax advisor regarding the tax consequences of the purchase, ownership, and disposition of our common stock.

Dividends

Dividends paid to a Non-U.S. Holder generally will be subject to United States federal withholding tax at a 30% rate subject to reduction or complete exemption under an applicable income tax treaty if the Non-U.S. Holder provides a United States Internal Revenue Service (the “IRS”) Form W-8BEN (or a suitable substitute form) certifying that it is a Non-U.S. Holder and is entitled to such treaty benefits.

Sale or Other Disposition of Common Stock

Upon a sale or other disposition of our common stock, a Non-U.S. Holder will generally not be subject to United States federal income tax.

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Information Reporting and Backup Withholding

In general, backup withholding will not apply to dividends paid to a Non-U.S. Holder and to proceeds from the disposition of our common stock paid to a Non-U.S. Holder if the holder has provided the required certification that it is a Non-U.S. Holder and neither we nor our paying agents have actual knowledge or reason to know that the holder is a United States person. Generally, we must report to the IRS the amount of dividends paid, the name and the address of the recipient, and the amount, if any, of tax withheld. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty. These information reporting requirements apply even if no tax was required to be withheld. Any amounts over withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded, or credited against the holder’s United States federal income tax liability, if any, provided that certain required information is provided to the IRS.

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UNDERWRITING

We, the selling stockholders and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are representatives of the underwriters.

Underwriters	Number of Shares
Goldman, Sachs & Co
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Banc of America Securities LLC
Legg Mason Wood Walker, Incorporated
ThinkEquity Partners LLC
Total	15,000,000

The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 2,250,000 shares from the selling stockholders to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by us and the selling stockholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

Paid by the Company
	No Exercise	Full Exercise
Per Share	$	$
Total	$	$

Paid by the Selling Stockholders
	No Exercise	Full Exercise
Per Share	$	$
Total	$	$

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $         per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $         per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms.

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The company and its officers, directors and principal stockholders have agreed with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock subject to certain exceptions during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as representatives of the underwriters. This agreement does not apply to any existing employee benefit plans. See “Shares Available for Future Sale” for a discussion of certain transfer restrictions.

Prior to the offering, there has been no public market for the shares. The initial public offering price has been negotiated among us and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of the business potential and our earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

An application has been made to quote the common stock on the NASDAQ National Market under the symbol “EEEE”.

In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from the selling stockholders in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on NASDAQ NMS, in the over-the-counter market or otherwise.

Each underwriter has represented, warranted and agreed that: (i) it has not offered or sold and, prior to the expiry of a period of six months from the closing date, will not offer or sell any shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the

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public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any shares in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

The shares may not be offered or sold, transferred or delivered, as part of their initial distribution or at any time thereafter, directly or indirectly, to any individual or legal entity in the Netherlands other than to individuals or legal entities who or which trade or invest in securities in the conduct of their profession or trade, which includes banks, securities intermediaries, insurance companies, pension funds, other institutional investors and commercial enterprises which, as an ancillary activity, regularly trade or invest in securities.

The shares may not be offered or sold by means of any document other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong, and no advertisement, invitation or document relating to the shares may be issued, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation or subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than under circumstances in which such offer, sale or invitation does not constitute an offer or sale, or invitation for subscription or purchase, of the shares to the public in Singapore.

Each underwriter has acknowledged and agreed that the securities have not been registered under the Securities and Exchange Law of Japan and are not being offered or sold and may not be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan, except (1) pursuant to an exemption from the registration requirements of the Securities and Exchange Law of Japan and (ii) in compliance with any other applicable requirements of Japanese law. As part of the offering, the underwriters may offer securities in Japan to a list of 49 offerees in accordance with the above provisions.

A prospectus in electronic format will be made available on the websites maintained by one or more of the representatives of the underwriters and may also be made available on websites maintained by other underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives of the underwriters to underwriters that may make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on websites maintained by one or more of the underwriters are not intended to be part of this prospectus.

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We currently anticipate that we will undertake a directed share program, pursuant to which we will direct the underwriters to reserve up to 750,000 shares of common stock for sale at the initial public offering price to directors, officers, employees and friends through a directed share program. The number of shares of common stock available for sale to the general public will be reduced to the extent these persons purchase any reserved shares. Any shares not so purchased will be offered by the underwriters to the general public on the same basis as other shares offered hereby.

The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.

We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $2,280,000, all of which will be paid by us.

We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses. JPMorgan Chase Bank, an affiliate of J.P. Morgan Securities Inc., is a lender and administrative agent for the other lenders under our operating company’s secured credit facility.

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VALIDITY OF SHARES

The validity of the shares of common stock offered hereby will be passed upon for us, Apollo Sylvan, LLC, Apollo Sylvan II, LLC and SSB Capital Partners (Master Fund) I, L.P. by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California and for the underwriters by Sullivan & Cromwell LLP, Washington, D.C.

EXPERTS

Ernst & Young LLP, independent registered public accounting firm, have audited our consolidated financial statements and schedules as of December 31, 2003 and for the period from June 30, 2003 (date of inception) through December 31, 2003 as set forth in their reports. Ernst & Young LLP, independent registered public accounting firm, have also audited the combined financial statements and schedule of our predecessor, the Laureate pre-K-12 Division, as of December 31, 2002 and for the years ended December 31, 2001 and 2002, and for the six months ended June 30, 2003, as set forth in their reports. We have included our consolidated financial statements and schedules and the combined financial statements and schedule of our predecessor in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s reports, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We maintain a website at www.educateinc.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.

We have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules, and amendments to the registration statement) under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all the information set forth in the registration statement. For further information with respect to us and the shares of common stock to be sold in this offering, we refer you to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document to which we make reference are not necessarily complete. In each instance, we refer you to the copy of such contract, agreement or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by the more complete description of the matter involved.

Upon completion of this offering, we will become subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and, as a result, will file periodic and current reports, proxy statements, and other information with the SEC. You may read and copy this information at the Public Reference Room of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Copies of all or any part of the registration statement may be obtained from the SEC’s offices upon payment of fees prescribed by the SEC. The SEC maintains an Internet site that contains periodic and current reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s website is http: //www.sec.gov.

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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

EDUCATE, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and March 31, 2004 (unaudited)	F-2
CONSOLIDATED STATEMENTS OF INCOME
For the period from June 30, 2003 (date of inception) through December 31, 2003 and the three months ended March 31, 2004 (unaudited)	F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the period from June 30, 2003 (date of inception) through December 31, 2003 and the three months ended March 31, 2004 (unaudited)	F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from June 30, 2003 (date of inception) through December 31, 2003 and the three months ended March 31, 2004 (unaudited)	F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-7
LAUREATE PRE-K-12 BUSINESS (PREDECESSOR)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-25
COMBINED BALANCE SHEET
December 31, 2002	F-26
COMBINED STATEMENTS OF OPERATIONS
Years ended December 31, 2001 and 2002, three months ended March 31, 2003 (unaudited) and the six months ended June 30, 2003	F-28
COMBINED STATEMENTS OF OWNERS’ EQUITY
Years ended December 31, 2001 and 2002 and the six months ended June 30, 2003	F-29
COMBINED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2002, three months ended March 31, 2003 (unaudited) and the six months ended June 30, 2003	F-30
NOTES TO COMBINED FINANCIAL STATEMENTS	F-31
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME	F-47
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2003	F-48
Three months ended March 31, 2003	F-49
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME	F-50

86

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Educate, Inc.

We have audited the accompanying consolidated balance sheet of Educate, Inc. as of December 31, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the period from June 30, 2003 (date of inception) through December 31, 2003. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Educate, Inc. at December 31, 2003 and the consolidated results of its operations and its cash flows for the period from June 30, 2003 (date of inception) through December 31, 2003, in conformity with U.S. generally accepted accounting principles.

Ernst & Young LLP

Baltimore, Maryland

May 3, 2004, except for Note 15,

as to which the date is

August     , 2004

The accompanying consolidated financial statements include the effects of a reverse stock split approved by the Company’s Board of Directors on June 29, 2004, and anticipated to be effected prior to the closing of this offering. The above opinion is the form which will be signed by Ernst & Young LLP upon consummation of the reverse stock split which is described in Note 15 of the notes to the consolidated financial statements and assuming that from June 29, 2004 to the date of such reverse stock split, no other events have occurred that would effect the accompanying financial statements and notes thereto.

/s/  Ernst & Young LLP

Baltimore, Maryland

June 29, 2004

F-1

Educate, Inc.

Consolidated Balance Sheets

(Dollar amounts in thousands)

	December 31, 2003			March 31, 2004
	(Restated)			(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	20,226		$	16,264
Receivables:
Accounts receivable		42,664			57,753
Notes receivable		732			606
		43,396			58,359
Allowance for doubtful accounts		(4,237	)		(4,723	)
		39,159			53,636
Inventory		920			768
Prepaid expenses and other current assets		4,234			3,129
Assets of discontinued operations held for sale		6,050			5,381
Total current assets		70,589			79,178
Property and equipment:
Furniture and fixtures		6,137			6,918
Computer equipment and software		5,598			6,566
Leasehold improvements		6,175			6,597
		17,910			20,081
Accumulated depreciation and amortization		(3,148	)		(4,770	)
		14,762			15,311
Intangible assets:
Goodwill		50,370			51,565
Tradenames		131,737			131,546
Franchise license rights		88,556			88,412
Other intangible assets, net of accumulated amortization of $220 at December 31, 2003 and $270 at March 31, 2004		979			929
		271,642			272,452
Other assets		5,202			5,294
Total assets	$	362,195		$	372,235

F-2

Educate, Inc.

Consolidated Balance Sheets (continued)

(Dollar amounts in thousands)

	December 31, 2003		March 31, 2004
	(Restated)		(Unaudited)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	20,886	$	21,643
Accrued compensation and related benefits		11,006		9,752
Income taxes payable		224		404
Current portion of long-term debt		8,301		10,711
Deferred income taxes		243		2,368
Deferred revenue		17,791		23,083
Liabilities of discontinued operations held for sale		2,071		2,146
Total current liabilities		60,522		70,107
Long-term debt, less current portion		159,564		156,751
Fair value of interest rate swap		202		681
Total liabilities		220,288		227,539
Commitments and contingencies		—		—
Stockholders’ equity:
Common stock, par value $0.01, 55,000,000 shares authorized, 36,800,000 shares issued and outstanding		368		368
Additional paid-in capital		137,336		137,336
Retained earnings		1,701		5,792
Accumulated other comprehensive income		2,502		1,200
Total stockholders’ equity		141,907		144,696
Total liabilities and stockholders’ equity	$	362,195	$	372,235

See notes to consolidated financial statements.

F-3

Educate, Inc.

Consolidated Statements of Income

(Dollar amounts in thousands, except per share data)

	Period from June 30, 2003 (date of inception) through December 31, 2003			Three months ended March 31, 2004
	(Restated)			(Unaudited)
Revenues
Learning Center:
Company-owned centers	$	57,390		$	29,969
Franchise services		20,817			12,834
Total Learning Center		78,207			42,803
Institutional Services		35,425			38,807
Online Learning Services		861			584
Total revenues		114,493			82,194
Costs and expenses
Instructional and franchise operations costs		83,501			59,252
Marketing and advertising		9,191			6,643
Depreciation and amortization		3,567			1,786
General and administrative expenses		6,258			3,476
Total costs and expenses		102,517			71,157
Operating income		11,976			11,037
Other income (expense)
Interest income		219			285
Interest expense		(6,967	)		(3,490	)
Income from continuing operations before income taxes		5,228			7,832
Income tax expense		(2,056	)		(2,976	)
Income from continuing operations		3,172			4,856
Loss from discontinued operations, net of income tax benefit of $791 in 2003 and $410 in 2004		(1,471	)		(765	)
Net income	$	1,701		$	4,091
Earnings per common share—basic
Income from continuing operations	$	0.09		$	0.13
Loss from discontinued operations	$	(0.04	)	$	(0.02	)
Net income	$	0.05		$	0.11
Earnings per common share—diluted
Income from continuing operations	$	0.09		$	0.13
Loss from discontinued operations	$	(0.04	)	$	(0.02	)
Net income	$	0.05		$	0.11

See notes to consolidated financial statements.

F-4

Educate, Inc.

Consolidated Statements of Stockholders’ Equity

(Dollar amounts in thousands)

	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Issuance of 36,800,000 shares of common stock upon formation for cash of $30,000 and securities of $107,703	$	368	$	137,336	$	—	$	—		$	137,704
Comprehensive income:
Net income for the period						1,701					1,701
Other comprehensive income:
Change in fair value of derivative financial instrument, net of tax of $77								(125	)		(125	)
Foreign currency translation adjustment								2,627			2,627
Total comprehensive income		—		—		1,701		2,502			4,203
Balance at December 31, 2003		368		137,336		1,701		2,502			141,907
Comprehensive income:
Net income for the period (unaudited)						4,091					4,091
Other comprehensive income (loss):
Change in fair value of derivative financial instrument, net of tax of $182 (unaudited)								(297	)		(297	)
Foreign currency translation adjustment (unaudited)								(1,005	)		(1,005	)
Total comprehensive income (unaudited)						4,091		(1,302	)		2,789
Balance at March 31, 2004 (unaudited)	$	368	$	137,336	$	5,792	$	1,200		$	144,696

See notes to consolidated financial statements.

F-5

Educate, Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

	Period from June 30, 2003 (date of inception) through December 31, 2003			Three months ended March 31, 2004
	(Restated)			(Unaudited)
Operating activities
Income from continuing operations	$	3,172		$	4,856
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations
Depreciation		3,249			1,730
Amortization		318			56
Bad debt expense		1,101			971
Deferred income taxes		869			2,125
Other non-cash items		78			213
Changes in operating assets and liabilities:
Receivables		(2,030	)		(15,448	)
Prepaid expenses and other current assets		(3,274	)		1,105
Inventory		631			152
Accounts payable and accrued expenses		8,460			249
Income taxes payable		131			180
Deferred revenue		(3,643	)		5,292
Accrued compensation and related benefits		1,524			(1,254	)
Net cash provided by continuing operations		10,586			227
Loss from discontinued operations		(1,471	)		(765	)
Adjustments to reconcile loss from discontinued operations to net cash (used in) provided by discontinued operations:
Changes in operating assets and liabilities		(2,358	)		2,229
Depreciation and other non-cash items		167			122
Net cash (used in) provided by operations of discontinued operations		(3,662	)		1,586
Net cash provided by operating activities		6,924			1,813
Investing activities
Cash paid for acquired pre-K-12 business at inception, net of cash acquired (including acquisition costs of $4,491)		(110,825	)		—
Cash paid for acquired businesses, net of cash acquired (including acquisition costs of $292 in 2003)		(4,586	)		(581	)
Purchase of property and equipment		(3,736	)		(2,179	)
Change in other assets		(288	)		(98	)
Net cash used in investing activities		(119,435	)		(2,858	)
Financing activities
Issuance of common stock upon formation		30,000			—
Deferred financing costs		(3,705	)		—
Cash received upon issuance of debt		110,000			—
Payments on debt		(3,927	)		(1,002	)
Net cash provided by (used in) financing activities		132,368			(1,002	)
Effect of exchange rate changes on cash		403			(428	)
Net change in cash and cash equivalents		20,260			(2,475	)
Cash and cash equivalents at beginning of period		—			20,260
Cash and cash equivalents at end of period	$	20,260		$	17,785
Included in balance sheet caption:
Cash and cash equivalents	$	20,226		$	16,264
Assets of discontinued operations held for sale	$	34		$	1,521
Supplemental Cash Flow Information
Interest paid	$	2,498		$	2,136
Income taxes paid	$	—		$	—

See notes to consolidated financial statements.

F-6

Educate, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

1.    Description of Business

Educate, Inc. and subsidiaries (“the Company”) was formed by an investor group led by affiliates of Apollo Advisors, L.P. (“Apollo”), a private equity investor and controlling stockholder of the Company, and certain management stockholders on June 30, 2003, to acquire the pre-K-12 educational services business of Laureate Education, Inc. (formerly known as Sylvan Learning Systems, Inc.) (“Laureate”).

The Company is a national provider of tutoring and other supplemental education services to pre-kindergarten through twelfth grade, or pre-K-12, students. The Company operates through three business segments summarized as follows:

Ÿ The Learning Center segment develops and delivers trusted, personalized tutoring programs through a network of more than 1,000 franchised and company-owned learning centers in North America operated under the Sylvan^® brand name, and more than 950 European franchised and company-owned learning centers operated under the Schülerhilfe brand name.

Ÿ The Institutional Services segment provides tutoring, as well as other supplemental education services and special-needs services, to eligible students of public and private schools through government-funded contracts under the Catapult Learning and other brand names.

Ÿ The Online Learning Services segment provides online tutoring programs modeled after those offered in Sylvan Learning Centers. These online services, provided primarily under the eSylvan brand name, are delivered using an internet-based application that enables teachers and students to talk and interact in real time over a dial-up or broadband connection.

2.    Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements represent the consolidated financial position, results of operations and cash flows of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

On March 26, 2004, Educate, Inc. committed to sell its subsidiary Connections Academy, Inc., an operator of K-8 virtual public and charter schools. As a result of this expected sale transaction, the accompanying 2003 consolidated financial statements have been restated to present the results of operations of Connections Academy as discontinued operations. See also Note 6.

The Company consolidates investments where it has a controlling financial interest. The usual condition for a controlling financial interest is ownership of a majority of the voting interest and, therefore, as a general rule ownership, directly or indirectly, of over fifty percent of the outstanding voting shares is a condition for consolidation. For investments in variable interest entities, as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, the Company consolidates when it is determined to be the primary beneficiary of the variable interest entity. As of December 31, 2003 and March 31, 2004, the Company was not the primary beneficiary of any variable interest entity.

F-7

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Unaudited Interim Financial Information

The unaudited interim financial information as of March 31, 2004 and for the three-month period then ended, has been prepared in accordance with generally accepted accounting principles for interim financial information and with Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Due principally to the timing of school semesters and holiday schedules, the Company is subject to seasonality in reported revenues and expenses that affect reported results of operations. The Company’s Learning Center segment generally experiences lower revenues in the fourth quarter. Learning Center franchisees pay royalties to the Company based on a percentage of cash receipts. Since customers of these franchisees frequently make payments for services in advance, royalty revenues earned by the Company are higher in periods of increased enrollment, particularly in the spring months prior to commencement of peak summer service periods. In addition, the Company’s Institutional Services segment generates a disproportionate amount of revenues during the first six months of the calendar year. This occurs because many school districts use the first semester in the fourth calendar quarter to evaluate the specific needs of individual students prior to enrolling students in the Company’s supplemental education programs. In addition, a disproportionate amount of marketing and advertising costs associated with the Company’s Institutional Services segment are incurred and expensed in periods when reported revenue is seasonally at a low point. As a result of these factors, quarter-to-quarter comparisons of results of operations may not be indicative of future results of operations.

Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles that require the Company’s management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Allowance for Doubtful Accounts

The Company reports accounts and notes receivable at net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company calculates the allowance based on a specific analysis of past due balances and also considers historical trends of write-offs. Past due status is based on how recently payments have been received by customers. Actual collection experience has not differed significantly from the Company’s estimates, due primarily to credit and collections practices and the financial strength of its customers. Accounts and notes receivable balances due from franchisees are secured by the assets of the franchisee’s business. Other accounts receivable balances, primarily due from governmental agencies, are not collateralized.

Inventory

Inventory, consisting primarily of educational, instructional and marketing materials and supplies, is stated at the lower of cost (first-in, first-out) or market value.

F-8

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Property and Equipment

Property and equipment is stated at cost. Included in property and equipment are the direct costs of developing or obtaining software for internal use. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the asset or the remaining term of the lease. Property and equipment acquired from Laureate upon formation is being depreciated over estimated remaining useful lives consistent with the Company’s established useful lives for new property and equipment after considering the age of the acquired asset.

Useful lives are as follows:

Furniture and fixtures	2-7 years
Computer equipment and software	2-3 years
Leasehold improvements	2-10 years

Goodwill

Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. The Company does not amortize goodwill, but rather reviews its carrying value for impairment annually, and whenever an impairment indicator is identified.

The goodwill impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting unit to which goodwill has been assigned. The reporting units of the Company for purposes of the impairment test are the Company’s major operating subsidiaries, as these are the components of reportable segments for which discrete financial information is available and segment management regularly reviews the operating results of those components. The Company then compares the fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of each reporting unit by estimating the present value of the reporting unit’s future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss. Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

Intangible Assets

Intangible assets consist principally of tradenames, franchise license rights, customer contract rights and customer backlog acquired in business combinations. Intangible assets with finite lives are amortized over their estimated useful lives ranging from six months to five years. Intangible assets with indefinite lives are not amortized, but rather are tested for impairment annually, and whenever an impairment indicator is identified. The impairment test requires the determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss is recognized for an amount equal to the difference. The intangible asset is then carried at its new fair value. Fair value is determined using estimates of discounted cash flows.

F-9

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Impairment of Long-Lived Assets

Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk.

Assets to be disposed of are reported at the lower of carrying value or fair values, less estimated costs of disposal.

Revenue Recognition

Company-Owned Learning Centers and Online Learning Services

Fees from providing supplemental education services to students through company-owned learning centers and online learning programs are recognized as revenue in the period the services are provided.

Franchised Learning Centers

Revenue related to license fees on the initial sale of a territory that transfer the right to operate a learning center in a specified geographic area is recognized when all material services or conditions relating to the sales have been substantially performed or satisfied by the Company and collectibility of the fee is reasonably assured. The criteria for substantial performance include: (1) receipt of an executed franchise license agreement, (2) a determination that collectibility of the fee is reasonably assured, (3) completion of requisite training by the franchisee or center director, and (4) completion of required site selection assistance. Initial franchise fees not meeting the recognition criteria are recorded as deferred revenue if not refundable, or deposits from franchisees if refundable.

Franchised learning centers also pay a monthly royalty fee based on cash receipts, payable by the fifteenth day of the following month. Royalty fees are recorded in the month earned if collectibility is reasonably assured. Estimates of royalties earned but unreported by franchisees at the balance sheet date are recorded as revenue and accounts receivable, and are adjusted to actual amounts when reported and paid by the franchisee.

Revenue from the sale of educational materials to learning centers is recognized when shipped and collectibility is reasonably assured.

Institutional Services

Revenue from the Institutional Services segment consists principally of revenue from contracts with school districts receiving funds under federal and state-based programs. For contracts that specify

F-10

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

a fixed fee per student for educational services over a stated period, revenue is recognized ratably over the contractual service period. Other contracts in this segment compensate the Company for services on an hourly basis. Revenue for these contracts is recorded as services are rendered at the specified hourly rate. Contracts with school districts generally specify monthly billings of service fees. Revenue recognized in advance of billings is recorded as accounts receivable.

Marketing and Advertising

The Company expenses marketing and advertising costs as incurred.

Stock-Based Compensation

The Company accounts for all stock-based compensation plans using the intrinsic value method. Under the intrinsic value method, if the exercise price of the employee stock option equals the estimated fair value of the underlying stock on the date of grant, no compensation expense is generally recognized. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (“Statement 123”) encourages companies to recognize expense for stock-based awards based on their estimated fair value on the date of grant. Statement 123 requires the disclosure of pro forma data in the notes to the financial statements if the fair value method is not adopted.

During 2003, the Company issued stock options under a stock-based employee compensation plan, which is more fully described in Note 11. All options granted under this plan were granted with an exercise price equal to the estimated fair value of the underlying common stock at the date of grant, and accordingly, no compensation expense for these awards has been recognized.

Pro forma net income and earnings per share data have been determined as if the Company had accounted for its stock options using the minimum value method. The minimum value method assumes that the fair value of a stock option is equal to the excess of the fair value of the underlying common stock at the date of grant over the present value of both the exercise price and the expected dividend payments, each discounted at the risk-free rate, over the expected life of the option. In management’s opinion, the minimum value method and other existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The weighted average estimated fair value of stock options granted during 2003 and the three-month period ended March 31, 2004 was $0.44 and $1.76, respectively.

The following assumptions were used in calculating pro forma stock compensation expense:

	Period from June 30, 2003 (date of inception) through December 31, 2003	Three months ended March 31, 2004
Risk-free interest rate (range)	2.48% – 2.99%	2.99%
Expected dividend yield	0.00%	0.00%
Expected life	4 years	4 years

F-11

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The Company’s pro forma information is as follows:

	Period from June 30, 2003 (date of inception) through December 31, 2003			Three months ended March 31, 2004
				(unaudited)
Net income, as reported	$	1,701		$	4,091
Stock-based employee compensation expense included in net income as reported, net of tax		—			3
Stock-based employee compensation expense as if the minimum value method had been applied, net of tax		(114	)		(58	)
Pro forma net income	$	1,587		$	4,036
Earnings per common share—basic and diluted
As reported	$	0.05		$	0.11
Pro forma	$	0.04		$	0.11

Foreign Currency Translation

The financial statements of foreign subsidiaries with a functional currency other than the U.S. dollar have been translated into U.S. dollars using the current rate method. Assets and liabilities have been translated using the exchange rates at year-end. Income and expense amounts have been translated using the average exchange rate prevailing for the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income (loss) included in the consolidated statement of stockholders’ equity.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from non-owner sources. Other comprehensive income refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are included in comprehensive income, but excluded from net income. The elements of other comprehensive income (loss), net of tax, consisted of foreign currency translation adjustments and the changes in fair value of a derivative financial instrument accounted for as a hedge. Because deferred taxes are not provided for the unremitted earnings of foreign subsidiaries, deferred taxes are not provided for translation adjustments.

Hedging and Derivative Activities

The Company sometimes uses derivative instruments, consisting primarily of interest rate swap agreements, to manage its exposure to changes in interest rates. The Company does not use derivative instruments for trading or other speculative purposes.

All derivative instruments are reported on the consolidated balance sheet at fair value and changes in a derivative’s fair value are recognized currently in earnings unless specified hedge criteria

F-12

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

are met. If an interest rate swap is designated a cash flow hedge, the effective portions of the changes in the fair value of the swap are recorded in other comprehensive income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

As part of managing its exposure to changes in the market interest rate of variable rate debt over a three-year period, the Company has entered into an interest rate swap transaction with a financial institution acting as the counterparty. To ensure both appropriate use as a hedge and hedge accounting treatment, the swap entered into was designated according to the hedge objective against a specific debt issue. The notional amount, rate and maturities of the interest rate swap are closely matched to the related terms of the hedged debt obligation, and there is no ineffective portion. The interest rate swap would not result in a significant loss to the Company if the counterparty failed to perform according to the terms of the agreement.

Income Taxes

The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, measured at prevailing enacted tax rates that are expected to be in effect when these temporary differences are settled or realized.

3.    Acquisitions

Pre-K-12 Business of Laureate Education, Inc.

On June 30, 2003, the Company acquired substantially all of the pre-K-12 business of Laureate. The operations acquired from Laureate comprise the existing operations of the Company as described more fully in Note 1.

The initial purchase price totaled approximately $282,073, including cash payments of $115,510, the surrender of securities issued by Laureate and Sylvan Ventures, LLC, its subsidiary, with a fair value of $107,703, a subordinated promissory note of $55,000, and a deferred payment obligation of $2,323. Included in the purchase price are acquisition costs of $4,491, and the purchase price has been reduced by an estimated working capital adjustment of $2,949. The purchase price was allocated to assets totaling $325,308 and assumed liabilities of $43,235. The Company is obligated to pay up to $10,000 of additional consideration if a subsidiary acquired in the business combination achieves specified levels of earnings prior to December 31, 2007. In addition, the final purchase price is subject to adjustment for any working capital variances at the date of acquisition.

F-13

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

The following table summarizes the allocation of the purchase price to acquired assets and liabilities, other than cash received in the acquisition:

Accounts and notes receivable	$	30,563
Other current assets		2,492
Property and equipment		14,661
Deferred tax assets		2,293
Intangible assets subject to amortization:
Contract rights and backlog (weighted-average amortization period of 4.25 years)		1,199
Schulerhilfe franchise rights (amortization period of 25 years)		3,500
Indefinite lived intangible assets:
Tradenames		131,000
Sylvan franchise license rights		82,000
Goodwill		46,781
Other assets		1,643
Total assets acquired, excluding cash of $9,176		316,132
Current liabilities		42,204
Long-term debt		1,031
Total liabilities assumed		43,235
Purchase price, net of cash received of $9,176	$	272,897

In June 2004, the Company completed its analysis of the valuation and estimated useful life of franchise rights for Schulerhilfe. The Company prior to June 2004 estimated that these franchise rights had a value of $6,000 and an indefinite life. The Company’s completed valuation and analysis estimates that these franchise rights have an estimated fair value of $3,500 and a useful life of 25 years, and commencing April 1, 2004, will amortize the Schulerhilfe franchise rights over their remaining useful life.

Management estimated the fair value of the acquired assets and assumed liabilities using several generally accepted valuation techniques. Current assets and liabilities were assumed to have fair values equal to their book value at the acquisition date. Tradenames and franchise license rights were valued using the income approach, whereby the fair value of an asset is based on the present value of its estimated future economic benefits. Property and equipment was valued using the cost approach, or if a ready market for similar assets could be identified and relied upon, the market approach. The cost approach measures fair value as the cost to construct or replace the asset with another asset of like utility. The market approach establishes fair value based on recent sales of comparable property. For certain technology assets, when identifiable, the market approach was used to verify the results of the cost approach. The acquired tradenames consist principally of the “Sylvan” tradename, which is licensed for no consideration to Laureate until June 30, 2004, after which time the seller must change its name and desist from using the Sylvan brand or tradename. The purchase price allocation is subject to adjustment no later than June 30, 2004 based on the completion of an analysis of the income tax basis of certain acquired assets and liabilities and the final estimation of deferred tax amounts related to differences between the financial reporting and income tax basis of these assets and liabilities.

The Company recorded significant goodwill, as a result of the estimated value of the assembled workforce and the ability to earn a higher rate of return from the acquired business than would be expected if those net assets had to be acquired or developed separately. All goodwill recorded in the acquisition is deductible for income tax purposes.

F-14

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Progressus

On October 31, 2003, the Company acquired Progressus Therapy, Inc. (“Progressus”), one of the largest providers of qualified professional physical, occupational, and speech therapists to school programs.

The initial purchase price totaled approximately $4,279, including acquisition costs of $288. The purchase price was preliminarily allocated to acquired assets totaling $7,837 and assumed liabilities of $3,558. Variable amounts of contingent consideration are payable to the seller based upon the operating income of Progressus through October 31, 2007. As of March 31, 2004 no amounts are payable under the contingent consideration provisions of the contract.

The initial purchase price totaled approximately $4,279, including acquisition costs of $288. The purchase price was preliminarily allocated to acquired assets totaling $7,837 and assumed liabilities of $3,558. Variable amounts of contingent consideration are payable to the seller based upon the operating income of Progressus through October 31, 2007. As of March 31, 2004 no amounts are payable under the contingent consideration provisions of the contract.

The purchase price is subject to adjustment upon the completion of an audit of the closing balance sheet of Progressus as of October 31, 2003, and the determination of the estimated fair value of identifiable intangible assets. The Company estimates that it will record approximately $2,675 of goodwill as a result of the acquisition, none of which will be tax deductible.

The following unaudited consolidated pro forma results of operations of the Company for the period from June 30, 2003 through December 31, 2003 give effect to the acquisition of Progressus as if it occurred on June 30, 2003.

Revenues	$	120,902
Income from continuing operations before income taxes		4,637
Net income		1,346

4.    Goodwill

Changes in the carrying amount of goodwill during the period from June 30, 2003 through March 31, 2004 are summarized as follows:

	Learning Center			Institutional Services		Total
Goodwill recorded upon acquisition of:
pre-K-12 business of Laureate	$	37,674		$	6,607	$	44,281
Progressus Therapy, Inc.		—			2,637		2,637
Other businesses		2,521			—		2,521
Foreign currency translation adjustment		931			—		931
Goodwill at December 31, 2003		41,126			9,244		50,370
Acquisition of franchised learning centers		1,437			—		1,437
Foreign currency translation adjustment		(242	)		—		(242	)
Goodwill at March 31, 2004 (unaudited)	$	42,321		$	9,244	$	51,565

F-15

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

5.    Other Intangible Assets

A summary of other intangible assets at December 31, 2003 is as follows:

	Useful life in Months	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Intangible assets subject to amortization:
Acquired backlog (Learning Center segment)	6	$	115	$	115	$	—
Contract rights (Institutional Services segment)	60		1,084		105		979
Total intangible assets subject to amortization			1,199		220		979
Indefinite-lived intangible assets not subject to amortization (Learning Center segment):
Tradenames	N/A		131,737		—		131,737
Franchise license rights	N/A		88,556		—		88,556
Total indefinite-lived intangible assets			220,293		—		220,293
Total other intangible assets		$	221,492	$	220	$	221,272

As disclosed more fully in Note 3, the Company in June 2004 reclassified $3,500 of franchise rights from indefinite-lived intangible assets to intangible assets subject to amortization. These franchise rights are being amortized over 25 years. Annual amortization is calculated using an accelerated method based on the estimated attrition of franchises. Estimated future amortization expense of intangible assets subject to amortization giving effect to this change is as follows:

Year ended December 31:
2004	$	421
2005		478
2006		468
2007		459
2008		346
Thereafter		2,307
	$	4,479

6.    Discontinued Operations

On March 26, 2004, the Company committed to a plan to sell the common stock of its subsidiary Connections Academy, Inc. by March 25, 2005. The Company is currently negotiating to sell Connections Academy to its majority and other stockholders. As a result of this expected disposal transaction, the Company estimates that it will record a yet to be determined gain from disposition representing the difference between the carrying value of the net assets to be sold (approximately $3,235 at March 31, 2004) and the net proceeds upon sale. Upon the acquisition of the pre-K-12 business of Laureate on June 30, 2003, the Company agreed to pay up to $10,000 of contingent consideration to Laureate if Connections Academy achieved specified levels of earnings through December 31, 2007. The Company currently expects to retain this contingent liability to Laureate upon the sale of Connections Academy. Any additional amounts of contingent consideration will be recorded when the contingency is resolved and the consideration, if any, becomes payable, and will result in an additional element of the gain or loss on the disposition of Connections Academy included in discontinued operations. The accompanying consolidated balance sheets at March 31, 2004 and December 31, 2003 classify the assets and liabilities of Connections Academy as current assets and liabilities of discontinued operations.

F-16

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

The operations of Connections Academy have been classified as discontinued operations in the accompanying statements of income. The operations of this component will be eliminated from the ongoing operations of the Company as a result of the disposal transaction, and the Company will not have any significant continuing involvement in the held for sale operations after the disposal transaction.

Summarized operating results from the discontinued operations included in the Company’s statements of income were as follows:

	Period from June 30, 2003 (date of inception) through December 31, 2003			Three months ended March 31, 2004
				(unaudited)
Revenues	$	3,230		$	2,191
Loss from operations of discontinued operations before income taxes		(2,262	)		(1,175	)
Income tax benefit		791			410
Loss from discontinued operations	$	(1,471	)	$	(765	)

Assets and liabilities of the discontinued operations were as follows:

	December 31, 2003			March 31, 2004
				(unaudited)
Current assets	$	3,982		$	3,334
Property and equipment, net		1,212			1,113
Other long-term assets		856			934
Current liabilities		(1,551	)		(1,626	)
Long-term liabilities		(520	)		(520	)
Net assets of discontinued operations	$	3,979		$	3,235

7.    Long-Term Debt and Subsequent Event

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

Senior term loan payable to a bank in quarterly installments through December 2008. The loan bears interest at the bank’s prime rate or the Eurodollar rate, plus specified margins, as elected by the Company (aggregating to 5.42% per annum at December 31, 2003).	$	108,750
Subordinated note payable to Laureate, due on June 30, 2009 and bearing interest at 12.00% per annum		55,000
Note payable to Laureate, due in quarterly installments through June 30, 2009. The note does not bear interest, and is recorded net of a discount of $499 at December 31, 2003.		2,165
Various notes payable bearing interest at fixed rates ranging from 5.00% to 8.00% per annum		1,950
	$	167,865
Less: current portion of long-term debt		(8,301	)
Total long-term debt	$	159,564

F-17

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Aggregate maturities of long-term debt at December 31, 2003 were as follows:

Year ended December 31:
2004	$	8,301
2005		14,405
2006		16,854
2007		21,885
2008		50,629
Thereafter		55,791
	$	167,865

The Company has entered into a loan agreement with a bank that provides for an unsecured revolving line of credit of $20,000 through June 2008. The credit line bears interest at a floating rate equal to the 30-day London Interbank Offered Rate plus 3.75% per annum. There were no amounts outstanding on this credit line at December 31, 2003 or March 31, 2004.

The fair value of debt at December 31, 2003 approximates its carrying value at those dates based on an assessment of market interest rates associated with similar debt.

The Company’s senior term loan payable was issued by one of its consolidated subsidiaries and requires compliance with financial covenants and otherwise restricts certain payments to the Company. At December 31, 2003, restricted net assets of the subsidiary were $140,907.

The Company incurred certain debt issuance costs in connection with obtaining the senior term loan which is being amortized over the life of the loan using the interest method. As of December 31, 2003, $3,368 has been recorded in other assets relating to these costs.

In order to manage interest rate exposure, the Company has entered into an interest rate swap agreement. A notional amount of $40,000 in variable rate debt has been swapped to a counterparty in exchange for a fixed interest rate commitment of 2.58% per annum. This agreement will terminate on July 1, 2006. Interest paid under this agreement is recorded as interest expense in the period in which it is incurred.

On April 27, 2004, the Company repaid the senior term loan and the subordinated note payable to Laureate and terminated the revolving credit agreement with the proceeds of a new credit agreement. The new credit agreement includes a seven-year $170,000 term loan and a five-year $30,000 revolving credit facility. Borrowings under the new credit agreement bear interest at a rate of LIBOR plus 3.0% subject to rate reductions specifically tied to reduced leverage ratios. Upon replacement of the existing senior term loan, $3,188 of previously capitalized debt issuance costs were written-off to expense. In addition, approximately $1,500 of other financing costs were incurred and charged to expense in April 2004 related to a terminated debt financing transaction.

F-18

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Upon completion of the refinancing, the Company had $174,115 of outstanding debt, which matures as follows:

Year ended December 31:
2004	$	2,076
2005		2,355
2006		2,304
2007		2,335
2008		2,329
Thereafter		162,716
	$	174,115

8.    Leases

The Company conducts significant operations from leased facilities. These facilities include office locations, warehouse space and company-owned learning centers. The lease terms of substantially all of these leases are five years or less. The Company also leases certain equipment under non-cancelable operating leases, the majority of which are for terms of 36 months or less.

Future minimum lease payments at December 31, 2003, by year and in the aggregate, under all non-cancelable operating leases are as follows:

Year ended December 31:
2004	$	11,773
2005		9,081
2006		5,708
2007		3,278
2008		2,275
Thereafter		4,319
	$	36,434

Rent expense was approximately $7,664 for the period from June 30, 2003 through December 31, 2003.

9.    Income Taxes

Significant components of income tax expense from continuing operations for the period from June 30, 2003 through December 31, 2003 are as follows:

Current:
U.S. Federal	$	—
U.S. state		—
Foreign		312
		312
Deferred:
U.S. Federal		1,364
U.S. state		124
Foreign		256
		1,744
Total income tax expense	$	2,056

F-19

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

For the period from June 30, 2003 through December 31, 2003, foreign income before income taxes was $1,277.

The Company uses the liability method to account for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2003 are summarized as follows:

Deferred tax assets:
Net operating loss carryforwards	$	17,284
Allowance for doubtful accounts		34
Nondeductible reserves		240
Other		464
Total deferred tax assets		18,022
Deferred tax liabilities:
Amortization of intangible assets		7,071
Prepaid expenses		132
Total deferred tax liabilities		7,203
Net deferred tax assets		10,819
Valuation allowance for net deferred tax assets		(11,062	)
Net deferred tax liability	$	(243	)

U.S. federal net operating loss carryforwards at December 31, 2003 were $43,958. These net operating loss carryforwards will begin to expire in 2019 and are subject to limitation under the Internal Revenue Code. At the date of acquisition of the pre-K-12 business of Laureate, the Company acquired net operating loss carryforwards of $36,984. Due to limitations imposed under the Internal Revenue Code, utilization of these carryforwards will be limited. Therefore, the Company has established a valuation allowance for the portion of carryforwards that it anticipates will not be utilized. If these net operating loss carryforwards are utilized in future periods, the related income tax benefit will be recorded as a reduction of goodwill recorded in the business combination.

The reconciliation of the reported income tax expense to the amount that would result by applying the U.S. federal statutory tax rate of 35% to income from continuing operations before income taxes for the period from June 30, 2003 through December 31, 2003 is as follows:

Tax expense at U.S. statutory rate	$	1,830
Permanent differences		52
State income tax expense		150
Tax effect of foreign income taxed at different rate		121
Foreign tax credits		(97	)
Total income tax expense from continuing operations	$	2,056

F-20

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

Income tax expense for the three months ended March 31, 2004 is based on the estimated annual effective income tax rate from continuing operations for 2004 of 38%.

10.    Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

A reconciliation of the numerators and denominators for basic and diluted earnings per common share are as follows:

	Period from June 30, 2003 through December 31, 2003			Three months ended March 31, 2004
				(unaudited)
Numerator
Income from continuing operations	$	3,172		$	4,856
Loss from discontinued operations		(1,471	)		(765	)
Net income	$	1,701		$	4,091
Denominator
Basic:
Weighted-average shares outstanding		36,800			36,800
Diluted:
Weighted-average shares outstanding		36,800			36,800
Dilutive effect of stock options		—			540
Total		36,800			37,340
Earnings per common share—basic:
Income from continuing operations	$	0.09		$	0.13
Loss from discontinued operations		(0.04	)		(0.02	)
Net income	$	0.05		$	0.11
Earnings per common share—diluted
Income from continuing operations	$	0.09		$	0.13
Loss from discontinued operations		(0.04	)		(0.02	)
Net income	$	0.05		$	0.11

11.    Stock Option Plan

During 2003, the Company adopted a stock option plan that provides for the granting of options to purchase up to 3,680,000 shares of common stock to selected employees and directors of the Company. All options granted during 2003 were issued with an exercise price equal to the estimated fair value of the common stock at the date of the grant, and expire 10 years after the date of the grant.

F-21

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

All options granted through December 31, 2003 have been granted with an exercise price of $3.71 per share, and vest over a four-year period. The following table summarizes the stock option activity of the Company for the period from June 30, 2003 through December 31, 2003:

Outstanding at beginning of period	—
Granted	3,424,000
Forfeited	(60,000	)
Outstanding at end of period (remaining contractual life of 9.5 years)	3,364,000
Exercisable at end of period	418,917

12.    Employee Benefit Plan

The Company sponsors a defined contribution retirement plan under section 401(k) of the Internal Revenue Code. The provisions of this plan allow for voluntary employee contributions of up to 20% of salary, subject to certain annual limitations. All employees are eligible after meeting certain minimum service requirements.

The Company may at its discretion make matching contributions, which are allocated to eligible participants. The Company made a discretionary contribution to this plan of $703 during the three months ended March 31, 2004.

13.    Commitments and Contingencies

In connection with the acquisition of the pre-K-12 business from Laureate, the Company and Laureate entered into a three-year shared services contract expiring June 30, 2006. Under the terms of the shared service agreement, the Company will provide certain support services including, but not limited to, specified accounting, benefits, information technology, human resources, purchasing and payroll services to Laureate. Conversely, Laureate will provide certain support services, primarily in the areas of tax, treasury, and lease administration to the Company.

The shared services agreement requires that the Company receive net payments each month of $204 during the term of the agreement. These payments amounted to $1,225 for the period from June 30, 2003 through December 31, 2003 and $612 for the three months ended March 31, 2004, and are accounted for as a reduction of general and administrative expenses. The agreement also allows for specified volume-based increases to the fees attributable to the services.

The Company is subject to legal actions arising in the ordinary course of its business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company’s financial position.

The Company maintains a number of standby letters of credit totaling $710 as of December 31, 2003 and March 31, 2004 to guarantee its insurance program and potential payment under a franchisee acquisition through 2008.

F-22

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

14.    Business and Geographic Segment Information

The Company is organized on the basis of educational services provided. The Company’s segments are business units that offer distinct services. The segments are managed separately as they have different customer bases and delivery channels. Reportable segments are as follows:

Ÿ Learning Center segment develops and delivers trusted, personalized tutoring programs primarily through a network of franchised and company-owned learning centers in North America operated under the Sylvan brand name, and more than 950 European franchised and company-owned learning centers operated under the Schülerhilfe brand name.

Ÿ Institutional Services segment provides tutoring, as well as other supplemental education services and special-needs services, to public and private schools through government-funded contracts.

Ÿ Online Learning Services segment provides online tutoring programs modeled after those offered in Sylvan Learning Centers.

The Company evaluates performance and allocates resources based on operating income. There are no significant intercompany sales or transfers.

The following tables set forth information on the Company’s reportable segments for the period from June 30, 2003 through December 31, 2003 and the three months ended March 31, 2004 (unaudited):

Period from June 30, 2003 (date of inception) through December 31, 2003	Learning Center			Institutional Services			Online Learning			Total
Revenues	$	78,207		$	35,425		$	861		$	114,493
Segment profit (loss) before depreciation and amortization		22,954			697			(1,850	)		21,801
Depreciation and amortization		(1,822	)		(655	)		(220	)		(2,697	)
Segment profit (loss)	$	21,132		$	42		$	(2,070	)	$	19,104
Segment assets	$	287,374		$	47,686		$	1,362		$	336,422
Total expenditures for additions to long-lived assets		3,988			4,818			125			8,931

Three months ended March 31, 2004 (Unaudited)	Learning Center			Institutional Services			Online Learning			Total
Revenues	$	42,803		$	38,807		$	584		$	82,194
Segment profit (loss) before depreciation and amortization		11,415			5,907			(1,023	)		16,299
Depreciation and amortization		(833	)		(466	)		(96	)		(1,395	)
Segment profit (loss)	$	10,582		$	5,441		$	(1,119	)	$	14,904
Segment assets	$	285,002		$	60,129		$	931		$	346,062
Total expenditures for additions to long-lived assets		2,602			422			72			3,096

F-23

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

The following tables reconcile the reported information on segment profit and assets to income from continuing operations before income taxes and total assets reported in the statements of income and balance sheets:

	Period from June 30, 2003 (date of inception) through December 31, 2003			Three months ended March 31, 2004
				(Unaudited)
Segment profit	$	19,104		$	14,904
Corporate depreciation and amortization		(870	)		(391	)
General and administrative expenses		(6,258	)		(3,476	)
Other income (expense)		(6,748	)		(3,205	)
Income from continuing operations before income taxes	$	5,228		$	7,832

	December 31, 2003		March 31, 2004
			(Unaudited)
Total assets for reportable segments	$	336,422	$	346,062
Unallocated corporate assets		19,723		20,792
Assets of discontinued operations held for sale		6,050		5,381
Total assets	$	362,195	$	372,235

Revenue by geographic area is as follows:

	Period from June 30, 2003 (date of inception) through December 31, 2003		Three months ended March 31, 2004
			(Unaudited)
United States	$	103,619	$	74,894
Other		10,874		7,300
Consolidated total	$	114,493	$	82,194

Revenues are attributed to countries based on the location of the customer. No country other than the United States represents more than 10% of consolidated revenues. Substantially all long-lived assets are located in the United States.

15.    Subsequent Events

During the period from April 1, 2004 through June 29, 2004, the Company issued options to purchase 305,200 shares of common stock to employees and members of the Board of Directors with a weighted-average exercise price of $5.06 per share. Certain options vested immediately, and other

F-24

Educate, Inc.

Notes to Consolidated Financial Statements—(Continued)

December 31, 2003 and March 31, 2004 (unaudited)

(Dollar amounts in thousands, except per share data)

options will vest over a four year period. The Company estimates that it will record approximately $2,728 of aggregate compensation expense related to these option grants, including $778 in the second quarter of 2004, based on an estimate of the fair value of common stock at the grant date of $14 per share.

In June 2004, the Company issued 604,000 shares of restricted common stock for $0.01 per share to certain employees that vested immediately. These shares of common stock are restricted as to resale over a three to five-year period. The Company estimated that due to the restrictions on resale, the common stock had an estimated fair value of $12.60 at the grant date, or 90% of the estimated fair value of an unrestricted share of common stock. The Company recorded aggregate compensation expense of $7,603 in June 2004 related to these common stock grants.

In connection with a proposed public offering of the Company’s common stock, on June 29, 2004 the Board of Directors approved a 1.00 for 1.25 reverse stock split of the Company’s common stock, which was effected on August     , 2004. All share and per share amounts in the accompanying consolidated financial statements have been restated for all periods to give retroactive effect to the reverse stock split.

F-25

Report Of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Educate, Inc.

We have audited the accompanying combined balance sheet of the Laureate pre-K-12 Business (Predecessor to Educate, Inc.) as of December 31, 2002, and the related combined statements of operations, owner’s equity, and cash flows for the years ended December 31, 2001 and 2002 and the six months ended June 30, 2003. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Laureate pre-K-12 Business (Predecessor to Educate, Inc.) at December 31, 2002, and the combined results of its operations and its cash flows for the years ended December 31, 2001 and 2002 and the six-month period ended June 30, 2003, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the combined financial statements, in 2002 the Company changed its method of accounting for goodwill.

/s/ Ernst & Young LLP

Baltimore, Maryland

May 3, 2004

F-26

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Combined Balance Sheet

December 31, 2002

(Dollar amounts in thousands)

Assets
Current assets:
Cash and cash equivalents	$	4,909
Receivables:
Accounts receivable		34,974
Notes receivable		712
		35,686
Allowance for doubtful accounts		(3,344	)
		32,342
Inventory		2,268
Prepaid expenses and other current assets		2,512
Assets of discontinued operations held for sale		692
Total current assets		42,723
Property and equipment:
Furniture and fixtures		25,541
Computer equipment and software		13,460
Leasehold improvements		11,149
		50,150
Accumulated depreciation and amortization		(27,647	)
		22,503
Goodwill		68,850
Other assets		3,890
Total assets	$	137,966

F-27

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Combined Balance Sheet (continued)

December 31, 2002

(Dollar amounts in thousands)

Liabilities and owner’s equity
Current liabilities:
Accounts payable and accrued expenses	$	11,224
Accrued compensation and related benefits		6,557
Deferred revenue		18,609
Liabilities of discontinued operations held for sale		729
Other current liabilities		30
Total current liabilities		37,149
Deferred income taxes		2,408
Other liabilities		513
Total liabilities		40,070
Commitments and contingencies		—
Owner’s equity:
Owner’s net investment		99,385
Accumulated other comprehensive loss		(1,489	)
Total owner’s equity		97,896
Total liabilities and owner’s equity	$	137,966

See accompanying notes to combined financial statements.

F-28

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Combined Statements of Operations

(Dollar amounts in thousands)

	Year ended December 31,						Three months ended March 31, 2003			Six months ended June 30, 2003
	2001			2002
							(unaudited)
Revenues
Learning Center:
Company-owned centers	$	74,286		$	103,066		$	27,852		$	59,789
Franchise services		36,692			42,680			11,059			23,654
Total Learning Center		110,978			145,746			38,911			83,443
Institutional Services		70,042			67,909			20,771			43,418
Online Learning Services		479			2,656			486			973
Total revenues		181,499			216,311			60,168			127,834
Costs and expenses
Instructional and franchise operations costs		135,277			156,620			44,365			88,633
Marketing and advertising		13,575			18,918			5,234			10,337
Depreciation and amortization of other intangible assets		8,235			7,898			1,825			4,221
Amortization of goodwill		2,210			—			—			—
Allocated indirect overhead costs		12,348			13,058			3,324			6,433
Total costs and expenses		171,645			196,494			54,748			109,624
Operating income		9,854			19,817			5,420			18,210
Other income (expense)
Loss on sale of assets		(961	)		(306	)		(4	)		(9	)
Other income (expense)		265			126			(11	)		21
Income from continuing operations before income taxes		9,158			19,637			5,405			18,222
Income tax expense		(9,267	)		(12,781	)		(3,221	)		(8,943	)
Income (loss) from continuing operations		(109	)		6,856			2,184			9,279
Loss from discontinued operations		(1,872	)		(4,412	)		(1,104	)		(2,355	)
Net income (loss)	$	(1,981	)	$	2,444		$	1,080		$	6,924

See accompanying notes to combined financial statements.

F-29

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Combined Statements of Owner’s Equity

(Dollar amounts in thousands)

	Owner’s Net Investment			Accumulated Other Comprehensive Income (Loss)			Total Owner’s Equity
Balance at January 1, 2001	$	82,581		$	(4,551	)	$	78,030
Activity in Laureate net investment before net loss—see Note 4		3,429			—			3,429
Comprehensive loss:
Net loss for 2001		(1,981	)		—			(1,981	)
Other comprehensive loss—foreign currency translation adjustment		—			(1,440	)		(1,440	)
Total comprehensive loss		(1,981	)		(1,440	)		(3,421	)
Balance at December 31, 2001		84,029			(5,991	)		78,038
Activity in Laureate net investment before net income—see Note 4		12,912			—			12,912
Comprehensive income:
Net income for 2002		2,444			—			2,444
Other comprehensive income—foreign currency translation adjustment		—			4,502			4,502
Total comprehensive income		2,444			4,502			6,946
Balance at December 31, 2002		99,385			(1,489	)		97,896
Activity in Laureate net investment before net income—see Note 4		(15,254	)		—			(15,254	)
Comprehensive income:
Net income for the six months ended June 30, 2003		6,924			—			6,924
Other comprehensive income—foreign currency translation adjustment		—			2,425			2,425
Total comprehensive income		6,924			2,425			9,349
Balance at June 30, 2003	$	91,055		$	936		$	91,991

See accompanying notes to combined financial statements.

F-30

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Combined Statements of Cash Flows

(Dollar amounts in thousands)

	Year ended December 31,						Three months ended March 31, 2003			Six months ended June 30, 2003
	2001			2002
							(unaudited)
Operating activities
Income (loss) from continuing operations	$	(109	)	$	6,856		$	2,184		$	9,279
Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operations:
Depreciation		7,610			7,160			1,640			3,840
Amortization		2,835			738			185			381
Bad debt expense		507			2,564			240			358
Other non-cash items		1,562			1,185			(13	)		1,254
Changes in operating assets and liabilities:
Receivables		5,054			(9,504	)		(5,059	)		1,143
Prepaid expenses and other current assets		821			185			2,468			1,923
Inventory		308			1,056			337			472
Payables and accrued expenses		(2,473	)		5,581			1,424			2,179
Accrued compensation and related benefits		(377	)		(1,746	)		(2,922	)		825
Deferred revenue		2,401			7,077			4,639			2,908
Other current liabilities		—			(1,310	)		(70	)		5
Net cash provided by continuing operations		18,139			19,842			5,053			24,567
Loss from discontinued operations		(1,872	)		(4,412	)		(1,104	)		(2,355	)
Adjustments to reconcile loss from discontinued operations to net cash used in discontinued operations:
Changes in operating assets and liabilities		275			80			434			150
Depreciation and other non-cash items		—			46			42			88
Net cash used in operations of discontinued operations		(1,597	)		(4,286	)		(628	)		(2,117	)
Net cash provided by operating activities		16,542			15,556			4,425			22,450
Investing activities
Purchase of property and equipment		(9,286	)		(7,251	)		(933	)		(2,991	)
Cash paid for acquired businesses, net of cash received		(2,007	)		(21,825	)		(354	)		(354	)
Payment of contingent consideration for prior period acquisitions		(261	)		—			—			—
Increase in other assets		(994	)		(1,146	)		(80	)		(473	)
Net cash used in investing activities		(12,548	)		(30,222	)		(1,367	)		(3,818	)
Financing activities
Proceeds from exercises of stock options		—			5			—			—
Net contribution (distribution) from/to owner		(916	)		12,703			(2,159	)		(14,745	)
Payments on debt		(84	)		(123	)		(76	)		(133	)
Net cash provided by (used in) financing activities		(1,000	)		12,585			(2,235	)		(14,878	)
Effects of exchange rate changes on cash		(429	)		636			(28	)		4
Net increase (decrease) in cash and cash equivalents		2,565			(1,445	)		795			3,758
Cash and cash equivalents at beginning of period		4,296			6,861			5,416			5,416
Cash and cash equivalents at end of period	$	6,861		$	5,416		$	6,211		$	9,174
Included in balance sheet caption:
Cash and cash equivalents	$	6,861		$	4,909		$	6,030		$	9,194
Assets of discontinued operations held for sale	$	—		$	507		$	181		$	(20	)

See accompanying notes to combined financial statements.

F-31

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

1.    Description of Business

The Laureate pre-K-12 Business (the “Company”), a component of Laureate Education, Inc. (formally known as Sylvan Learning Systems, Inc.) (“Laureate”), is a leading branded supplemental education services provider to pre-kindergarten through twelfth grade, or pre-K-12, students. The Company operates through three business segments, summarized as follows:

Ÿ The Learning Center segment develops and delivers trusted, personalized tutoring programs primarily through a network of more than 1,000 franchised and company-owned learning centers in North America operated under the Sylvan^® brand name, and more than 950 European franchised and company–owned learning centers operated under the Schülerhilfe brand name.

Ÿ The Institutional Services segment provides tutoring, as well as other supplemental education services and special-needs services, to public and private schools through government-funded contracts under the Catapult Learning and other brand names.

Ÿ The Online Learning Services segment provides online tutoring programs modeled after those offered in Sylvan Learning Centers. These online services, provided primarily under the eSylvan brand name, are delivered using a internet-based application that enables teachers and students to talk and interact in real time over a dial-up or broadband connection.

On June 30, 2003, Educate, Inc., a company formed by affiliates of Apollo Advisors L.P., a private equity investor, and management shareholders, acquired the Company. Accordingly, the Company is the predecessor of Educate, Inc.

2.    Accounting Policies

Basis of Presentation and Principles of Combination

The accompanying combined financial statements represent the combined financial position, results of operations and cash flows of the business acquired by Educate, Inc. from Laureate on June 30, 2003. This business was managed and operated by Laureate through several consolidated subsidiaries and an unincorporated division. The accounts of these subsidiaries and the division have been combined, and all significant intercompany balances have been eliminated in combination.

As more fully discussed in Note 4, the combined financial statements for all periods presented include allocations of corporate expenses from Laureate. For financial reporting purposes, the equity activity of the Company has been accumulated into a single caption entitled “owner’s net investment.”

On March 26, 2004, Educate, Inc. committed to sell its subsidiary Connections Academy, Inc., an operator of K-8 virtual public and charter schools. As a result of this expected sale transaction, the accompanying combined financial statements of the predecessor to Educate, Inc. present the results of operations of Connections Academy as discontinued operations. See also Note 6.

Unaudited Interim Financial Information

The unaudited interim financial information for the three months ended March 31, 2003 has been prepared in accordance with generally accepted accounting principles for interim financial

F-32

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

information and with Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Due principally to the timing of school semesters and holiday schedules, the Company is subject to seasonality in reported revenues and expenses that affect reported results of operations. The Company’s Learning Center segment generally experiences lower revenues in the fourth quarter. learning center franchises pay royalties to the Company based on a percentage of cash receipts. Since customers of these franchises frequently make payments for services in advance, royalty revenues earned by the Company are higher in periods of increased enrollment, particularly in the spring months prior to commencement of peak summer service periods. In addition, the Company’s Institutional Services segment generates a disproportionate amount of revenues during the first six months of the calendar year. This occurs because many school districts use the first semester in the fourth calendar quarter to evaluate the specific needs of individual students prior to enrolling students in the Company’s supplemental education programs. In addition, a disproportionate amount of marketing and advertising costs associated with the Company’s business are incurred and expensed in periods when reported revenue is seasonally at a low point. As a result of these factors, quarter-to-quarter comparisons of results of operations may not be indicative of future results of operations.

Use of Estimates

The accompanying combined financial statements have been prepared in accordance with U.S. generally accepted accounting principles that require the Company’s management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Allowance for Doubtful Accounts

The Company reports accounts and notes receivable at net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company calculates the allowance based on a specific analysis of past due balances and also considers historical trends of write-offs. Past due status is based on how recently payments have been received by customers. Actual collection experience has not differed significantly from the Company’s estimates, due primarily to credit and collections practices and the financial strength of customers. Accounts and notes receivable balances due from franchisees are secured by the assets of the franchisee’s business. Other accounts receivable balances, primarily due from governmental agencies, are not collateralized.

F-33

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Inventory

Inventory, consisting primarily of educational, instructional, and marketing materials and supplies, is stated at the lower of cost (first-in, first-out) or market value.

Property and Equipment

Property and equipment is stated at cost. Included in property and equipment are the direct costs of developing or obtaining software for internal use. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the asset or the remaining term of the lease. Useful lives are as follows:

Furniture and fixtures	2–7 years
Computer equipment and software	2–5 years
Leasehold improvements	2–10 years

Goodwill

Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. Prior to 2002, goodwill was amortized over estimated useful lives ranging from 15 to 35 years. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under Statement 142, goodwill is no longer amortized, but rather is subject to impairment tests annually or whenever an impairment indicator is identified. Had goodwill not been amortized in 2001, the reported net loss of $(1,981) in 2001 would have been $1,334 lower, or a net loss of $(647).

Under Statement 142, the goodwill impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting unit to which goodwill has been assigned. The reporting units of the Company for purposes of the impairment test are the Company’s operating segments, as these are the components of the business for which discrete financial information is available and segment management regularly reviews the operating results of those components. The Company then compares the fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of each reporting unit by estimating the present value of the reporting unit’s future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss. Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

F-34

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Impairment of Long-Lived Assets

Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk.

Assets to be disposed of are reported at the lower of carrying value or fair values, less estimated costs of disposal.

Revenue Recognition

Company-Owned Learning Centers and Online Learning Services

Fees from providing supplemental education services to students through company-owned learning centers and online learning programs are recognized as revenue in the period the services are provided.

Franchised Learning Centers

Revenue related to license fees on the initial sale of a territory that transfer the right to operate a Learning Center in a specified geographic area is recognized when all material services or conditions relating to the sales have been substantially performed or satisfied by the Company and collectibility of the fee is reasonably assured. The criteria for substantial performance include: (1) receipt of an executed franchise license agreement, (2) a determination that collectibility of the fee is reasonably assured, (3) completion of requisite training by the franchisee or center director, and (4) completion of required site selection assistance. Initial franchise fees not meeting the recognition criteria are recorded as deferred revenue if not refundable, or deposits from franchisees if refundable.

Franchised learning centers also pay a monthly royalty fee based on cash receipts, payable by the fifteenth day of the following month. Royalty fees are recorded in the month earned if collectibility is reasonably assured. Estimates of royalties earned but unreported by franchisees at the balance sheet date are recorded as revenue and accounts receivable, and are adjusted to actual amounts when reported and paid by the franchisee.

Revenue from the sale of educational materials to learning centers is recognized when shipped and collectibility is reasonably assured.

F-35

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Institutional Services

Revenue from the Institutional Services segment consists principally of revenue from contracts with school districts receiving funds under federal and state-based programs. For contracts that specify a fixed fee per student for educational services over a stated period, revenue is recognized ratably over the contractual service period. Other contracts in this segment compensate the Company for services on an hourly basis. Revenue recorded for these contracts is recorded as services are rendered at the specified hourly rate. Billings under contracts with school districts generally specify monthly billings of service fees. Revenue recognized in advance of billings is recorded as accounts receivable.

Marketing and Advertising

The Company expenses marketing and advertising costs as incurred.

Stock-Based Compensation

Certain employees of the Company participated in the employee stock option plans of Laureate. Laureate recognizes stock compensation expense using the intrinsic value method, under which stock compensation expense is recorded over the award’s vesting period for the difference, if any, between the quoted market price of the underlying common stock and the exercise price. All options granted during the periods presented in the accompanying combined financial statements have been granted with an exercise price equal to the quoted market price of Laureate’s common stock at the date of grant, and accordingly, no compensation expense for these awards was recognized.

The Company has computed pro forma net income (loss) as if Laureate had accounted for stock options using the Black-Scholes option-pricing model prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Black Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are freely tradable. In addition, option-pricing models require the input of highly subjective assumptions, including stock price volatility. Because Laureate’s stock options have characteristics significantly different from 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 stock-based awards.

F-36

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

The following assumptions were used in calculating pro forma stock compensation expense:

	Year ended December 31,		Three months ended March 31, 2003	Six months ended June 30, 2003
	2001	2002
			(Unaudited)
Risk-free interest rate	4.50%-4.96%	4.01%-4.52%	2.35%-2.89%	2.48%-3.02%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Expected life	5 years	5 years	5 years	5 years
Expected volatility	46.4%	51.1%	53.8%	54.0%

The weighted average estimated fair value of stock options granted during the years ended December 31, 2001 and 2002 and the six months ended June 30, 2003 was $9.49, $11.70 and $6.91, respectively.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The Company’s pro forma information is as follows:

	Year ended December 31,						Three months ended March 31, 2003			Six months ended June 30, 2003
	2001			2002
							(unaudited)
Net income (loss), as reported	$	(1,981	)		2,444		$	1,080		$	6,924
Stock-based employee compensation expense as if the fair value method had been applied, net of tax		(2,277	)		(2,358	)		(483	)		(630	)
Pro forma net income (loss)	$	(4,258	)	$	86		$	597		$	6,294

Foreign Currency Translation

The financial statements of foreign subsidiaries with a functional currency other than the U.S. dollar have been translated into U.S. dollars using the current rate method. Assets and liabilities have been translated using the exchange rates at year-end. Income and expense amounts have been translated using the average exchange rate prevailing for the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income (loss) included in the combined statement of owner’s equity.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from non-owner sources. Other comprehensive income refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States, are included in comprehensive income, but excluded from net income. The elements of other comprehensive income (loss) consisted of foreign currency translation adjustments. Because deferred taxes are not provided for the unremitted earnings of foreign subsidiaries, deferred taxes are not provided for translation adjustments.

F-37

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Income Taxes

The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, measured at prevailing enacted tax rates that are expected to be in effect when these temporary differences are settled or realized.

The operations of the Company were conducted through domestic and foreign subsidiaries of Laureate. Laureate consolidated the Company’s domestic subsidiaries in its U.S. federal income tax return, except for eSylvan, Inc. and Connections Academy, Inc. eSylvan, Inc. and Connections Academy, Inc. were subsidiaries of Sylvan Ventures, LLC, a subsidiary that is not consolidated in the federal income tax returns of Laureate. Accordingly, eSylvan, Inc. and Connections Academy, Inc. filed separate federal and state income tax returns. The foreign operations of the Company consist of the Schülerhilfe business headquartered in Germany, and were conducted through foreign subsidiaries of Laureate that filed separate income tax returns and settled their income tax obligations through the accounts of these subsidiaries.

For financial reporting purposes, the Company has calculated income tax expense attributable to its operations using the separate return method. Under this method, the Company has assumed that its subsidiaries included in the consolidated U.S. federal income tax return of Laureate filed a combined separate return. Income tax expense for all other subsidiaries that filed their own separate return are computed using the liability method, and all resulting current and deferred income tax amounts are reported in the accompanying balance sheets as assets or liabilities of the Company. Income taxes attributable to the Company’s domestic operations that were paid or accrued by Laureate and the related deferred income tax balances are included as a component of owner’s net investment.

3.    Acquisitions

Effective January 1, 2002, the Company acquired from a commonly controlled investment group substantially all of the net operating assets of three Sylvan Learning Center franchise businesses, comprising 30 centers, for an initial cash payment of $11,110, including acquisition costs, and 144,000 shares of Laureate common stock with a quoted market value of $3,000. The Company purchased these centers to increase revenues in three established, stable markets. The acquisition was accounted for using the purchase method of accounting. The purchase agreement required the Company to pay additional consideration to the sellers in the event that specified levels of operating results were achieved in 2002, 2003, 2004 and 2005. In October 2002, the Company paid $8,081 in final settlement of all remaining contingent payments. The final purchase price totaled approximately $22,191. The purchase price was allocated to acquired assets totaling $22,999 and assumed liabilities of $808, based on estimated fair values at the date of acquisition. Goodwill of $21,712 was recorded and is fully deductible for income tax purposes. The results of operations of the acquired franchise businesses are included in the accompanying combined financial statements commencing on January 1, 2002.

F-38

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

The following table summarizes the allocation of the purchase price to acquired assets and liabilities:

Current assets	$	73
Property and equipment		1,214
Goodwill		21,712
Total assets acquired		22,999
Current liabilities		808
Purchase price	$	22,191

The following 2001 unaudited combined pro forma results of operations of the Company give effect to the acquisition as if it occurred on January 1, 2001.

Revenues	$	190,892
Income from continuing operations before income taxes		9,794
Net loss		(1,599	)

In addition, during 2002 the Company acquired six other Sylvan Learning Center franchises in separate transactions for cash payments of $2,600 and a note payable of $300. The aggregate purchase price totaled approximately $2,934, including acquisition costs of $34, and was allocated to acquired assets totaling $3,514 and assumed liabilities of $580. Goodwill of $3,344 was recorded and is fully deductible for income tax purposes.

During 2001, the Company acquired five other Sylvan Learning Center franchises in separate transactions for cash payments aggregating $2,007. Assets totaling $2,363 and liabilities of $356 were acquired in these acquisitions. Goodwill of $2,306 was recorded and is fully deductible for income tax purposes.

4.    Owner’s Net Investment and Corporate Allocations

Owner’s net investment includes amounts invested by Laureate in the Company, reduced by net cash from operations generated by the Company and retained by Laureate in centralized cash management accounts. During all periods presented, Laureate collected through its centralized cash management accounts substantially all domestic revenues of the Company and paid substantially all domestic expenses. Owner’s net investment also includes amounts paid by Laureate for (i) the acquisition of certain businesses acquired by the Company, (ii) certain fixed asset acquisitions of the Company paid through Laureate’s centralized disbursement accounts and (iii) allocated indirect overhead costs. Indirect overhead costs were allocated for all periods presented based on an analysis of the components of Laureate’s corporate general and administrative expenses and the estimated percentage of each component attributable to the Company. Corporate general and administrative expense consists principally of corporate payroll and compensation expense, which was allocated considering the estimated efforts of individual employees. Management believes that the method used to allocate these expenses is reasonable.

F-39

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Allocated indirect overhead consists principally of the following:

Ÿ Corporate human resources, including labor relations, payroll and training;

Ÿ Finance, accounting, legal and administration;

Ÿ Tax services, including tax return preparation;

Ÿ Investor relations; and

Ÿ Information management services.

Income taxes have been allocated to the Company based on the separate return method, described more fully in Note 1.

The following table summarizes the components of the changes in owner’s net investment during the periods presented.

	Year ended December 31						Three months ended March 31, 2003			Six months ended June 30, 2003
	2001			2002
							(unaudited)
Owner’s net investment, beginning of period	$	82,581		$	84,029		$	99,385		$	99,385
Net cash flows of the Company maintained by Laureate in centralized cash management accounts		(45,088	)		(54,998	)		(24,300	)		(37,721	)
Contributions by Laureate to capital of combined subsidiaries		16,196			14,368			2,354			5,078
Payments by Laureate for acquisitions		2,268			21,825			354			354
Payments by Laureate for property and equipment		8,998			6,850			875			2,392
Change in Laureate net investment before expense allocations and net income (loss)		(17,626	)		(11,955	)		(20,717	)		(29,897	)
Allocated indirect overhead costs		12,348			13,058			3,324			6,433
Allocated income taxes		8,707			11,809			2,857			8,210
Net income (loss)		(1,981	)		2,444			1,080			6,924
Owner’s net investment, end of period	$	84,029		$	99,385		$	85,929		$	91,055
Average owner’s net investment during period	$	83,699		$	96,521		$	92,657		$	92,123

5.    Goodwill

The change in the carrying amount of goodwill for the year ended December 31, 2002 by reportable business segment is as follows:

	Learning Center			Institutional Services		Total
Balance at January 1, 2002	$	43,681		$	1,447	$	45,128
Foreign currency translation adjustment		(1,334	)		—		(1,334	)
Acquisitions		25,056			—		25,056
Balance at December 31, 2002	$	67,403		$	1,447	$	68,850

F-40

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

6.    Discontinued Operations

On March 26, 2004, Educate adopted a formal plan to sell the common stock of its subsidiary Connections Academy, Inc. by March 25, 2005. Connections Academy, which commenced operations in 2002, is an operator of K-8 virtual public and charter schools. At December 31, 2002, the net assets held for sale of the discontinued operation were $254, consisting of $1,233 of assets and $979 of liabilities.

The operations of Connections Academy have been classified as discontinued operations in the accompanying statements of operations. The operations and cash flows of this component will be eliminated from the ongoing operations of Educate as a result of the disposal transaction and Educate will not have any significant continuing involvement in the operations after the disposal transaction.

Summarized operating results from the discontinued operations is as follows:

	Year ended December 31						Three months ended March 31, 2003			Six months ended June 30, 2003
	2001			2002
							(unaudited)
Revenues	$	—		$	650		$	472		$	914
Loss from operations of discontinued operations before income taxes		(1,872	)		(4,412	)		(1,104	)		(2,355	)
Income tax expense		—			—			—			—
Loss from discontinued operations	$	(1,872	)	$	(4,412	)	$	(1,104	)	$	(2,355	)

Assets and liabilities of the discontinued operations were as follows at December 31, 2002:

Current assets	$	692
Property and equipment, net		496
Other long-term assets		45
Current liabilities		(729	)
Long-term liabilities		(250	)
Net assets of discontinued operations	$	254

7.    Leases

The Company conducts significant operations from leased facilities. These facilities include office locations, warehouse space and company-owned learning centers. The terms of substantially all of these leases are five years or less. The Company also leases certain equipment under non-cancelable operating leases, substantially all of which are for terms of 36 months or less.

F-41

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Future minimum lease payments, by year and in the aggregate, under all non-cancelable operating leases are as follows at December 31, 2002:

Years ending December 31:
2003	$	11,454
2004		9,464
2005		7,102
2006		4,286
2007		3,080
Thereafter		56
	$	35,442

Rent expense for all cancelable and non-cancelable leases was approximately $8,677, $11,277 and $6,899 for the years ended December 31, 2001, 2002 and the six months ended June 30, 2003, respectively.

8.    Commitments and Contingencies

The Company is subject to legal actions arising in the ordinary course of its business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company’s financial position.

9.    Defined Contribution Retirement Plan

The Company’s employees participate in a defined contribution retirement plan under section 401(k) of the Internal Revenue Code that is sponsored by Laureate. The provisions of this plan allow for voluntary employee contributions up to 20% of their salary, subject to certain annual limitations. Laureate may at its discretion make matching contributions, which are allocated to eligible participants. All employees are eligible after meeting certain service requirements. Laureate made discretionary contributions to this plan on behalf of the Company’s employees of $603 in 2001, $596 in 2002 and $686 for the six months ended June 30, 2003.

F-42

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

10.    Income Taxes

Significant components of income tax expense from continuing operations are as follows:

	Year ended December 31,						Six months ended June 30, 2003
	2001			2002
Current:
U.S. Federal	$	9,359		$	10,649		$	9,470
Foreign		424			9			158
U.S. state		1,249			1,454			1,348
		11,032			12,112			10,976
Deferred:
U.S. Federal		(1,544	)		(115	)		(2,612	)
Foreign		—			800			952
U.S. state		(221	)		(16	)		(373	)
		(1,765	)		669			(2,033	)
Total income tax expense	$	9,267		$	12,781		$	8,943

For the years ended December 31, 2001 and 2002, and the six months ended June 30, 2003, foreign income before income taxes was $624, $2,253 and $2,118, respectively.

The Company uses the liability method to account for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2002 are summarized as follows:

Deferred tax assets:
Net operating loss carryforwards	$	13,963
Deferred revenue		5,005
Allowance for doubtful accounts		1,604
Deferred compensation		341
Non-deductible reserves		832
Other		34
Total deferred tax assets		21,779
Deferred tax liabilities:
Depreciation		3,277
Amortization of intangible assets		3,591
Deferred income		112
Unbilled receivables		802
Total deferred tax liabilities		7,782
Net deferred tax assets		13,997
Valuation allowance for net deferred tax assets		(13,579	)
Net deferred tax asset	$	418

F-43

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

Included in the accompanying balance sheet as:

Component of owner’s net investment	$	2,826
Long-term deferred tax liability		(2,408	)
Net deferred tax asset	$	418

At December 31, 2002, undistributed earnings of non-U.S. subsidiaries totaled $3,400. Deferred tax liabilities have not been recognized for these undistributed earnings because it is management’s intention to reinvest such undistributed earnings outside of the U.S. If all undistributed earnings were remitted to the U.S., the amount of incremental U.S. Federal income taxes, net of foreign tax credits, would be approximately $1,000.

The net operating loss carryforwards at December 31, 2002 are related to subsidiaries of the Company, and are available only to offset future taxable income of those subsidiaries. Domestic net operating loss carryforwards total $32,615 at December 31, 2002 and begin to expire in 2019. Foreign net operating loss carryforwards total $4,463 at December 31, 2002 and have no expiration date.

The reconciliation of the reported income tax expense to the amount that would result by applying the U.S. federal statutory tax rate of 35% to income from continuing operations is as follows:

	Year ended December 31,				Six months ended June 30, 2003
	2001		2002
Tax expense at U.S. statutory rate	$	3,205	$	6,873	$	6,378
Permanent differences		158		196		62
State income tax expense, net of federal tax effect		529		959		535
Tax effect of foreign income taxed at higher rate		205		20		236
Change in valuation allowance		5,170		4,733		1,732
Total tax expense	$	9,267	$	12,781	$	8,943

11.    Stock Option Plans

The Company’s employees participated in the stock option plans of Laureate. These plans generally allow for the granting of options to purchase shares of common stock to selected employees of the Company at a price not less than the estimated fair value of the common stock at the date of the grant. All options expire 10 years after the date of the grant.

F-44

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

The following table summarizes the stock option activity of the Company (shares in thousands):

	Year ended December 31,								Six months ended June 30,
	2001				2002				2003
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of period	3,787		$	17.17	3,376		$	18.34	3,100		$	19.11
Granted	274			20.50	212			23.53	25			14.18
Exercised	(543	)		10.54	(286	)		11.38	(65	)		14.35
Forfeited	(142	)		21.23	(202	)		21.74	(58	)		21.32
Outstanding at end of period	3,376		$	18.34	3,100		$	19.11	3,002		$	19.16
Exercisable at end of period	2,340		$	17.81	2,391		$	19.09	2,498		$	19.12

The following table summarizes information about stock options outstanding at December 31, 2002:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted average Exercise Prices		Weighted Average Remaining Contractual Life	Number of shares	Weighted Average Exercise Prices
$3.48 - $6.08	267	$	4.69	0.6	267	$	4.69
$6.78 - $13.11	279		10.77	5.1	166		9.46
$13.55 - $19.77	1,119		14.86	4.9	829		14.45
$20.82 - $32.38	1,435		26.77	5.7	1,129		27.33

12.    Business and Geographic Segment Information

The Company is organized on the basis of educational services provided. The Company’s segments are business units that offer distinct services. The segments are managed separately as they have different customer bases and delivery channels. Reportable segments are as follows:

Ÿ Learning Center provides personalized instructional services to students of all ages and skill levels through its network of franchised and company-owned learning centers. This segment includes the Sylvan Learning Center network and the Schülerhilfe network.

Ÿ Institutional Services provides educational programs to students of public and non-public school districts through contracts funded by Federal and State-based programs.

Ÿ Online Learning Services provides supplemental education to children through applications on the Internet.

The Company evaluates performance and allocates resources based on operating income before allocated indirect overhead costs. There are no significant intercompany sales or transfers.

F-45

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

The following table sets forth information on the Company’s reportable segments:

	Learning Center			Institutional Services			Online Learning			Total Segments
Year ended December 31, 2001
Revenues	$	110,978		$	70,042		$	479		$	181,499
Segment profit (loss) before depreciation and amortization		30,113			13,550			(11,016	)		32,647
Segment depreciation and amortization		(3,976	)		(2,844	)		(2,206	)		(9,026	)
Segment profit (loss)	$	26,137		$	10,706		$	(13,222	)	$	23,621
Segment assets	$	65,466		$	24,068		$	4,864		$	94,398
Total expenditures for additions to long-lived assets		7,069			1,269			2,432			10,770
Year ended December 31, 2002
Revenues	$	145,746		$	67,910		$	2,656		$	216,312
Segment profit (loss) before depreciation and amortization		39,920			10,922			(10,069	)		40,773
Segment depreciation and amortization		(2,924	)		(1,612	)		(2,140	)		(6,676	)
Segment profit (loss)	$	36,996		$	9,310		$	(12,209	)	$	34,097
Segment assets	$	93,464		$	31,178		$	2,900		$	127,542
Total expenditures for additions to long-lived assets		28,355			384			197			28,936
Three months ended March 31, 2003 (unaudited)
Revenues	$	38,911		$	20,771		$	486		$	60,168
Segment profit (loss) before depreciation and amortization		10,269			2,637			(2,337	)		10,569
Depreciation and amortization		(901	)		(309	)		(286	)		(1,496	)
Segment profit	$	9,368		$	2,328		$	(2,623	)	$	9,073
Segment assets	$	96,942		$	31,913		$	2,557		$	131,412
Total expenditures for additions to long-lived assets		1,256			287			—			1,543
Six months ended June 30, 2003
Revenues	$	83,443		$	43,418		$	973		$	127,834
Segment profit (loss) before depreciation and amortization		25,765			6,650			(3,551	)		28,864
Depreciation and amortization		(1,857	)		(1,162	)		(543	)		(3,562	)
Segment profit	$	23,908		$	5,488		$	(4,094	)	$	25,302
Segment assets	$	102,616		$	25,420		$	2,521		$	130,557
Total expenditures for additions to long-lived assets		2,450			790			374			3,614

F-46

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

Notes to Combined Financial Statements—(Continued)

Years Ended December 31, 2001 and 2002

Three Months Ended March 31, 2003 (Unaudited)

Six Months Ended June 30, 2003

(Dollar amounts in thousands)

The following tables reconcile the reported information on segment profit to income from continuing operations before income taxes reported in the combined statements of operations:

	Year ended December 31,						Three months ended March 31, 2003			Six months ended June 30, 2003
	2001			2002
Segment profit	$	23,621		$	34,097		$	9,073		$	25,302
Corporate depreciation and amortization		(1,419	)		(1,222	)		(329	)		(659	)
Other income (expense)		(696	)		(180	)		(15	)		12
Allocated indirect overhead costs		(12,348	)		(13,058	)		(3,324	)		(6,433	)
Income from continuing operations before income taxes	$	9,158		$	19,637		$	5,405		$	18,222

The following table reconciles segment assets to total assets at December 31, 2002:

Total assets for reportable segments	$	127,542
Unallocated corporate assets		9,191
Assets of discontinued operations held for sale		1,233
Total assets	$	137,966

Revenue by geographic area is as follows:

	Year ended December 31,				Three months ended March 31, 2003		Six months ended June 30, 2003
	2001		2002
Revenues
United States	$	165,375	$	197,660	$	54,233	$	115,132
Other		16,124		18,651		5,935		12,702
Consolidated total	$	181,499	$	216,311	$	60,168	$	127,834

Revenues are attributed to countries based on the location of the customer. No country other than the United States represents more than 10% of combined revenues. Substantially all long-lived assets are held in the United States.

F-47

EDUCATE, INC.

INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

On June 30, 2003, we acquired substantially all of the pre-K-12 business of Laureate, our predecessor. The initial purchase price totaled approximately $282,073, including cash payments of $115,510, the exchange of debt securities issued by Laureate with a fair value of $107,703, a subordinated promissory note of $55,000, and a deferred payment obligation of $2,323. Included in the purchase price are acquisition costs of $4,491, and the purchase price has been reduced by an estimated working capital adjustment of $2,949. The purchase price was allocated to assets totaling $325,308 and assumed liabilities of $43,235.

The following Unaudited Pro Forma Consolidated Statements of Income are derived from our audited consolidated financial statements for the period from June 30, 2003 (date of inception) through December 31, 2003 and the audited combined financial statements of the predecessor for the six months ended June 30, 2003, adjusted to give effect to the acquisition as if it occurred as of January 1, 2003. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that management believes are reasonable. The Unaudited Pro Forma Consolidated Statements of Income do not purport to represent what our results of operations would actually have been had the acquisition in fact occurred on such date or to project our results of operations for any future date or period. The Unaudited Pro Forma Consolidated Statements of Income should be read in conjunction with our historical consolidated financial statements and the historical financial statements of our predecessor, included elsewhere in this Prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

F-48

Educate, Inc.

Unaudited Pro Forma Consolidated Statement of Income

Year Ended December 31, 2003

(Dollar amounts in thousands)

	Historical						Pro Forma Adjustments			Pro Forma
	Predecessor— Six months ended June 30, 2003			Educate, Inc.— Period from June 30, 2003 through December 31, 2003
										Year ended December 31, 2003
Revenues
Learning Center:
Company-owned centers	$	59,789		$	57,390		$	—		$	117,179
Franchise services		23,654			20,817			—			44,471
Total Learning Center		83,443			78,207			—			161,650
Institutional Services		43,418			35,425			—			78,843
Online Learning Services		973			861			—			1,834
Total revenues		127,834			114,493			—			242,327
Costs and expenses
Instructional and franchise operations costs		88,633			83,501			—			172,134
Marketing and advertising		10,337			9,191			—			19,528
Depreciation and amortization		4,221			3,567			(1,219	)(1),(2)		6,569
General and administrative expenses		6,433			6,258			—			12,691
Total costs and expenses		109,624			102,517			(1,219	)		210,922
Operating income		18,210			11,976			1,219			31,405
Other income (expense)
Interest income		21			219			—			240
Interest expense		—			(6,967	)		(6,484	)(3)		(13,451	)
Loss on sale of assets		(9	)		—			—			(9	)
Income from continuing operations before income taxes		18,222			5,228			(5,265	)		18,185
Income tax expense		(8,943	)		(2,056	)		3,708	(4)		(7,291	)
Income from continuing operations	$	9,279		$	3,172		$	(1,557	)	$	10,894
Income from continuing operations per common share, basic and diluted				$	0.07					$	0.24

See accompanying notes to unaudited pro forma consolidated statements of income.

F-49

Educate, Inc.

Unaudited Pro Forma Consolidated Statements of Income

Three Months Ended March 31, 2003

(Dollar amounts in thousands)

	Historical			Pro Forma Adjustments			Pro Forma
	Predecessor— Three months ended March 31, 2003
							Three months ended March 31, 2003
Revenues
Learning Center:
Company-owned centers	$	27,852		$	—		$	27,852
Franchise services		11,059			—			11,059
Total Learning Center		38,911			—			38,911
Institutional Services		20,771			—			20,771
Online Learning Services		486			—			486
Total revenues		60,168			—			60,168
Costs and expenses
Instructional and franchise operations costs		44,365			—			44,365
Marketing and advertising		5,234			—			5,234
Depreciation and amortization		1,825			(333	)(1),(2)		1,492
General and administrative expenses		3,324			—			3,324
Total costs and expenses		54,748			(333	)		54,415
Operating income		5,420			333			5,753
Other income (expense)
Other expense		(15	)		—			(15	)
Interest expense		—			(3,242	)(3)		(3,242	)
Income from continuing operations before income taxes		5,405			(2,909	)		2,496
Income tax expense		(3,221	)		2,213	(4)		(1,008	)
Income from continuing operations	$	2,184		$	(696	)	$	1,488
Income from continuing operations per common share, basic and diluted							$	0.03

See accompanying notes to unaudited pro forma consolidated statements of income.

F-50

EDUCATE, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

Summary of Purchase Price Allocation

The following table summarizes the allocation of the purchase price to acquired assets and liabilities:

Cash	$	9,176
Accounts and notes receivable		30,563
Other current assets		2,492
Property and equipment		14,661
Deferred tax assets		2,293
Intangible assets subject to amortization (weighted average amortization period of 5 years)		1,199
Indefinite lived intangible assets:
Tradenames		131,000
Franchise license rights		88,000
Goodwill		44,281
Other assets		1,643
Total assets acquired		325,308
Current liabilities		42,204
Long-term debt		1,031
Total liabilities assumed		43,235
Purchase price	$	282,073

Management estimated the fair value of the acquired assets and assumed liabilities using several generally accepted valuation techniques. Current assets and liabilities were assumed to have fair values equal to their book value at the acquisition date. Tradenames and franchise license rights were valued using the income approach, whereby the fair value of an asset is based on the present value of its estimated future economic benefits. Property and equipment was valued using the cost approach, or if a ready market for similar assets could be identified and relied upon, the market approach. The cost approach measures fair value as the cost to construct or replace the asset with another asset of like utility. The market approach establishes fair value based on recent sales of comparable property. For certain technology assets, when identifiable, the market approach was used to verify the results of the cost approach. The acquired tradenames consist principally of the “Sylvan” tradename, which is licensed to Laureate until June 30, 2004, after which time Laureate must change its name and desist from using the Sylvan brand or tradename. The purchase price allocation is subject to adjustment no later than June 30, 2004 based on the completion of an analysis of the income tax basis of certain acquired assets and liabilities and the final estimation of deferred tax amounts related to differences between the financial reporting and income tax basis of these assets and liabilities.

Summary of Pro Forma Adjustments

(1) Adjustment to reduce depreciation expense by $1,020 and $233 for the year ended December 31, 2003 and the three-month period ended March 31, 2003, respectively. This adjustment accounts for the annual effect on depreciation for the revaluation of property and equipment to fair value based on an independent appraisal at the acquisition date, and includes the effects of depreciating property and equipment over shorter lives for the full year in accordance with the depreciation policies of the Company.

F-51

(2) Adjustment to reduce amortization expense by $199 and $100 for the year ended December 31, 2003 and the three-month period ended March 31, 2003, respectively. Amortization expense has been adjusted to eliminate amortization expense of $299 for the year ended December 31, 2003 and $150 for the three months ended March 31, 2003 related to intangible assets of the Predecessor. In addition, amortization expense was increased by $100 for the year ended December 31, 2003 and $50 for the three months ended March 31, 2003 to provide for the full year effect of amortizing intangibles acquired by the Company on June 30, 2003.

(3) Adjustment to increase interest expense by $6,484 and $3,242 for the year ended December 31, 2003 and the three-month period ended March 31, 2003, respectively. To acquire the pre-K-12 business of Laureate, the Company on June 30, 2003 borrowed $110.0 million from banks and other lenders, issued a $55.0 million note to Laureate, and agreed to a deferred payment to Laureate of $2.3 million. The interest rates for the above long-term borrowings range from 5.5% to 12% per annum, with a weighted average interest rate of 7.75% per annum. The $55.0 million note issued to Laureate in connection with the acquisition bears interest at 12% per annum.

(4) Adjustment to record pro forma income tax expense related to pro forma adjustments to the estimated effective income tax rate of 40%.

F-52

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2004 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

15,000,000 Shares

Educate, Inc.

Common Stock

PROSPECTUS

Goldman, Sachs & Co.

Merrill Lynch & Co.

JPMorgan

Banc of America Securities LLC

Legg Mason Wood Walker

Incorporated

ThinkEquity Partners LLC

                        , 2004

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the various expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale and distribution of the securities being registered. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the NASDAQ National Market application fee.

SEC registration fee	$	36,426.25
NASD filing fee	$	29,250.00
NASDAQ National Market application fee	$	100,000.00
Accounting fees and expenses	$	550,000.00
Legal fees and expenses	$	850,000.00
Printing and engraving expenses	$	450,000.00
Transfer agent fees and expenses	$	30,000.00
Miscellaneous fees and expenses	$	234,323.75
Total	$	2,280,000.00

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been our director, officer, employee or agent. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for any breach of the director’s duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or for any transaction from which the director derived an improper personal benefit.

Article Sixth of our certificate of incorporation provides that none of our directors shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Delaware law. In addition, Article VIII of our bylaws provides that we shall indemnify our directors and officers to the fullest extent permitted by Delaware law, including the obligation to pay the expenses incurred by the director or officer in defending or otherwise participating in any proceeding in advance of its final disposition.

Article VIII, Section 8 of our bylaws provides that we shall have the power to purchase and maintain insurance on behalf of any person who is or was one of our directors or officers, or is or was

II-1

serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of his status as such, whether or not we would have the power to indemnify him against such liability under our bylaws.

Prior to the completion of this offering, we intend to enter into indemnification agreements with our directors and officers. The indemnification agreements provide indemnification to our directors and officers under certain circumstances for acts or omissions which may not be covered by directors’ and officers’ liability insurance, and may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. We have also obtained directors’ and officers’ liability insurance, which insures against liabilities that our directors or officers may incur in such capacities.

Item 15. Recent Sales of Unregistered Securities

In June 2003, we sold an aggregate of 368,126 shares of common stock to five management employees of Educate, Inc. and its subsidiaries, and certain other investors, all of whom we determined were “accredited investors” within the meaning of the Securities Act. The consideration received by us for each share sold was $3.98 per share. These securities were issued in a transaction exempt from the registration requirements of the Securities Act in reliance on Section 4(2) of the Securities Act.

During 2003 and 2004, we granted options to purchase an aggregate of 3,765,200 shares of our common stock to employees under our 2003 Omnibus Stock Option Plan pursuant to the exemptions from registration provided by Rule 701 and Rule 506 under the Securities Act. The options have exercise prices ranging from $3.71 per share to $5.06 per share.

On May 13, 2004, we granted restricted stock awards to five of our executive officers covering an aggregate of 604,000 shares of our common stock for a purchase price per share equal to $0.01 pursuant to the terms and conditions of our 2003 Omnibus Stock Incentive Plan. The restricted stock is immediately vested but may not be directly or indirectly sold, assigned, transferred, pledged, hypothecated, monetized or otherwise disposed of for a period of three years from the date of grant, which period will be extended until five years from the date of termination of employment in the event the executive officer’s employment is terminated by us for cause or by the executive officer other than for good reason. In the event we do not consummate this offering prior to December 31, 2004, we have the right, but not the obligation, to repurchase the shares subject to the restricted stock awards at a per share price equal to the per share purchase price plus any withholding taxes the executive officer paid with respect to each such share. This right terminates immediately upon consummation of this offering. These securities were issued in a transaction exempt from the registration requirements of the Securities Act in reliance on Section 4(2) of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

Exhibit Number	Description
1.0	Form of Underwriting Agreement.
2.1	Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo Management IV, L.P., dated as of March 10, 2003.(1)
2.2	Amendment No. 1 to Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo Management IV, L.P., dated as of June 30, 2003.(1)

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Exhibit Number	Description
2.3	Amendment No. 2 to Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Laureate Education, Inc., f/k/a Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo Management IV, L.P., dated as of June     , 2004.*
3.1	Amended and Restated Certificate of Incorporation of Educate, Inc., a Delaware corporation.*
3.2	Form of Amended and Restated By-Laws of Educate Inc., a Delaware corporation.
3.3	Specimen of stock certificate for common stock.*
4.1	Registration Rights Agreement, dated as of                     , by and among Educate, Inc., and certain of its stockholders.*
5.1	Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related to the shares of common stock being sold in the initial public offering.
10.1	$200,000,000 Credit Agreement, dated as of April 27, 2004, among Educate Operating Company, LLC, the several banks and other financial institutions party thereto, Merrill Lynch Capital, as documentation agent and JPMorgan Chase Bank, as administrative agent.(1)
10.2	Guarantee and Collateral Agreement, dated as of April 27, 2004, among Educate, Inc., Educate Operating Company, LLC and the other guarantors party thereto in favor of JPMorgan Chase Bank, as administrative agent for the banks and other financial institutions party to the Credit Agreement.(1)
10.3	Sublease, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC, for the property located at 1001 Fleet Street, Baltimore, Maryland 21202.(1)
10.4	Sublease, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC, for the property located at 506 S. Central, Baltimore, Maryland 21202.(1)
10.5	Shared Services Agreement, dated June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC.(1)
10.6	Patent License Agreement, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate, Inc.(1)
10.7	Employment Agreement of Christopher Hoehn-Saric, dated June 30, 2003.
10.8	Indemnification Agreement between Educate, Inc. and Christopher Hoehn-Saric, dated June 30, 2000.
10.9	Stock Subscription Agreement, dated June 30, 2003 among the stockholders party thereto and Educate, Inc.(1)
10.10	Stock Subscription Agreement, dated June 30, 2003 among Apollo Sylvan, LLC, Apollo Sylvan II, LLC and Educate, Inc.(1)
10.11	Educate, Inc. 2003 Omnibus Stock Incentive Plan.(1)
10.12	Form of Indemnification Agreement.*
10.13	Form of Nominating Agreement, dated as of June     , 2004, among Educate, Inc., Apollo Sylvan, LLC and Apollo Sylvan II, LLC.
21.1	List of Subsidiaries.(1)
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.

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Exhibit Number	Description
23.2	Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in Exhibit 5.1).*
24.1	Power of Attorney (included on signature page of the Registration Statement).(1)
24.2	Power of Attorney of Cheryl Gordon.

* To be filed by subsequent amendment.

(1) Previously filed with the Form S-1 filed by the Registrant on May 14, 2004.

(b) Financial Statement Schedules

II-4

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON FINANCIAL STATEMENT SCHEDULES OF EDUCATE, INC.

The Board of Directors and Stockholders

Educate, Inc.

We have audited the consolidated financial statements of Educate, Inc. (the Company) as of December 31, 2003, and for the period from June 30, 2003 (date of inception) through December 31, 2003, and have issued our report thereon dated May 3, 2004, except for Note 15 as to which the date is August     , 2004 (included elsewhere in this Registration Statement). Our audit also included the financial statement schedules listed in Item 16(b) of this Registration Statement. These schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit.

In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

Ernst & Young LLP

Baltimore, Maryland

May 3, 2004

The accompanying consolidated financial statements include the effects of a reverse stock split approved by the Company’s Board of Directors on June 29, 2004, and anticipated to be effected prior to the closing of this offering. The above opinion is the form which will be signed by Ernst & Young LLP upon consummation of the reverse stock split which is described in Note 15 of the notes to the consolidated financial statements and assuming that from June 29, 2004 to the date of such reverse stock split, no other events have occurred that would effect the accompanying financial statements and notes thereto.

/s/ Ernst & Young LLP

Baltimore, Maryland

June 29, 2004

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Schedule I – Condensed Financial Information of Registrant

Educate, Inc.

Condensed Balance Sheet

December 31, 2003

(Dollar amounts in thousands)

Assets
Investment in and advances to subsidiaries	$	200,234
Total assets	$	200,234
Liabilities and stockholders’ equity
Interest payable	$	3,327
Note payable to Laureate		55,000
Total liabilities		58,327
Stockholders’ equity:
Common stock		368
Additional paid-in capital		137,336
Retained earnings		1,701
Accumulated other comprehensive income		2,502
Total stockholders’ equity		141,907
Total liabilities and stockholders’ equity	$	200,234

See notes to condensed financial statements.

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Schedule I – Condensed Financial Information of Registrant – Continued

Educate, Inc.

Statements of Income and Cash Flows

Period from June 30, 2003 (date of inception) through December 31, 2003

(Dollar amounts in thousands)

Revenues	$	—
Interest expense		(3,327	)
Loss before income taxes and equity in net income of consolidated subsidiaries		(3,327	)
Income tax benefit		1,418
Loss before equity in net income of consolidated subsidiaries		(1,909	)
Equity in net income of consolidated subsidiaries		3,610
Net income	$	1,701
Operating activities
Net income	$	1,701
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net income of subsidiaries		(3,610	)
Change in interest payable		3,327
Net cash provided by operating activities		1,418
Investing activities
Investment in subsidiary		(31,418	)
Net cash used in investing activities		(31,418	)
Financing activities
Issuance of common stock for cash upon formation		30,000
Net cash provided by financing activities		30,000
Cash and net change in cash at December 31, 2003	$	—

See notes to condensed financial statements.

II-7

Schedule I – Condensed Financial Information of Registrant – Continued

Educate, Inc.

Notes to Financial Statements

December 31, 2003

(Dollar amounts in thousands)

1. Basis of Presentation

The accompanying condensed financial statements present the unconsolidated financial position, results of operations and cash flows of Educate, Inc. In these parent company only financial statements, Educate’s investment in its subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of formation. Educate’s share of the net income of its subsidiaries is included in income using the equity method of accounting. These parent company only financial statements should be read in conjunction with Educate’s consolidated financial statements.

2. Note Payable to Laureate

Note payable to Laureate consists of a note payable to Laureate Education, Inc. (formerly known as Sylvan Learning Systems, Inc.) (“Laureate”), the predecessor to the Company, in the amount of $55,000. The entire amount of the loan is due on June 30, 2009, and bears interest at 12% per annum.

3. Dividends from Subsidiaries

There were no dividends paid to Educate, Inc. from its consolidated subsidiaries for the period from June 30, 2003 (date of inception) through December 31, 2003.

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Schedule II — Valuation and Qualifying Accounts

Educate Inc.

December 31, 2003

(In Thousands)

Column A	Column B		Column C				Column D			Column E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expense		Recorded for acquired business		Deductions— Describe			Balance at End of Period
Period from June 30, 2003 (date of inception) through December 31, 2003:
Deducted from asset accounts:
Allowance for doubtful accounts	$	—	$	1,101	$	4,469	$	1,333	(1)	$	4,237
Deferred tax asset valuation allowance		—		78		10,984				$	11,062
Total	$	—	$	1,179	$	15,453	$	1,333		$	15,299

(1) Uncollectible accounts written off, net of recoveries.

II-9

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON FINANCIAL STATEMENT SCHEDULE OF LAUREATE PRE-K-12 BUSINESS

(PREDECESSOR TO EDUCATE, INC.)

The Board of Directors and Stockholders

Educate, Inc.

We have audited the combined financial statements of the Laureate pre-K-12 Business (Predecessor to Educate, Inc.) as of December 31, 2002, and for the years ended December 31, 2001 and 2002 and the six months ended June 30, 2003, and have issued our report thereon dated May 3, 2004 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Baltimore, Maryland

May 3, 2004

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Schedule II —   Valuation and Qualifying Accounts

Laureate pre-K-12 Business

(Predecessor to Educate, Inc.)

(In Thousands)

Column A	Column B		Column C				Column D			Column E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions— Describe			Balance at End of Period
Six Months Ended June 30, 2003:
Deducted from asset accounts:
Allowance for doubtful accounts	$	3,343	$	240	$	—	$	716	(1)	$	2,867
Deferred tax asset valuation account		13,579		1,736		—		—		$	15,315
Total	$	16,922	$	1,976	$	—	$	716		$	18,182
Year Ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts	$	1,233	$	2,564	$	—	$	454	(1)	$	3,343
Deferred tax asset valuation account		8,706		4,873		—		—			13,579
Total	$	9,939	$	7,437	$	—	$	454		$	16,922
Year Ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts	$	848	$	507	$	—	$	122	(1)	$	1,233
Deferred tax asset valuation account		3,536		5,170		—		—		$	8,706
Total	$	4,384	$	5,677	$	—	$	122		$	9,939

(1) Uncollectible accounts written off, net of recoveries.

II-11

Item 17. Undertakings

(a) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the provisions described in “Item 14—Indemnification of Directors and Officers” above, or otherwise, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification by the Registrant against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(c) The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-12

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Educate, Inc. has duly caused this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Baltimore, State of Maryland, on June 29, 2004.

Educate, Inc.
By:	/s/    Peter Cohen         Peter Cohen President and Chief Operating Officer

Signature	Title	Date
* R. Christopher Hoehn-Saric	Chief Executive Officer and Director (Principal Executive Officer)	June 29, 2004
* Kevin Shaffer	Chief Financial Officer (Principal Financial and Accounting Officer)	June 29, 2004
* Laurence Berg	Director	June 29, 2004
* Cheryl Gordon	Director	June 29, 2004
* Michael Gross	Director	June 29, 2004
* Aaron Stone	Director	June 29, 2004

*By: /s/    Peter Cohen         Peter Cohen Attorney-in-fact

II-13

EXHIBIT INDEX

Exhibit Number	Description
1.0	Form of Underwriting Agreement.
2.1	Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo Management IV, L.P., dated as of March 10, 2003. (1)
2.2	Amendment No. 1 to Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo Management IV, L.P., dated as of June 30, 2003. (1)
2.3	Amendment No. 2 to Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Laureate Education, Inc., f/k/a Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo Management IV, L.P., dated as of June     , 2004.*
3.1	Amended and Restated Certificate of Incorporation of Educate, Inc., a Delaware corporation.*
3.2	Form of Amended and Restated By-Laws of Educate Inc., a Delaware corporation.
3.3	Specimen of stock certificate for common stock.*
4.1	Registration Rights Agreement, dated as of                     , by and among Educate, Inc., and certain of its stockholders.*
5.1	Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related to the shares of common stock being sold in the initial public offering.
10.1	$200,000,000 Credit Agreement, dated as of April 27, 2004, among Educate Operating Company, LLC, the several banks and other financial institutions party thereto, Merrill Lynch Capital, as documentation agent and JPMorgan Chase Bank, as administrative agent. (1)
10.2	Guarantee and Collateral Agreement, dated as of April 27, 2004, among Educate, Inc., Educate Operating Company, LLC and the other guarantors party thereto in favor of JPMorgan Chase Bank, as administrative agent for the banks and other financial institutions party to the Credit Agreement. (1)
10.3	Sublease, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC, for the property located at 1001 Fleet Street, Baltimore, Maryland 21202. (1)
10.4	Sublease, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC, for the property located at 506 S. Central, Baltimore, Maryland 21202. (1)
10.5	Shared Services Agreement, dated June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC. (1)
10.6	Patent License Agreement, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate, Inc. (1)
10.7	Employment Agreement of Christopher Hoehn-Saric, dated June 30, 2003.
10.8	Indemnification Agreement between Educate, Inc. and Christopher Hoehn-Saric, dated June 30, 2000.
10.9	Stock Subscription Agreement, dated June 30, 2003 among the stockholders party thereto and Educate, Inc. (1)

II-14

Exhibit Number	Description
10.10	Stock Subscription Agreement, dated June 30, 2003 among Apollo Sylvan, LLC, Apollo Sylvan II, LLC and Educate, Inc. (1)
10.11	Educate, Inc. 2003 Omnibus Stock Incentive Plan. (1)
10.12	Form of Indemnification Agreement.*
10.13	Form of Nominating Agreement, dated as of June     , 2004, among Educate, Inc., Apollo Sylvan, LLC and Apollo Sylvan II, LLC.
21.1	List of Subsidiaries. (1)
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
23.2	Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in Exhibit 5.1).*
24.1	Power of Attorney (included on signature page of the Registration Statement). (1)
24.2	Power of Attorney of Cheryl Gordon.

* To be filed by subsequent amendment.

(1) Previously filed with the Form S-1 filed by the Registrant on May 14, 2004.

II-15

EX-1.0

Exhibit 1.0

Educate, Inc.

Common Stock, par value $0.01 per share

Underwriting Agreement

                    , 2004

Goldman, Sachs & Co.,

Merrill Lynch, Pierce, Fenner & Smith Incorporated,

J.P. Morgan Securities Inc.,

Banc of America Securities LLC,

Legg Mason Wood Walker, Incorporated,

ThinkEquity Partners LLC,

As representatives of the several Underwriters

named in Schedule I hereto,

c/o Goldman, Sachs & Co.,

85 Broad Street,

New York, New York 10004,

and

c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated,

North Tower, World Financial Center,

New York, New York 10281.

Ladies and Gentlemen:

Educate, Inc., a Delaware corporation (the “Company”), proposes, subject to the terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I hereto (the “Underwriters”) an aggregate of . . . . . . .shares of Common Stock, par value $0.01 per share (“Stock”) of the Company, and the stockholders of the Company named in Schedule II hereto (the “Selling Stockholders”) propose, subject to the terms and conditions stated herein, to sell to the Underwriters an aggregate of . . . . . . . shares and, at the election of the Underwriters, up to . . . . . additional shares of Stock. The aggregate of . . . . shares to be sold by the Company and the Selling Stockholders is herein called the “Firm Shares” and the . . . . . additional shares to be sold by the Selling Stockholders is herein called the “Optional Shares”. The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant to Section 2 hereof are herein collectively called the “Shares”.

1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that:

(i) A registration statement on Form S-1 (File No. 333-115496) (the “Initial Registration Statement”) in respect of the Shares has been filed with the Securities and Exchange Commission (the “Commission”); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to you, and, excluding exhibits thereto, to you for each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any,

increasing the size of the offering (a “Rule 462(b) Registration Statement”), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Act”), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission by the Company; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or, to the Company’s knowledge, threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a “Preliminary Prospectus”; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the “Registration Statement”; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the “Prospectus”);

(ii) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated expressly for use therein or by a Selling Stockholder expressly for use in the preparation of the answers therein to Items 7 and 11(m) of Form S-1;

(iii) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated expressly for use therein or by a Selling Stockholder expressly for use in the preparation of the answers therein to Items 7 and 11(m) of Form S-1;

(iv) Neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not

2

covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, management, consolidated financial position, stockholders’ equity or results of operations of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Prospectus;

(v) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus (including, for the avoidance of doubt, such liens imposed under the Credit Agreement, dated April 27, 2004, by and among Educate Operating Company, LLC, the several lenders named therein and the other parties thereto (the “Credit Agreement”) and the Guarantee and Collateral Agreement, dated April 27, 2004, by and among the Company, certain of its subsidiaries and the certain lenders party to the Credit Agreement (the “Guarantee and Collateral Agreement”)) or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditor’s rights and to general equity principles;

(vi) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction;

(vii) Each of the Company’s subsidiaries has been duly incorporated or organized and is validly existing as a corporation or similar legal entity in good standing under the laws of its jurisdiction of incorporation or organization, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification except for such jurisdictions where the failure to so qualify would not, individually or in the aggregate, have a material adverse effect on the consolidated financial position, stockholders’ equity or results of operations of the Company and its subsidiaries, taken as a whole (“material adverse effect”);

(viii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description of the Stock

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contained in the Prospectus under the caption “Description of Common Stock”; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and (except for directors’ qualifying shares and except as set forth in the Prospectus) are owned directly or indirectly by the Company, free and clear of all liens (other than, for the avoidance of doubt, liens imposed pursuant to the Guarantee and Collateral Agreement or as otherwise set forth in the Prospectus), encumbrances, equities or claims;

(ix) The Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable and will conform to the description of the Stock contained in the Prospectus;

(x) The issue and sale of the Shares to be sold by the Company to the Underwriters hereunder and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, (a) any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, except for such conflicts, breaches or defaults as would not, individually or in the aggregate, have a material adverse effect, (b) the Certificate of Incorporation or By-laws of the Company or (c) any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, except for such conflicts, breaches or defaults as would not, individually or in the aggregate, have a material adverse effect. No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the consummation by the Company of the transactions contemplated by this Agreement, except the registration under the Act of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters;

(xi) Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or By-laws or similar organizational document or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound, except for such violations or defaults as would not, individually or in the aggregate, have a material adverse effect;

(xii) The statements set forth in the Prospectus under the caption “Description of Capital Stock”, insofar as they purport to constitute a summary of the terms of the Stock, under the captions “United States Federal Income Tax Consequences to Non-U.S. Holders”, “Shares Eligible for Future Sale” and “Underwriting”, insofar as they purport to describe the provisions of the laws and documents referred to therein, are accurate, complete and fair in all material respects;

(xiii) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which, if determined

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adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect; to the best of the Company’s knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others that, if determined adversely, would, individually or in the aggregate, have a material adverse effect; to the best of the Company’s knowledge, there are no legal or governmental investigations, actions, suits or proceedings pending against or affecting any Sylvan learning center or Schülerhilfe learning center that, if determined adversely, would individually or in the aggregate have, or reasonably be expected to have, a material adverse effect; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required;

(xiv) The Company is not and, after giving effect to the offering and sale of the Shares, will not be an “investment company”, as such term is defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”);

(xv) Ernst & Young LLP, who have certified certain financial statements of the Company and its subsidiaries and of the Predecessor (as defined in the Prospectus), are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder;

(xvi) The Company and each of its subsidiaries owns, possesses or has obtained all licenses, permits, certificates, consents, orders, approvals, franchises and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including foreign regulatory agencies), all self-regulatory organizations and all courts and other tribunals, domestic or foreign, necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as conducted as of the date hereof, except where the failure to own, possess or obtain such licenses, permits, certificates, consents, orders, approvals, franchises and other authorizations would not, individually or in the aggregate, have a material adverse effect; and neither the Company nor any of its subsidiaries has received any actual notice of any proceeding relating to revocation or modification of any such license, permit, certificate, consent, order, approval, franchise or other authorization; and the Company and each of its subsidiaries is in compliance in all material respects with all laws and regulations relating to the conduct of its business as conducted as of the date hereof;

(xvii) The Company and its subsidiaries are in compliance in all material respects with the applicable requirements of the Federal Trade Commission (the “FTC”) rules governing franchising and are in compliance in all material respects with all applicable provisions of federal, state, local and other laws or regulations governing the business of a franchisor in which the Company or any of its subsidiaries is a franchisor;

(xviii) The Company and each of its subsidiaries owns, is licensed to use or otherwise possesses adequate rights to use the patents, patent rights, licenses, inventions, trademarks, service marks, trade names, copyrights and know-how, including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures (collectively, the “Intellectual Property”), necessary to carry on the business conducted by it, except to the extent that the failure to own, be licensed to use or otherwise possess adequate rights to use such Intellectual Property would not have a material adverse effect; except as set forth in the Prospectus, neither the Company nor any of its subsidiaries has received any

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notice of infringement of or conflict with (and the Company has no knowledge of any infringement of or conflict with) asserted rights of others with respect to Intellectual Property of the Company and its subsidiaries that would have a material adverse effect;

(xix) The statistical and market-related data included in the Registration Statement and the Prospectus are based on or derived from sources that are believed by the Company to be reliable in all material respects, including data received from its franchisees;

(xx) The Company and each of its subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their business and the value of their properties and, to the Company’s knowledge, as is customary for companies engaged in similar businesses in similar industries; and

(xxi) The Company has established and maintains controls and procedures that (A) are designed to ensure that material information relating to the Company, including its subsidiaries, is made known to the Company’s Chief Executive Officer and its Chief Financial Officer by others within the Company and its subsidiaries (B) are evaluated for effectiveness, and (C) are effective to perform the functions for which they were established. The Company has established and maintains internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with the management’s general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (C) access to assets is permitted only in accordance with the management’s general or specific authorization and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any difference.

(b) Each of the Selling Stockholders severally represents and warrants to, and agrees with, each of the Underwriters and the Company that:

(i) All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Stockholder of this Agreement and the Power of Attorney and the Custody Agreement hereinafter referred to, and for the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder, have been obtained; and such Selling Stockholder has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder;

(ii) The sale of the Shares to be sold by such Selling Stockholder hereunder and the compliance by such Selling Stockholder with all of the provisions of this Agreement, the Power of Attorney and the Custody Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under (a) any statute, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, except for such conflicts, breaches or defaults as would not, individually or in the aggregate, have a material adverse effect, (b) the Certificate of Formation or Limited Liability Company Agreement of such Selling Stockholder if such Selling Stockholder is a limited liability company, the Limited Partnership Agreement of such Selling Stockholder if such Selling Stockholder is a limited partnership or (c) any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder, except for such conflicts, breaches or defaults as would not, individually or in the aggregate, have a material adverse effect;

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(iii) Such Selling Stockholder is, and immediately prior to each Time of Delivery (as defined in Section 4 hereof) such Selling Stockholder will be, the sole registered and beneficial owner of the Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities or claims (other than pursuant to the Stockholders’ Agreement, dated, June 30, 2003, by and among the Company and its Stockholders); and, upon delivery of such Shares and payment therefor pursuant hereto, sole registered and beneficial ownership to such Shares, free and clear of all liens, encumbrances, equities or claims, will pass to the several Underwriters;

(iv) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action in violation of (A) the Securities Exchange Act of 1934, as amended, or (B) any rules or regulations, thereunder, that is designed to or that has constituted or that would reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares;

(v) Solely to the extent that any statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein, such Preliminary Prospectus and the Registration Statement did, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus, when they become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading;

(vi) In order to document the Underwriters’ compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, such Selling Stockholder will deliver to you prior to or at the First Time of Delivery (as hereinafter defined) a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof);

(vii) Certificates in negotiable form representing all of the Shares to be sold by such Selling Stockholder hereunder have been placed in custody under a Custody Agreement, in the form heretofore furnished to you (the “Custody Agreement”), duly executed and delivered by such Selling Stockholder to LaSalle Bank, National Association, as custodian (the “Custodian”), and such Selling Stockholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you (the “Power of Attorney”), appointing the persons indicated in Schedule II hereto, and each of them, as such Selling Stockholder’s attorneys-in-fact (the “Attorneys-in-Fact”) with authority to execute and deliver this Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholders as provided in Section 2 hereof, to authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement; and

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(viii) The Shares represented by the certificates held in custody for such Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters hereunder; the arrangements made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable; the obligations of the Selling Stockholders hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Stockholder or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a partnership or corporation, by the dissolution of such partnership or corporation, or by the occurrence of any other event; if any individual Selling Stockholder or any such executor or trustee should die or become incapacitated, or if any such estate or trust should be terminated, or if any such partnership or corporation should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of the Selling Stockholders in accordance with the terms and conditions of this Agreement and of the Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if such death, incapacity, termination, dissolution or other event had not occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity, termination, dissolution or other event.

2. Subject to the terms and conditions herein set forth, (a) the Company and each of the Selling Stockholders agree, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and each of the Selling Stockholders, at a purchase price per share of $            , the number of Firm Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Shares to be sold by the Company and each of the Selling Stockholders as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and all of the Selling Stockholders hereunder and (b) in the event and to the extent that the Underwriters shall exercise the election to purchase Optional Shares as provided below, each of the Selling Stockholders agrees, severally and not jointly, to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from each of the Selling Stockholders, at the purchase price per share set forth in clause (a) of this Section 2, that portion of the number of Optional Shares as to which such election shall have been exercised (to be adjusted by you so as to eliminate fractional shares) determined by multiplying such number of Optional Shares by a fraction the numerator of which is the maximum number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of Optional Shares that all of the Underwriters are entitled to purchase hereunder.

The Selling Stockholders, as and to the extent indicated in Schedule II hereto, hereby grant, severally and not jointly, to the Underwriters the right to purchase at their election up to              Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole purpose of covering sales of shares in excess of the number of Firm Shares, provided that the purchase price per Optional Share shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Firm Shares but not payable on the Optional Shares. Any such election to purchase Optional Shares shall be made in proportion to the

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number of Optional Shares to be sold by each Selling Stockholder. Any such election to purchase Optional Shares may be exercised only by written notice from you to the Attorneys-in-Fact, given within a period of 30 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by you but in no event earlier than the First Time of Delivery (as defined in Section 4 hereof) or, unless you and the Attorneys-in-Fact otherwise agree in writing, earlier than two or later than ten business days after the date of such notice.

3. Upon the authorization by you of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus.

4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated may request upon at least forty-eight hours’ prior notice to the Company and the Selling Stockholders shall be delivered by or on behalf of the Company and the Selling Stockholders to Merrill Lynch, Pierce, Fenner & Smith Incorporated, through the facilities of The Depository Trust Company (“DTC”), for the account of such Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company and the Custodian to Merrill Lynch, Pierce, Fenner & Smith Incorporated at least forty-eight hours in advance. The Company will cause the certificates representing the Shares to be made available for checking and packaging at least twenty-four hours prior to the Time of Delivery (as defined below) with respect thereto at the office of DTC or its designated custodian (the “Designated Office”). The time and date of such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on                     , 2004 or such other time and date as Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, the Company and the Selling Stockholders may agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated in the written notice given by Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated of the Underwriters’ election to purchase such Optional Shares, or such other time and date as Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, the Company and the Selling Stockholders may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the “First Time of Delivery”, such time and date for delivery of the Optional Shares, if not the First Time of Delivery, is herein called the “Second Time of Delivery”, and each such time and date for delivery is herein called a “Time of Delivery”.

(b) The documents to be delivered at each Time of Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof, including the cross receipt for the Shares and any additional documents requested by the Underwriters pursuant to Section 7(m) hereof, will be delivered at the offices of Sullivan & Cromwell LLP, 125 Broad Street, New York, NY 10004 (the “Closing Location”), and the Shares will be delivered at the Designated Office, all at such Time of Delivery. A meeting will be held at the Closing Location at 3:00 p.m., New York City time, on the New York Business Day next preceding such Time of Delivery, at which meeting the final drafts of the documents to be delivered pursuant to the preceding sentence will be available for review by the parties hereto. For the purposes of this Section 4 and Section 5, “New York Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close.

5. The Company agrees with each of the Underwriters:

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(a) To prepare the Prospectus in a form approved by you and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission’s close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no further amendment or any supplement to the Registration Statement or Prospectus prior to the last Time of Delivery without the prior approval of the Underwriters (such approval not to be unreasonably withheld); to advise you, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish you with copies thereof; to advise you, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order;

(b) Promptly from time to time to take such action as you may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction;

(c) Prior to 12:00 P.M., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with written and electronic copies of the Prospectus in New York City in such quantities as you may reasonably request, and, if the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such period to amend or supplement the Prospectus in order to comply with the Act, to notify you and upon your request to prepare and furnish without charge to each Underwriter and to any dealer in securities as many written and electronic copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance, and in case any Underwriter is required to deliver a prospectus in connection with sales of any of the Shares at any time nine months or more after the time of issue of the Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to such Underwriter as many written and electronic copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the Act;

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(d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158);

(e) During the period beginning from the date hereof and continuing to and including the date 180 days after the date of the Prospectus, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company that are substantially similar to the Shares, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than (i) the Shares, (ii) pursuant to employee benefit plans, stock option plans or other employee compensation plans described in the Prospectus or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement or (iii) in connection with acquisitions by the Company or any subsidiary, provided that such Stock shall not exceed in the aggregate 10% of the Stock to be outstanding immediately following the offering contemplated hereby and provided, further, that the recipients of such Stock agree to be bound by this clause (e) for the duration of the 180 day period) without the prior written consent of Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated;

(f) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders’ equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail;

(g) During a period of three years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to stockholders and not available through the Commission’s Electronic Data Gathering, Analysis and Retrieval System, and to deliver to you (i) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and not available through the Commission’s Electronic Data Gathering, Analysis and Retrieval System; and (ii) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally or to the Commission); provided that no such additional information shall be required except to the extent the disclosure of additional information will not result in a violation of Regulation FD (without requiring new disclosure to third parties in order to avoid violation of Regulation FD); and provided further, that the Company may satisfy the requirements of this subsection by making any such reports, communications or information generally available on its website;

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(h) To use the net proceeds received by it from the sale of the Shares pursuant to this Agreement in the manner specified in the Prospectus under the caption “Use of Proceeds”;

(i) To use its reasonable best efforts to list for quotation the Shares on the National Association of Securities Dealers Automated Quotations National Market System (“NASDAQ”);

(j) To file with the Commission such information on Form 10-Q or Form 10-K as may be required by Rule 463 under the Act;

(k) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement, and the Company shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act; and

(l) Upon request of any Underwriter, to furnish, or cause to be furnished, to such Underwriter an electronic version of the Company’s and its subsidiaries’ trademarks, service marks and corporate logos for use on the website, if any, operated by such Underwriter for the purpose of facilitating the on-line offering of the Shares (the “License”); provided, however, that the License shall be used solely for the purpose described above, is granted without any fee and may not be assigned or transferred.

6. The Company and each of the Selling Stockholders covenant and agree with one another and with the several Underwriters that (a) the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company’s counsel and accountants in connection with the registration of the Shares under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the Shares on the NASDAQ; (v) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and charges of any transfer agent or registrar; (viii) reasonable fees and expenses of counsel for the Selling Stockholders; and (ix) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Stockholders hereunder which are not otherwise specifically provided for in this Section 6; and (b) each Selling Stockholder severally and not jointly covenants and agrees with the several Underwriters that it will pay or cause to be paid all expenses and taxes incident to the sale and delivery of the Shares to be sold by such Selling Stockholder to the Underwriters hereunder. In connection with clause (b)(iii) of the preceding sentence, Merrill Lynch, Pierce, Fenner & Smith Incorporated agrees to pay New York State stock transfer tax, and each Selling Stockholder agrees to reimburse Merrill Lynch, Pierce, Fenner & Smith Incorporated for its proportionate share of the associated carrying costs if such tax payment is not

12

rebated on the day of payment and for any portion of such tax payment not rebated. It is understood, however, that the Company shall bear, and the Selling Stockholders shall not be required to pay or to reimburse the Company for, the cost of any other matters not directly relating to the sale and purchase of the Shares pursuant to this Agreement, and that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make.

7. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each Time of Delivery, shall be subject, in their discretion, to the condition that all representations and warranties and other statements of the Company and of the Selling Stockholders herein are, at and as of such Time of Delivery, true and correct, the condition that the Company and the Selling Stockholders shall have performed all of its and their obligations hereunder theretofore to be performed, and the following additional conditions:

(a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction;

(b) Sullivan & Cromwell LLP, counsel for the Underwriters, shall have furnished to you such written opinion or opinions, dated such Time of Delivery in such form as you may request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters;

(c) Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company, shall have furnished to you their written opinion, a draft of which is attached hereto as Annex II(a), dated such Time of Delivery, in form and substance reasonably satisfactory to you;

(d) [                    ], special regulatory counsel for the Company, shall have furnished to you their written opinion, a draft of which is attached hereto as Annex II(b), dated such Time of Delivery, in form and substance reasonably satisfactory to you;

(e) [                    ], counsel of the Company, shall have furnished to you their written opinion, a draft of which is attached hereto as Annex II(c), dated such Time of Delivery, in form and substance reasonably satisfactory to you;

(f) [                    ], special German counsel for the Company, shall have furnished to you their written opinion, a draft of which is attached hereto as Annex II(d), dated such Time of Delivery, in form and substance reasonably satisfactory to you;

(g) The respective counsel for each of the Selling Stockholders, as indicated in Schedule II hereto, each shall have furnished to you their written opinion with respect to each of the Selling Stockholders for whom they are acting as counsel (a draft of each such opinion is attached as Annex II(e)), dated such Time of Delivery, in form and substance reasonably satisfactory to you;

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(h) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30 a.m., New York City time, on the effective date of any post-effective amendment to the Registration Statement filed subsequent to the date of this Agreement and also at Time of Delivery, Ernst & Young LLP shall have furnished to you a letter or letters, dated the respective dates of delivery thereof, in form and substance satisfactory to you, to the effect set forth in Annex I hereto (the executed copy of the letter delivered prior to the execution of this Agreement is attached as Annex I(a) hereto and a draft of the form of letter to be delivered on the effective date of any post-effective amendment to the Registration Statement and as of each Time of Delivery is attached as Annex I(b) hereto);

(i)(i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus, and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders’ equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus;

(j) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company’s debt securities by any “nationally recognized statistical rating organization”, as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company’s debt securities;

(k) On or after the date hereof there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the NASDAQ; (ii) a suspension or material limitation in trading in the Company’s securities on the NASDAQ; (iii) a general moratorium on commercial banking activities declared by either Federal or New York State authorities or a material disruption in commercial banking or securities settlement or clearance services in the United States; (iv) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or (v) the occurrence of any other calamity or crisis or any change in financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in clause (iv) or (v) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered at such Time of Delivery on the terms and in the manner contemplated in the Prospectus;

(l) The Shares at such Time of Delivery shall have been duly listed for quotation on the NASDAQ;

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(m) The Company has obtained and delivered to the Underwriters executed copies of an agreement from each director, executive officer and stockholder of the Company listed in Annex III hereto, substantially to the effect set forth in Annex IV hereto;

(n) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and

(o) The Company and the Selling Stockholders shall have furnished or caused to be furnished to you at such Time of Delivery, certificates of officers of the Company and of the Selling Stockholders, respectively, satisfactory to you as to the accuracy of the representations and warranties of the Company and the Selling Stockholders, respectively, as to the performance by the Company and the Selling Stockholders, of all of their respective obligations hereunder to be performed, and as to such other matters as you may reasonably request, and the Company shall have furnished or caused to be furnished certificates as to the matters set forth in subsections (a) and (i) of this Section.

8. (a) (i) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated expressly for use therein.

(ii) Each of the Selling Stockholders, severally and not jointly, will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein; and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that such Selling Stockholders shall not be liable in

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any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated expressly for use therein; provided, further, that no Selling Stockholder shall be liable under this Section 8 in an aggregate amount greater than the product of (x) the number of Shares purchased by the Underwriters from such Selling Stockholder under Section 2 hereof, times (y) the initial public offering price per share as set forth on the front cover of the Prospectus.

(b) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated expressly for use therein; and will reimburse the Company and each Selling Stockholder for any legal or other expenses reasonably incurred by the Company or such Selling Stockholder in connection with investigating or defending any such action or claim as such expenses are incurred.

(c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and

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(ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.

(d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders on the one hand or the Underwriters on the other and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, each of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. The Selling Stockholders’ obligations in this subsection (d) to contribute are several in proportion to the number of Shares sold by each Selling Stockholder and not joint.

(e) The obligations of the Company and the Selling Stockholders under this Section 8 shall be in addition to any liability which the Company and the respective Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under

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this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act.

9. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder at a Time of Delivery, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Stockholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Stockholders notify you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Stockholders shall have the right to postpone Time of Delivery for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares.

(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time of Delivery, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by you and the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased exceeds one-eleventh of the aggregate number of all of the Shares to be purchased at such Time of Delivery, or if the Company and the Selling Stockholders shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second Time of Delivery, the obligations of the Underwriters to purchase and of the Selling Stockholders to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company or the Selling Stockholders, except for the expenses to be borne by the Company and the Selling Stockholders and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

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10. The respective indemnities, agreements, representations, warranties and other statements of the Company, the Selling Stockholders and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any of the Selling Stockholders, or any officer or director or controlling person of the Company, or any controlling person of any Selling Stockholder, and shall survive delivery of and payment for the Shares.

11. If this Agreement shall be terminated pursuant to Section 9 hereof, neither the Company nor the Selling Stockholders shall then be under any liability to any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are not delivered by or on behalf of the Company and the Selling Stockholders as provided herein, the Company will reimburse the Underwriters through you for all out-of-pocket expenses approved in writing by you, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered, but the Company shall then be under no further liability to any Underwriter in respect of the Shares not so delivered except as provided in Sections 6 and 8 hereof.

12. In all dealings hereunder, you shall act on behalf of each of the Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by you jointly or by Goldman, Sachs & Co. or Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of you as the representatives; and in all dealings with any Selling Stockholder hereunder, you and the Company shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of such Selling Stockholder made or given by any or all of the Attorneys-in-Fact for such Selling Stockholder.

All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to you as the representatives in care of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention: Registration Department and Merrill Lynch, Pierce, Fenner & Smith Incorporated, North Tower, World Financial Center, New York, New York, 10281; if to any Selling Stockholder shall be delivered or sent by mail, telex or facsimile transmission to counsel for such Selling Stockholder at its address set forth in Schedule II hereto; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Secretary, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Suite 3400, Los Angeles, California 90071, Attention Jeffrey H. Cohen; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters’ Questionnaire or telex constituting such Questionnaire, which address will be supplied to the Company or the Selling Stockholders by you on request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof.

13. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and the Selling Stockholders and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company, any Selling Stockholder or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase.

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14. Time shall be of the essence of this Agreement. As used herein, the term “business day” shall mean any day when the Commission’s office in Washington, D.C. is open for business.

15. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

16. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

17. The Company and the Selling Stockholders are authorized, subject to applicable law, to disclose any and all aspects of this potential transaction that are necessary to support any U.S. federal income tax benefits expected to be claimed with respect to such transaction, and all materials of any kind (including tax opinions and other tax analyses) related to those benefits, without the Underwriters imposing any limitation of any kind.

If the foregoing is in accordance with your understanding, please sign and return to us one for the Company and each of the Representatives plus one for each counsel and the Custodian, counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof shall constitute a binding agreement among each of the Underwriters, the Company and each of the Selling Stockholders. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company and the Selling Stockholders for examination, upon request, but without warranty on your part as to the authority of the signers thereof.

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Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Stockholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such action.

Very truly yours,
Educate, Inc.
By:
	Name:
	Title:
Apollo Sylvan, LLC
Apollo Sylvan II, LLC
SSB Capital Partners (Master Fund) I, LP
By:
	Name:
	Title:
	As Attorney-in-Fact acting on behalf of each of the Selling Stockholders named in Schedule II to this Agreement.

Accepted as of the date hereof:

Goldman, Sachs & Co.

Merrill Lynch, Pierce, Fenner & Smith

Incorporated

J.P. Morgan Securities Inc.

Banc of America Securities LLC

Legg Mason Wood Walker, Incorporated

ThinkEquity Partners LLC

By:

(Goldman, Sachs & Co.)

On behalf of each of the Underwriters

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SCHEDULE I

Underwriter	Total Number of Firm Shares to be Purchased	Number of Optional Shares to be Purchased if Maximum Option Exercised
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Banc of America Securities LLC Legg Mason Wood Walker, Incorporated ThinkEquity Partners LLC
Total

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SCHEDULE II

	Total Number of Firm Shares to be Sold	Number of Optional Shares to be Sold if Maximum Option Exercised
The Company.
The Selling Stockholder(s):
Apollo Sylvan, LLC (a)
Apollo Sylvan II, LLC (b)
SSB Capital Partners (Master Fund) I, LP (c)
Total

(a) This Selling Stockholder is represented by Skadden, Arps, Slate, Meagher & Flom LLP and has appointed [Names of Attorneys-in-Fact)], and each of them, as the Attorneys-in-Fact for such Selling Stockholder.

(b) This Selling Stockholder is represented by Skadden, Arps, Slate, Meagher & Flom LLP and has appointed [Names of Attorneys-in-Fact], and each of them, as the Attorneys-in-Fact for such Selling Stockholder.

(c) This Selling Stockholder is represented by [Name and Address of Counsel] and has appointed [Names of Attorneys-in-Fact], and each of them, as the Attorneys-in-Fact for such Selling Stockholder.

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ANNEX I

[FORM OF COMFORT LETTER]

ANNEX II(a)

[FORM OF LEGAL OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP]

ANNEX II(b)

FORM OF LEGAL OPINION OF [REGULATORY COUNSEL OF COMPANY]

ANNEX II(c)

[FORM OF LEGAL OPINION OF INTERNAL COMPANY COUNSEL]

ANNEX II(d)

[FORM OF LEGAL OPINION OF COMPANY’S GERMAN COUNSEL]

ANNEX II(e)

[FORM OF LEGAL OPINION OF SELLING STOCKHOLDERS’ COUNSEL]

ANNEX III

[SELLING STOCKHOLDERS]

ANNEX IV

[FORM OF LOCK-UP AGREEMENT]

EX-3.2

Exhibit 3.2

AMENDED AND RESTATED

BY-LAWS

OF

EDUCATE, INC.

A Delaware Corporation

Effective                     , 2004

AMENDED AND RESTATED

BY-LAWS

OF

EDUCATE, INC.

(hereinafter called the “Corporation”)

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 2. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors.

Section 2. Annual Meetings. The Annual Meeting of Stockholders for the election of directors shall be held on such date and at such time as shall be designated from time to time by the Board of Directors. Any other proper business may be transacted at the Annual Meeting of Stockholders.

Section 3. Special Meetings. Unless otherwise required by law or by the certificate of incorporation of the Corporation, as amended and restated from time to time (the “Certificate of Incorporation”), Special Meetings of Stockholders, for any purpose or purposes, may be called by either (i) the Chairman, if there be one, (ii) the President, (iii) any Vice President, (iv) the Secretary or (v) any Assistant Secretary, and shall be called by any such officer at the request in writing of (i) the Board of Directors or (ii) a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings. Such request shall state the purpose or purposes of the proposed meeting. At a Special Meeting of Stockholders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement thereto).

Section 4. Notice. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a Special Meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by law, written notice of any meeting shall be given not less than

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ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to notice of and to vote at such meeting.

Section 5. Adjournments. Any meeting of the stockholders may be adjourned from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting in accordance with the requirements of Section 4 hereof shall be given to each stockholder of record entitled to notice of and to vote at the meeting.

Section 6. Quorum. Unless otherwise required by applicable law or the Certificate of Incorporation, the holders of a majority of the Corporation’s capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall

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have the power to adjourn the meeting from time to time, in the manner provided in Section 5 hereof, until a quorum shall be present or represented.

Section 7. Voting. Unless otherwise required by law, the Certificate of Incorporation or these By-Laws, any question brought before any meeting of the stockholders, other than the election of directors, shall be decided by the vote of the holders of a majority of the total number of votes of the Corporation’s capital stock represented and entitled to vote thereat, voting as a single class. Unless otherwise provided in the Certificate of Incorporation, and subject to Section 12(a) of this Article II, each stockholder represented at a meeting of the stockholders shall be entitled to cast one (1) vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy as provided in Section 8 of this Article II. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of the stockholders, in such officer’s discretion, may require that any votes cast at such meeting shall be cast by written ballot.

Section 8. Proxies. Each stockholder entitled to vote at a meeting of the stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder as proxy, but no such proxy shall be voted upon after three years from its date, unless such proxy provides for a longer period. Without limiting the manner in

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which a stockholder may authorize another person or persons to act for such stockholder as proxy, the following shall constitute a valid means by which a stockholder may grant such authority:

(i) A stockholder may execute a writing authorizing another person or persons to act for such stockholder as proxy. Execution may be accomplished by the stockholder or such stockholder’s authorized officer, director, employee or agent signing such writing or causing such person’s signature to be affixed to such writing by any reasonable means, including, but not limited to, by facsimile signature.

(ii) A stockholder may authorize another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a telegram or cablegram to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such telegram or cablegram, provided that any such telegram or cablegram must either set forth or be submitted with information from which it can be determined that the telegram or cablegram was authorized by the stockholder. If it is determined that such telegrams or cablegrams are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information on which they relied.

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Any copy, facsimile telecommunication or other reliable reproduction of the writing, telegram or cablegram authorizing another person or persons to act as proxy for a stockholder may be substituted or used in lieu of the original writing, telegram or cablegram for any and all purposes for which the original writing, telegram or cablegram could be used; provided, however, that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing, telegram or cablegram.

Section 9. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any Annual or Special Meeting of Stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of the stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of

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signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this Section 9 to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of the stockholders are recorded. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation as provided above in this Section 9.

Section 10. Nature of Business at Meetings of Stockholders. No business may be transacted at an Annual Meeting of Stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement

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thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the Annual Meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the Annual Meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 10 and on the record date for the determination of stockholders entitled to notice of and to vote at such Annual Meeting and (ii) who complies with the notice procedures set forth in this Section 10.

In addition to any other applicable requirements, for business to be properly brought before an Annual Meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

To be timely, a stockholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding Annual Meeting of Stockholders; provided, however, that in the event that the Annual Meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date

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of the Annual Meeting was mailed or such public disclosure of the date of the Annual Meeting was made, whichever first occurs.

To be in proper written form, a stockholder’s notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the Annual Meeting (i) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the Annual Meeting to bring such business before the meeting.

No business shall be conducted at the Annual Meeting of Stockholders except business brought before the Annual Meeting in accordance with the procedures set forth in this Section 10; provided, however, that, once business has been properly brought before the Annual Meeting in accordance with such procedures, nothing in this Section 10 shall be deemed to preclude discussion by any stockholder of any such business. If the chairperson of an Annual Meeting deter-

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mines that business was not properly brought before the Annual Meeting in accordance with the foregoing procedures, the chairperson shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.

Section 11. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting (i) either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held or (ii) during ordinary business hours, at the principal place of business of the Corporation. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present.

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Section 12. Record Date.

(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of the stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining

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stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of the stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

Section 13. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 11 of this Article II or the books of the Corporation, or to vote in person, by proxy at any meeting of the stockholders or to consent to corporate action in writing without a meeting.

Section 14. Conduct of Meetings. The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of

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any meeting of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairperson of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairperson, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairperson of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) the determination of when the polls shall open and close for any given matter to be voted on at the meeting; (iii) rules and procedures for maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairperson of the meeting shall determine; (v) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (vi) limitations on the time allotted to questions or comments by participants.

Section 15. Inspectors of Election. In advance of any meeting of the stockholders, the Board of Directors, by resolution, the Chairman or the President shall appoint one or more inspectors to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to

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replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of the stockholders, the chairperson of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by applicable law, inspectors may be officers, employees or agents of the Corporation. Each inspector, before entering upon the discharge of the duties of inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector shall have the duties prescribed by law and shall take charge of the polls and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by applicable law.

ARTICLE III

DIRECTORS

Section 1. Number and Election of Directors.

(a) The Board of Directors shall consist of nine members; provided, however, that until (i) Apollo Sylvan, LLC, Apollo Sylvan II, LLC and any of their Affiliates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) (collectively, “Apollo”) no longer beneficially own at least 50% of the total number of shares of the Corporation’s common stock outstanding at any time, and (ii) Apollo (excluding any individuals who own shares of the Corporation’s

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common stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the Corporation’s initial public offering of common stock (and any related overallotment option), sold at least one share of the Corporation’s common stock to a person that is not an Affiliate of Apollo, Apollo shall have the right to increase the size of the Board of Directors by two members, such vacancies to be filled in accordance with Section 2(c) of this Article III.

(b) Pursuant to a Nominating Agreement, dated as of                     , 2004, by and among the Corporation, Apollo Sylvan, LLC and Apollo Sylvan II, LLC, Apollo Management IV, L.P. has the right to nominate four persons (the “Apollo Designees”) to the Board of Directors, and the Corporation is required to support the nomination of, and is required to include in the slate of nominees recommended to stockholders for election as directors the Apollo Designees.

(c) Except as provided in Section 2 of this Article III, directors shall be elected by a plurality of the votes cast at each Annual Meeting of Stockholders and each director so elected shall hold office until the next Annual Meeting of Stockholders and until such director’s successor is duly elected and qualified, or until such director’s earlier death, resignation or removal. Directors need not be stockholders.

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Section 2. Vacancies.

(a) Unless otherwise required by law, the Certificate of Incorporation or subsections (b) and (c) of this Section 2, vacancies arising through death, resignation, removal, an increase in the number of directors or otherwise may be filled only by a majority of the directors then in office, though less than a quorum, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.

(b) Until such time as (i) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of the Corporation’s common stock outstanding at any time, and (ii) Apollo (excluding any individuals who own shares of the Corporation’s common stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the Corporation’s initial public offering of common stock (and any related overallotment option), sold at least one share of the Corporation’s common stock to a person that is not an Affiliate of Apollo, vacancies arising through the death, resignation or removal of an Apollo Designee nominated by Apollo Management to the Board of Directors pursuant to Section 1(b) of this Article III may be filled only by a majority of the directors nominated by Apollo Management (either pursuant to these By-Laws or pursuant to the Nominating Agreement) then in office and the directors so chosen shall hold office until the

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next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.

(c) Until such time as (i) Apollo no longer beneficially owns at least 50% of the total number of shares of the Corporation’s common stock outstanding at any time and (ii) Apollo (excluding any individuals who own shares of the Corporation’s common stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the Corporation’s initial public offering of common stock (and any related overallotment option), sold at least one share of the Corporation’s common stock to a person that is not an Affiliate of Apollo, vacancies arising from an increase in the number of directors pursuant to Section 1(a) of this Article III may be filled only by a majority of the directors nominated by Apollo Management (either pursuant to these By-Laws or pursuant to the Nominating Agreement) then in office and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.

Section 3. Duties and Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts

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and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders.

Section 4. Meetings. The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, the President, or by a majority of the entire Board of Directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours’ notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.

Section 5. Organization. At each meeting of the Board of Directors, the Chairman of the Board of Directors, or, in his or her absence, a director chosen by a majority of the directors present, shall act as chairperson. The Secretary of the Corporation shall act as secretary at each meeting of the Board of Directors. In case the Secretary shall be absent from any meeting of the Board of Directors, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all the Assistant Secretar-

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ies, the chairperson of the meeting may appoint any person to act as secretary of the meeting.

Section 6. Resignations and Removals of Directors. Any director of the Corporation may resign at any time, by giving notice in writing to the Chairman of the Board of Directors, the President or the Secretary of the Corporation. Such resignation shall take effect at the time therein specified or, if no time is specified, immediately; and, unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective. Except as otherwise required by applicable law and subject to the rights, if any, of the holders of shares of preferred stock then outstanding, any director or the entire Board of Directors may be removed from office at any time, but only for cause, and only by the affirmative vote of the holders of at least a majority in voting power of the issued and outstanding capital stock of the Corporation entitled to vote in the election of directors; provided, however, that until such time as (i) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of the Corporation’s common stock outstanding at any time, and (ii) Apollo (excluding any individuals who own shares of the Corporation’s common stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the Corporation’s initial public offering of common stock (and any related overallotment option), sold at least one share of the

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Corporation’s common stock to a person that is not an Affiliate of Apollo, if any Apollo Designee shall be removed by the affirmative vote of a majority in voting power of the issued and outstanding capital stock of the Corporation entitled to vote in the election of directors, such vacancy shall be filled in accordance with Section 2(b) of this Article III.

Section 7. Quorum. Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and, except as provided in Section 8 of this Article III, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present.

Section 8. Apollo Approval Rights.

(a) Subject to the provisions of subsection (b), without the approval of a majority of the entire Board of Directors, which must include the approval of a majority of the directors nominated by Apollo Management (either pursuant to these By-Laws or pursuant to the Nominating Agreement), the Corpora-

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tion may not, and any subsidiary of the Corporation may not, take any of the actions set forth on Exhibit A hereto.

(b) The foregoing approval rights shall terminate at such time as (i) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of the Corporation’s common stock outstanding at any time, and (ii) Apollo (excluding any individuals who own shares of the Corporation’s common stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the Corporation’s initial public offering of common stock (and any related overallotment option), sold at least one share of the Corporation’s common stock to a person that is not an Affiliate of Apollo.

Section 9. Actions of the Board by Written Consent. Unless otherwise provided in the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee.

Section 10. Meetings by Means of Conference Telephone. Unless otherwise provided in the Certificate of Incorporation or these By-Laws, members of

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the Board of Directors of the Corporation, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting.

Section 11. Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise any or all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the

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Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required.

Section 12. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary for service as director, payable in cash or securities. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for service as committee members.

Section 13. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because any such director’s or officer’s vote is counted for such purpose if: (i) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the

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contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

ARTICLE IV

OFFICERS

Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer, a President, a Secretary and a Chief Financial Officer. The Board of Directors, in its discretion, also may choose a Chairman of the Board of Directors (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The officers of

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the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation.

Section 2. Election. The Board of Directors, at its first meeting held after each Annual Meeting of Stockholders (or action by written consent of stockholders in lieu of the Annual Meeting of Stockholders), shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and each officer of the Corporation shall hold office until such officer’s successor is elected and qualified, or until such officer’s earlier death, resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors.

Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chief Executive Officer, the President, the Chief Financial Officer or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf of the

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Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.

Section 4. Chairman of the Board of Directors. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board of Directors shall be the chief executive officer of the Corporation, unless the Board of Directors designates the Chief Executive Officer or the President as the chief executive officer, and, except where by law the signature of the Chief Executive Officer or President is required, the Chairman of the Board of Directors shall possess the same power as the Chief Executive Officer and the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the Chief Executive Officer and the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the Chief Executive Officer or President. The Chairman of the Board of

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Directors shall also perform such other duties and may exercise such other powers as may from time to time be assigned by these By-Laws or by the Board of Directors.

Section 5. Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and affairs of the Corporation. He or she shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, at all meetings of the Board of Directors. He or she shall have the general powers and duties of management usually vested in a chief executive officer of a corporation and such other powers and duties as may be prescribed by the Board of Directors.

Section 6. President. The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors and the Chief Executive Officer, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the President. In the absence or

28

disability of the Chairman of the Board of Directors and the Chief Executive Officer, or if there be none, the President shall preside at all meetings of the stockholders and, provided the President is also a director, the Board of Directors. If there be no Chairman of the Board of Directors and no Chief Executive Officer, or if the Board of Directors shall otherwise designate, the President shall be the chief executive officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as may from time to time be assigned to such officer by these By-Laws or by the Board of Directors.

Section 7. Vice Presidents. At the request of the President or in the President’s absence or in the event of the President’s inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President, or the Vice Presidents if there are more than one (in the order designated by the Board of Directors), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors, no Chief Executive Officer and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties

29

of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.

Section 8. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for committees of the Board of Directors when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors, the Chief Executive Officer or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the affixing by such officer’s

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signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.

Section 9. Chief Financial Officer. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation. If required by the Board of Directors, the Chief Financial Officer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of the Chief Financial Officer and for the restoration to the Corporation, in case of the Chief Financial Officer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Chief

31

Financial Officer’s possession or under the Chief Financial Officer’s control belonging to the Corporation.

Section 10. Assistant Secretaries. Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of the Secretary’s inability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.

Section 11. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurer’s inability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office

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of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Assistant Treasurer’s possession or under the Assistant Treasurer’s control belonging to the Corporation.

Section 12. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

ARTICLE V

STOCK

Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation (i) by the Chairman of the Board of Directors, the Chief Executive Officer, the President or a Vice President and (ii) by the Chief Financial Officer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation.

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Section 2. Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or such owner’s legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate.

Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by applicable law and in these By-Laws. Transfers of

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stock shall be made on the books of the Corporation only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer taxes; provided, however, that such surrender and endorsement or payment of taxes shall not be required in any case in which the officers of the Corporation shall determine to waive such requirement. Every certificate exchanged, returned or surrendered to the Corporation shall be marked “Cancelled,” with the date of cancellation, by the Secretary or Assistant Secretary of the Corporation or the transfer agent thereof. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

Section 5. Dividend Record Date. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for

35

any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 6. Record Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by law.

Section 7. Transfer and Registry Agents. The Corporation may from time to time maintain one or more transfer offices or agencies and registry offices or agencies at such place or places as may be determined from time to time by the Board of Directors.

ARTICLE VI

NOTICES

Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person’s address as it

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appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex or cable.

Section 2. Waivers of Notice. Whenever any notice is required by applicable law, the Certificate of Incorporation or these By-Laws to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any Annual or Special Meeting of Stockholders or any regular or special meeting of the directors or members of a committee of directors need be specified in any written waiver of notice unless so required by law, the Certificate of Incorporation or these By-Laws.

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ARTICLE VII

GENERAL PROVISIONS

Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the requirements of the General Corporation Law of the State of Delaware (the “DGCL”), the provisions of the Certificate of Incorporation and Section 8 of Article III, if any, may be declared by the Board of Directors at any regular or special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section 9 of Article III hereof), and may be paid in cash, in property, or in shares of the Corporation’s capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for purchasing any of the shares of capital stock, warrants, rights, options, bonds, debentures, notes, scrip or other securities or evidences of indebtedness of the Corporation, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.

Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

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Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

Section 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE VIII

INDEMNIFICATION

Section 1. Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such

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action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action

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or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Section 3. Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal

41

counsel in a written opinion or (iv) by the stockholders. Such determination shall be made, with respect to former directors and officers, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.

Section 4. Good Faith Defined. For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person’s conduct was unlawful, if such person’s action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected

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with reasonable care by the Corporation or another enterprise. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be.

Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to the Court of Chancery of the State of Delaware or any other court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Section 1 or Section 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful,

43

in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

Section 6. Expenses Payable in Advance. Expenses (including attorneys’ fees) incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VIII. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.

Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in

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Section 1 and Section 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or Section 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL, or otherwise.

Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VIII.

Section 9. Certain Definitions. For purposes of this Article VIII, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director

45

or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. The term “another enterprise” as used in this Article VIII shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. For purposes of this Article VIII, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article VIII.

Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or

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granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 11. Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 of this Article VIII), the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) or advance expenses in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.

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ARTICLE IX

AMENDMENTS

Section 1. Amendments. These By-Laws may be altered, amended or repealed, in whole or in part, or new By-Laws may be adopted by the stockholders or by the Board of Directors; provided, however, that notice of such alteration, amendment, repeal or adoption of new By-Laws be contained in the notice of such meeting of the stockholders or Board of Directors, as the case may be. All such amendments must be approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office (which, so long as (i) Apollo beneficially owns at least 33 ¹/3% of the total number of shares of the Corporation’s common stock outstanding at any time, and (ii) Apollo (excluding any individuals who own shares of the Corporation’s common stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has not, subsequent to the Corporation’s initial public offering of common stock (and any related overallotment option), sold at least one share of the Corporation’s common stock to a person that is not an Affiliate of Apollo, must include the approval of a majority of the directors nominated by Apollo Management (either pursuant to these By-Laws or pursuant to the Nominating Agreement)).

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Section 2. Entire Board of Directors. As used in this Article IX and in these By-Laws generally, the term “entire Board of Directors” means the total number of directors which the Corporation would have if there were no vacancies.

* * *

Adopted as of:                                 

Last Amended as of:                     

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EXHIBIT A

Apollo Approval Rights

Ÿ amendment, modification or repeal of any provision of the Certificate of Incorporation, By-Laws or similar organizational documents in a manner that adversely affects Apollo;

Ÿ the redemption, purchase or acquisition of any securities of the Corporation or any of its subsidiaries;

Ÿ the issuance of additional shares of any class of capital stock (other than the grant of options or the issuance of shares upon the exercise of options);

Ÿ the payment or declaration of any dividend or other distribution, with respect to any shares of any class or series of capital stock;

Ÿ a consolidation or merger with or into any other entity, or transfer (by lease, assignment, sale or otherwise) of all or substantially all of the Corporation’s or any of its subsidiaries’ assets to another entity;

Ÿ a complete or partial liquidation, dissolution, winding-up, recapitalization, reclassification or reorganization;

Ÿ a split, combination or reclassification of any shares of capital stock;

Ÿ a disposition of any assets with a value in excess of $5 million in the aggregate;

Ÿ consummation of any acquisition of the stock or assets of any other entity involving consideration in excess of $5 million in the aggregate;

Ÿ consummation of any transaction, or amendment of the terms of any contract, agreement or understanding (whether oral or written), with any of the Corporation’s subsidiaries or any Affiliate of the Corporation;

Ÿ the incurrence of indebtedness aggregating more than $5 million, except for borrowings under a revolving credit facility that has previously been approved or is in existence (with no increase in maximum availability) on the date of closing of the Corporation’s initial public offering of common stock;

Ÿ a change in the Corporation’s Chief Executive Officer; and

Ÿ a change in size of the Corporation’s Board of Directors.

2

EX-5.1

Exhibit 5.1

Skadden, Arps, Slate, Meagher & Flom LLP

300 South Grand Avenue, Suite 3400

Los Angeles, California 90071

June     , 2004

Educate, Inc.

1001 Fleet Street

Baltimore, Maryland 21202

Re: Educate, Inc.

Registration Statement on Form S-1

(File No. 333-115496)                            

Ladies and Gentlemen:

We have acted as special counsel to Educate, Inc., a Delaware corporation (the “Company”), in connection with its filing with the Securities and Exchange Commission (the “Commission”) of a registration statement on Form S-1 (File No. 333-115496) and all amendments thereto (such registration statement, as so amended through the date hereof, being hereinafter referred to as the “Registration Statement”), with respect to the registration under the Securities Act of 1933, as amended (the “Securities Act”), of up to              shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), to be sold by the Company (including              shares subject to an over-allotment option, the “Primary Shares”) and up to              shares of the Common Stock (the “Secondary Shares”) to be sold by certain selling stockholders (the “Selling Stockholders”).

This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act.

In rendering the opinions set forth herein, we have examined and relied on originals or copies of the following: (i) the Registration Statement; (ii) the form of Underwriting Agreement (the “Underwriting Agreement”) proposed to be entered into by and among the Company, as issuer, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Legg Mason Wood Walker Incorporated and ThinkEquity Partners LLC, as representatives of the several underwriters named therein (the “Underwriters”), and the Selling Stockholders, filed as an exhibit to the Registration Statement; (iii) a specimen certificate evidencing the Common Stock; (iv) the form of Amended and Restated Certificate of Incorporation of the Company, to be filed

Educate, Inc.

June     , 2004

Page 2

with the Secretary of State of the State of Delaware (the “Certificate of Incorporation”); (vi) the form of Amended and Restated By-laws of the Company; and (vii) certain resolutions of the Board of Directors of the Company. We also have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein.

In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as facsimile, electronic, certified or photostatic copies, and the authenticity of the originals of such copies. In making our examination of executed documents, we have assumed that the parties thereto, other than the Company, had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and the execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. In rendering the opinions set forth below, we have assumed that the Board of Directors of the Company and its stockholders will approve the Certificate of Incorporation and that the Certificate of Incorporation will be duly filed with the Secretary of State of the State of Delaware. In rendering the opinion set forth in paragraph 1 below, we have assumed that the Primary Shares will be issued and sold as contemplated by the Registration Statement. In rendering the opinion set forth in paragraph 2 below, we have assumed that the Company received the entire amount of the consideration contemplated by the resolutions of the Board of Directors of the Company authorizing the issuance of the Secondary Shares. As to any facts material to the opinions expressed herein that we did not independently establish or verify, we have relied upon statements and representations of officers and other representatives of the Company and of public officials.

We do not express any opinion as to any laws other than the corporate law of the State of Delaware, and we do not express any opinion as to the effect of any other laws on the opinion stated herein.

Based upon and subject to the foregoing, we are of the opinion that:

1.    The Primary Shares will be duly authorized, validly issued, fully paid and nonassessable when approved by the Pricing Committee of the Board of Directors of the Company and delivered to and paid for by the Underwriters in accordance with the terms of the Underwriting Agreement.

2.    The Secondary Shares have been duly authorized and validly issued and are fully paid and nonassessable.

Educate, Inc.

June     , 2004

Page 3

We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the heading “Legal Matters” in the prospectus forming a part of the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission.

Very truly yours,

EX-10.7

Exhibit 10.7

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered into as of the 30th day of June, 2003 (the “Effective Date”), by and between Educate Operating Company, LLC, a Delaware limited liability company (the “Company”), CHRIS HOEHN-SARIC (the “Executive”) and, solely with respect to Sections 1.1, 1.2, 3.4(e) and 3.5, Educate, Inc., a Delaware corporation (“Holdings”).

WHEREAS, the Company, Holdings, Sylvan Learning Systems, Inc., a Maryland corporation (“Sylvan”), and Sylvan Ventures, L.L.C., a Delaware limited liability company (“Ventures”), entered into an Asset Purchase Agreement, dated as of March 10, 2003 (the “APA”), whereby the Company will purchase the Targeted Businesses (as defined in the APA) of Sylvan and Ventures (the “Transaction”);

WHEREAS, the Executive, currently the Chairman and Chief Executive Officer of Sylvan Ventures, Inc., a Delaware corporation (“Sylvan Ventures”), desires to provide the Company and certain of its subsidiaries with his services, and the Company desires to employ Executive on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

1.    Employment of Executive; Duties and Status.

1.1    Title. During the “Employment Period” (as defined in Section 2 hereof), the Executive shall serve as a member of the Board of Directors of the Company (the “Board”) and as a member of the Board of Directors of Holdings (the “Holdings Board”). Initially, the Executive shall serve as Chairman of the Board and as Chairman of the Holdings Board. In addition the Executive shall serve as the Chief Executive Officer of the Company and as the Chief Executive Officer of Holdings. The Executive shall have the normal duties, responsibilities and authority commensurate with such positions. During the Employment Period, in his capacity as Chief Executive Officer of the Company, the Executive shall report directly to the Board. During the Employment Period, in his capacity as Chief Executive Officer of Holdings, the Executive shall report directly to the Holdings Board.

1.2    Duties.

(a)    During the Employment Period, the Executive shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities of his positions and shall render such services on the terms set forth herein. In addition, the Executive shall have such other executive and managerial powers and duties as may reasonably be assigned to him by the Board or the Holdings Board, commensurate with his serving as Chief Executive Officer. Except for sick leave, reasonable vacations, and excused leaves of absence or as provided in Section 1.2(b), the Executive shall, throughout the Employment Period, devote substantially all his working time, attention, knowledge and skills faithfully and to the best of his ability, to the duties and responsibilities of his positions in furtherance of the business affairs and

activities of Holdings, the Company, and its subsidiaries and affiliates. The Executive shall at all times be subject to, observe and carry out such rules, regulations, policies, directions, and restrictions as the Board or the Holdings Board, as applicable, may from time to time reasonably establish for senior executive officers of Holdings or the Company.

(b)    The Company acknowledges that the Executive shall continue to serve on the board of directors of Sylvan and has certain preexisting commitment(s) to serve on the boards of directors and/or as an officer of the entities specified on Schedule 1.2(b) hereof (the “Pre-authorized Entities”), and the Executive shall be permitted to devote a reasonable amount of time, subject to Sections 4.1 and 4.2 hereof, to serve as an officer and/or director (as the case may be) of the Pre-authorized Entities, to serve as an officer and/or director or otherwise provide services to non-profit and community activities, and to serve on such other boards of directors or in such other offices as may be approved in writing from time to time by the Board; provided, however, that such approval shall not be unreasonably withheld. In addition, the Executive shall be permitted, subject to Sections 4.1 and 4.2 hereof, to devote a reasonable amount of time to (i) the management of his personal investments, finances, and business and legal affairs and (ii) delivering lectures, fulfilling speaking engagements and teaching at educational institutions. The Executive agrees that (i) in all events, the Executive’s activities otherwise permitted under this Section 1.2(b) shall not interfere with the performance by the Executive of his duties to the Company or Holdings under this Agreement, and (ii) if requested by the Board, the Executive shall provide the Board with a description of the activities of the Executive permitted under this Section 1.2(b).

2.    Term of Employment.

2.1    Employment Period. Subject to the consummation of the Transaction, the Executive’s employment hereunder shall continue until the later to occur of (i) the third anniversary of the Effective Date, or (ii) the applicable anniversary date of any extension of this Agreement as provided in Section 2.2 hereof, unless terminated earlier in accordance with the provisions of this Agreement (the “Employment Period”).

2.2    Extension. On the third anniversary of the Effective Date and on each subsequent anniversary date of the Effective Date thereafter, the Employment Period shall be extended for an additional one-year period unless the Company or the Executive notifies the other in writing at least 90 days prior to such anniversary date of its or his election, in its or his sole discretion, not to extend the Employment Period.

3.    Compensation and General Benefits.

3.1    Base Salary.

(a)    During the Employment Period, the Company agrees to pay to the Executive an annual base salary of Four Hundred Thousand Dollars ($400,000) (such base salary, as adjusted from time to time pursuant to Section 3.1(b), is referred to herein as the “Base Salary”). The Executive’s Base Salary, less amounts required to be withheld under applicable law, shall be payable in equal installments in accordance with the practice of the Company in

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effect from time to time for the payment of salaries to officers of the Company, but in no event less frequently than monthly.

(b)    The Executive’s Base Salary shall be reviewed annually for increases by the Board or by the Compensation Committee established by the Board.

3.2    Bonus. Commencing in calendar year 2003 and through the Employment Period, Executive shall be eligible to receive from the Company an annual performance bonus (the “Annual Bonus”). Executive’s target Annual Bonus shall be 100% of Executive’s Base Salary; provided, that the amount, if any, of the actual Annual Bonus paid to Executive shall be based upon the Company’s attainment of the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) goals set forth set forth on Schedule 3.2 hereof. Any Annual Bonus earned shall be payable in full within forty-five days following the determination of the amount thereof and in accordance with the Company’s normal payroll practices and procedures. Except as otherwise provided herein, any Annual Bonus payable under this Section 3.2 shall be deemed not to accrue until the last day of the period with respect to which such Annual Bonus would otherwise be scheduled to be paid. The amount of the 2003 Annual Bonus payable to Executive shall be prorated for the portion of 2003 in which Executive is employed by the Company.

3.3    Expenses. During the Employment Period, in addition to any amounts to which the Executive may be entitled pursuant to the other provisions of this Section 3.3 or elsewhere herein, the Executive shall be entitled to cause payment by, or to receive prompt reimbursement from, the Company for all reasonable and necessary expenses incurred by him in performing his duties hereunder on behalf of the Company, subject to, and consistent with, the Company’s policies for expense payment and reimbursement, in effect from time to time. Expenses for reimbursement include, but are not limited to, (i) reasonable expenses related to the activities of, and arising from, the Company’s or the Executive’s participation in, or as a member or officer of, trade associations or other similar organizations reasonably associated with the Company’s business; (ii) reasonable expenses incurred in connection with business related entertaining and other ordinary, non capital expenses incurred by the Executive in carrying on the Company’s business at his home such as non capital equipment, supplies, computer connections, etc.; (iii) reasonable business travel expenses, including first class airfare and lodging, incurred by the Executive for business travel for the Company; and (iv) reasonable automobile and car phone payments, reimbursements, or allowances incurred by the Executive for the Company.

3.4    Fringe Benefits.

(a)    Company Plans. During the Employment Period, in addition to any amounts to which the Executive may be entitled pursuant to the other provisions of this Section 3 or elsewhere herein, the Executive shall be entitled to participate in, and to receive benefits under, any long-term incentive plan, deferred compensation plan, qualified retirement plan, profit-sharing plan, savings plan, equity option plan, group life, disability, sickness, accident and health insurance programs, or any other benefit plan or arrangement made available by the Company to its executives and key management employees generally, subject to and on a basis consistent with the terms, conditions and overall administration of each such plan or

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arrangement. The award of any additional incentive under this Section 3.4(a) shall be separate and distinct from the right of the Executive to receive the bonus payment from the Company described in Section 3.2.

(b)    Insurance.

(i)     Provided that the Executive is insurable at standard rates during the Employment Period, the Company shall provide, at its cost, life insurance for the Executive in the face amount of Two Million Five Hundred Thousand Dollars ($2,500,000), with proceeds payable at the direction of the Executive, unless Executive waives such coverage.

(ii)    During the Employment Period, the Company shall provide directors’ and officers’ liability insurance covering the Executive, and errors and omissions insurance covering the activities of the Executive, in the exercise of his duties in the interest of the Company on terms and in coverages provided by the Company to its executives generally.

(iii)    Provided that the Executive is reasonably insurable during the Employment Period, the Company shall provide to the Executive disability insurance at levels provided by the Company to its executives generally.

(c)    Vacation. The Executive shall be entitled to four (4) weeks’ paid vacation during each full year (pro-rated for each partial year) of the Employment Period. In addition, the Executive shall be entitled to all paid holidays given by the Company to its senior executive officers. The extent to which the Executive may accumulate vacation days not taken in any year or receive payment for unused vacation days at the end of the Employment Period shall be determined in accordance with the Company’s policies for its senior executive officers.

(d)    Legal and Professional Fees. The Company will pay or reimburse the Executive for the reasonable legal and accounting fees and expenses he incurs in the preparation and negotiation of this Agreement and the Executive’s option grant as set forth in Section 3.5, not to exceed $ 45,000 in the aggregate, upon presentment by the Executive of a written statement of such fees and expenses. In addition, the Company will pay or reimburse the Executive up to $5,000 each year during the Employment Period for the reasonable accounting fees and expenses the Executive incurs for advice and preparation of his federal, state and local income tax returns, upon presentment by the Executive of a written statement of such fees and expenses.

(e)    Indemnification. Holdings shall indemnify the Executive pursuant to that certain Indemnification Agreement, dated as of the Effective Date, by and between Holdings and the Executive attached hereto as Exhibit A.

3.5     Stock Options. Subject of approval by the Holdings Board, Executive shall be granted an option (the “Option”) to purchase a total of 1,725,000 shares of common stock of Holdings pursuant to the Educate, Inc. 2003 Omnibus Stock Incentive Plan (the “Plan”), with a per share exercise price equal to $2.97. The Option shall vest as to 1/36 of the shares subject to the Option at the end of each full month following the date of grant. In the event of a

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“Change of Control” of the Company, the Option shall vest in full and become and remain immediately exercisable at such time as will permit him to exercise the Option in connection with the Change of Control and, if not therein exercised, shall remain outstanding and exercisable for the longer of two (2) years (six (6) months in the event the Change of Control occurs at any time following any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, (“IPO”)) or the duration provided in the Plan, but in no event shall such Option be exercisable following the expiration date. Except as otherwise provided, the Option shall be subject to the terms and conditions of the Plan and the form of option agreement approved by the Board. The Executive may immediately or in the future transfer or direct the Company to provide directly, the Executive’s vested and unvested Option to Sterling Partners I, L.P. (the “Options Transferee”). In the event the Executive elects to transfer or direct the Company to provide directly, the Executive’s vested and unvested Option to the Options Transferee, the Executive agrees that the Company shall be under no obligation to any additional registration obligations with respect to the shares issuable upon exercise of the Option by the Options Transferee. The parties agree that the compensation described in this Section 3.5 may actually be provided through options or restricted stock as the parties may mutually agree and that all references throughout this Agreement to “options” will be deemed to refer to the eventual compensation arrangement under this section, and that any references to share numbers or exercise prices with respect to options shall not apply to the restricted stock unless specifically agreed to by both parties.

3.6    Reserved.

3.7    Parachute Treatment.

(a)    Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any payment, vesting, distribution, or transfer by the Company or any successor, or any Affiliate of the foregoing or by any other person or that any other event occurring with respect to the Executive and the Company for the Executive’s benefit, whether paid or payable or distributed or distributable under the terms of this Agreement or otherwise (including under any employee benefit plan) (a “Payment”) would be subject to or result in the imposition of the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (and any regulations issued thereunder, any successor provision, and any similar provision of state or local income tax law) (collectively, the “Excise Tax”), then the amount of the Payment shall be reduced to the highest amount that may be paid by the Company or other entity without subjecting such Payment to the Excise Tax (the “Payment Reduction”). The Executive shall have the right, in his sole discretion, to designate those payments or benefits that shall be reduced or eliminated under the Payment Reduction to avoid the imposition of the Excise Tax. Notwithstanding the foregoing, the Payment Reduction shall not apply if the Executive would, on a net after-tax basis, receive less compensation than if the Payment were not so reduced.

(b)    Subject to the provisions of Section 3.7(c), all determinations required to be made under this Section 3.7, including whether and when a Payment is subject to Section 4999 and the assumptions to be utilized in arriving at such determination and in determining an appropriate Payment Reduction, shall be made by Ernst and Young, or any other

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nationally recognized accounting firm that shall be the Company’s outside auditors at the time of such determination (the “Accounting Firm”), which Accounting Firm shall provide detailed supporting calculations to the Executive and the Company within fifteen (15) business days of the receipt of notice from the Company or the Executive that there will be a Payment that the person giving notice believes may be subject to the Excise Tax. All fees and expenses of the Accounting Firm shall be borne by the Company. If the Accounting Firm shall determine that no Excise Tax is payable by the Executive, it shall furnish to the Executive written advice that failure to report the Excise Tax on his applicable federal income tax return would not be reasonably likely to result in the imposition of a penalty for fraud, negligence, or disregard of rules or regulations. Any determination by the Accounting Firm shall be binding upon the Company and the Executive in determining whether a Payment Reduction is required and the amount thereof (subject to Sections 3.7(c) and (d)), in the absence of material mathematical or legal error.

(c)    As a result of uncertainty in the application of Section 4999 that may exist at the time of the initial determination by the Accounting Firm, it may be possible that in making the calculations required to be made hereunder, the Accounting Firm shall determine that a Payment Reduction need not be made that properly should be made (an “Overpayment”) or that a Payment Reduction not properly needed to be made should be made (an “Underpayment”). If, within seventy-five (75) days after the Accounting Firm’s initial determination under the preceding clause (b), the Accounting Firm shall determine that an Overpayment was made, any such Overpayment shall be treated for all purposes, to the extent practicable, as a loan to the Executive with interest at the applicable Federal rate provided for in Section 1274(d) of the Code; provided, however, that the amount to be repaid by the Executive to the Company shall be reduced to the extent that any portion of the Overpayment to be repaid will not be offset by a corresponding reduction in tax by reason of such repayment of the Overpayment. If the Accounting Firm shall determine that an Underpayment was made, any such Underpayment shall be due and payable by the Company to the Executive within thirty-five (35) days after the Company receives notice of the Accounting Firm’s determination.

(d)    The Executive shall give written notice to the Company of any claim by the IRS that, if successful, would require the payment by the Executive of an Excise Tax, such notice to be provided within fifteen (15) days after the Executive shall have received written notice of such claim. The Executive shall cooperate with the Company in determining whether to contest or pay such claim and shall not pay such claim without the written consent of the Company, which shall not be unreasonably withheld, conditioned or delayed.

(e)    This Section 3.7 shall remain in full force and effect following the termination of the Executive’s employment for any reason until the expiration of the statute of limitations on the assessment of taxes applicable to the Executive for all periods in which the Executive may incur a liability for taxes (including Excise Taxes), interest or penalties arising out of the operation of this Agreement.

4.    Confidentiality and Non-Competition.

4.1    Confidentiality; Intellectual Property.

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(a)    The Executive recognizes that the Company’s business interests require a confidential relationship between the Company and the Executive and the fullest practical protection and confidential treatment of all “Trade Secrets or Confidential or Proprietary Information” (as defined in Section 4.3 hereof). Accordingly, the Executive agrees that, except as required by law or court order, the Executive will keep confidential and will not disclose to anyone (other than the Company or any Persons designated by the Company), or publish, utter, exploit, make use of (or aid others in publishing, uttering, exploiting or using), or otherwise “Misappropriate” (as defined in Section 4.3 hereof) any Trade Secrets or Confidential or Proprietary Information at any time. The Executive’s obligations hereunder shall continue during the Employment Period and thereafter for so long as such Trade Secrets or Confidential or Proprietary Information remain Trade Secrets or Confidential or Proprietary Information.

(b)    The Executive acknowledges and agrees that:

(i)     all Trade Secrets or Confidential or Proprietary Information shall be “Trade Secrets” (as defined under the Maryland Uniform Trade Secrets Act) of the Company;

(ii)    the Executive occupies a unique position within the Company, and he is and will be intimately involved in the development and/or implementation of Trade Secrets or Confidential or Proprietary Information;

(iii)    in the event the Executive breaches Section 4.1 hereof with respect to any Trade Secrets or Confidential or Proprietary Information, such breach shall be deemed to be a Misappropriation of such Trade Secrets or Confidential or Proprietary Information; and

(iv)    any Misappropriation of Trade Secrets or Confidential or Proprietary Information will result in immediate and irreparable harm to the Company.

(c)    The Executive acknowledges and agrees that all ideas, inventions and business plans developed by him during the Employment Period, including, without limitation, any process, operations, product or improvement which may be patentable or copyrightable, are and will be the property of the Company, and that he will do, at the Company’s request and cost, whatever is reasonably necessary to secure the rights thereto by patent, copyright or otherwise to the Company.

(d)    Upon termination or expiration of the Employment Period and at any other time upon request, the Executive further agrees to surrender to the Company all documents, writings, notes, business, marketing or strategic plans, financial information, customer, distributor and supplier lists, manuals, illustrations, models, and other such materials (collectively, “Company Documents”) produced by the Executive or coming into his possession by or through employment with the Company during the Employment Period, within the scope of such employment, and agrees that all Company Documents are at all times the Company’s property, provided that the Executive may maintain a copy of any Company Documents that are not Trade Secrets or Confidential or Proprietary Information.

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(e)    During the Employment Period, the Executive represents and agrees that he will not use or disclose any confidential or proprietary information or trade secrets of others, including but not limited to former employers, and that he will not bring onto the premises of the Company such confidential or proprietary information or trade secrets of such others, unless consented to in writing by said others, and then only with the prior written authorization of the Company; provided, however, that this prohibition does not apply to information or secrets pertaining to matters covered by Section 1.2(b).

4.2    Noncompetition and Nonsolicitation.

(a)    Subject to Section 4.2(b) hereof, during the Employment Period and until the end of the Restricted Period, the Executive agrees that the Executive will not, directly or indirectly, on the Executive’s own behalf or as a partner, owner, officer, director, stockholder, member, employee, agent or consultant of any other Person (including, without limitation any “Sterling Affiliate,” as defined herein), within the United States of America or in any other country or territory in which the businesses of the Company are conducted:

(i)     own, manage, operate, control, be employed by, provide services as a consultant, to or participate in the ownership, management, operation, or control of, any enterprise that engages in, owns or operates businesses that provide facility-based or online tutoring services or tutoring services provided under contract with a Governmental Entity (as defined in the APA) in the United States, in each case, for grades K-12 and younger students (other than any business conducted pursuant to the Master License Agreement (as defined in the APA)) and any enterprise that owns or operates government funded “charter schools” as such term is defined under applicable law in effect on March 10, 2003.

(ii)    solicit, hire, or otherwise attempt to establish for any Person, any employment, agency, consulting or other business relationship with any Person who is or was an employee of the Company or any of its Affiliates, provided that (w) the prohibition in this Section 4.2(a)(ii) shall not bar the Executive from soliciting or hiring any former employee who at the time of such solicitation or hire had not been employed by the Company or any of its Affiliates for a period of at least one year, (x) following the Executive’s termination of employment, the Executive may hire but not solicit any Person covered in this clause (ii) if such hiring occurs after a Change of Control of the Company with respect to Persons employed at that entity, (y) the prohibition in this Section 4.2(a)(ii) does not bar the Executive from soliciting or hiring the Executive’s personal assistant following the Executive’s termination of employment, and (z) the prohibition does not apply to individuals below the level of vice president at the Company unless the Executive knowingly solicits the individual to leave the Company’s employ.

(iii)    The parties hereto acknowledge and agree that, notwithstanding anything in Section 4.2(a)(i) hereof, (x) the Executive may own or hold, solely as passive investments, securities of Persons engaged in any business that would otherwise be included in Section 4.2(a)(i) as long as with respect to each such investment, the securities held by the Executive do not exceed five percent (5%) of the outstanding securities of such Person and, such securities are publicly traded and registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the parties agree that the Executive shall not be deemed to violate Section 4.2(a)(i) hereof solely by virtue of the

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ownership by the Sterling Affiliates or investment vehicles that are not Affiliates of the Executive or his immediate family of more than 5%, provided that the Executive’s indirect equity interest in the ultimate investment is less than 5% of the outstanding securities of that Person that would otherwise be included in Section 4.2(i); and (y) the Executive may serve on the board of directors (or other comparable position) or as an officer of any entity at the request of the Board; provided, however, that in the case of investments otherwise permitted under clause (x) above, the Executive shall not be permitted to, directly or indirectly, participate in, or attempt to influence, the management, direction or policies of (other than through the exercise of any voting rights held by the Executive in connection with such securities), or lend his name to, any such Person.

(b)    Section 4.2(a) shall not apply following termination of the Employment Period in the event Employment Period is not extended pursuant to Section 2.2(b) hereof.

4.3    Definitions. For purposes of this Agreement, the following terms shall have the following meanings:

(a)    An “Affiliate” of any Person shall mean any other Person, whether now or hereafter existing, directly or indirectly controlling or controlled by, or under direct or indirect common control with, such specified Person. For purposes hereof, “control” or any other form thereof, when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

(b)    “Misappropriation”, or any form thereof, means:

(i)    the acquisition of any Trade Secret or Confidential or Proprietary Information by a Person who knows or has reason to know that the Trade Secret or Confidential or Proprietary Information was acquired by theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means (each, an “Improper Means”); or

(ii)    the disclosure or use of any Trade Secret or Confidential or Proprietary Information without the express consent of the Company by a Person who (x) used Improper Means to acquire knowledge of the Trade Secret or Confidential or Proprietary Information; or (y) at the time of disclosure or use, knew or had reason to know that his or her knowledge of the Trade Secret or Confidential or Proprietary Information was (i) derived from or through a Person who had utilized Improper Means to acquire it, (ii) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, or (iii) derived from or through a Person who owed a duty to the Company to maintain its secrecy or limit its use; or (z) before a material change of his or her position, knew or had reason to know that it was a Trade Secret or Confidential or Proprietary Information and that knowledge of it had been acquired by accident or mistake.

(c)    “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, business trust, joint-stock company, estate,

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trust, unincorporated organization, or government or other agency or political subdivision thereof, or any other legal or commercial entity.

(d)    “Restricted Period” shall mean for terminations or resignations under Sections 5.4, 5.5, and 5.6 the later of the first anniversary of the date of termination or the third anniversary of the Effective Date; provided, however, that the Restricted Period following termination or resignation under Sections 5.5 and 5.6 following a Change of Control shall be the first anniversary of the date of termination.

(e)    “Sterling Affiliate” means Sterling Capital, Ltd., an Illinois limited partnership, Sterling Venture Partners, LP, an Illinois limited partnership, Sterling Advisors, and any and all Affiliates of any of the foregoing.

(f)    “Trade Secrets or Confidential or Proprietary Information” shall mean:

(i)    any and all information, formulae, patterns, compilations, programs, devices, methods, techniques, processes, know how, plans (marketing, business, strategic or otherwise), arrangements, pricing and other data (collectively, “Information”) that (a) derives independent economic value, actual or potential, from not being generally known to the public or to other Persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts by the Company that are reasonable under the circumstances to maintain its secrecy; or

(ii)    any and all other Information (i) unique to the Company which has a significant business purpose and is not known or generally available from sources outside of such Persons or typical of industry practice, or (ii) the disclosure of which would have a material adverse effect on the business of the Company.

4.4    Remedies. The Executive acknowledges and agrees that if the Executive breaches any of the provisions of Section 4 hereof, the Company may suffer immediate and irreparable harm for which monetary damages alone will not be a sufficient remedy, and that, in addition to all other remedies that the Company may have, the Company shall be entitled to seek injunctive relief, specific performance or any other form of equitable relief to remedy a breach or threatened breach of this Agreement (including, without limitation, any actual or threatened Misappropriation) by the Executive and to enforce the provisions of this Agreement. The Executive and the Company each agrees (i) to submit to the jurisdiction of any competent court where the Company or Executive may choose to seek equitable relief, (ii) to waive any and all defenses each may have on the grounds of lack of jurisdiction of such court; and (iii) that neither party shall be required to post any bond, undertaking, or other financial deposit or guarantee in seeking or obtaining such equitable relief. The existence of this right shall not preclude or otherwise limit the applicability or exercise of any other rights and remedies which the Company and/or the Executive may have at law or in equity.

4.5    Interpretation; Severability.

(a)    The Executive has carefully considered the possible effects on the Executive of the covenants not to compete, the confidentiality provisions, and the other

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obligations contained in this Agreement, and the Executive recognizes that the Company has made every effort to limit the restrictions placed upon the Executive to those that are reasonable and necessary to protect the Company’s legitimate business interests.

(b)    The Executive acknowledges and agrees that the restrictive covenants set forth in this Agreement are reasonable and necessary in order to protect the Company’s valid business interests. It is the intention of the parties hereto that the covenants, provisions and agreements contained herein shall be enforceable to the fullest extent allowed by law. If any covenant, provision, or agreement contained herein is found by a court having jurisdiction to be unreasonable in duration, scope or character of restrictions, or otherwise to be unenforceable, such covenant, provision or agreement shall not be rendered unenforceable thereby, but rather the duration, scope or character of restrictions of such covenant, provision or agreement shall be deemed reduced or modified with retroactive effect to render such covenant, provision or agreement reasonable or otherwise enforceable (as the case may be), and such covenant, provision or agreement shall be enforced as modified. If the court having jurisdiction will not review the covenant, provision or agreement, the parties hereto shall mutually agree to a revision having an effect as close as permitted by applicable law to the provision declared unenforceable. The parties hereto agree that if a court having jurisdiction determines, despite the express intent of the parties hereto, that any portion of the covenants, provisions or agreements contained herein are not enforceable, the remaining covenants, provisions and agreements herein shall be valid and enforceable. Moreover, to the extent that any provision is declared unenforceable, the Company shall have any and all rights under applicable statutes or common law to enforce its rights with respect to any and all Trade Secrets or Confidential or Proprietary Information or unfair competition by the Executive.

5.    Termination.

5.1    General. The employment of the Executive hereunder (and the Employment Period) shall terminate as provided in Section 2, unless earlier terminated in accordance with the provisions of this Section 5.

5.2    Termination Upon Mutual Agreement. The Company and the Executive may, by mutual written agreement, terminate this Agreement and/or the employment of the Executive (and the Employment Period) at any time.

5.3    Death or Disability of the Executive.

(a) The employment of the Executive hereunder (and the Employment Period) shall terminate upon (i) the death of the Executive, and (ii) at the option of the Company, upon not less than fifteen (15) days’ prior written notice to the Executive or his personal representative or guardian, if the Executive suffers a “Total Disability” (as defined in Section 5.3(b) below). Upon termination for death or Total Disability, the Company shall pay to the Executive, guardian or personal representative, as the case may be, in addition to any insurance or disability benefits to which he may be entitled hereunder, all amounts of accrued but unpaid Base Salary and benefits through the date of such termination, including a bonus pursuant to Section 3.2(a) hereof that Executive would have been entitled to had he worked the full year during which death or Total Disability occurred. The bonus shall be payable in full within forty-

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five days following the determination of the amount thereof and in accordance with the Company’s normal payroll practices and procedures.

(b)     For purposes of this Agreement, “Total Disability” shall mean (i) if the Executive is subject to a legal decree of incompetency (the date of such decree being deemed the date on which such disability occurred), (ii) the written determination by a physician selected by the Company that, because of a medically determinable disease, injury or other physical or mental disability, the Executive is unable substantially to perform, with or without reasonable accommodation, each of the material duties of the Executive required hereby, and that such disability has lasted for the immediately preceding ninety (90) days or one hundred twenty days (120) days during the immediately preceding year and is, as of the date of determination, reasonably expected to last an additional six (6) months or longer after the date of determination, in each case based upon medically available reliable information, or (iii) Executive’s qualifying for benefits under the Company’s long-term disability coverage, if any.

(c)     The date of any legal decree of incompetency or written opinion which is conclusive as to the Total Disability of the Executive shall be deemed the date on which such Total Disability occurred. Any leave on account of illness or temporary disability which is short of Total Disability shall not constitute a breach of this Agreement by the Executive, and in no event shall any party be entitled to terminate this Agreement for Cause due to any such leave. All physicians selected hereunder shall be board certified in the specialty most closely related to the nature of the disability alleged to exist. In conjunction with determining mental and/or physical disability for purposes of this Agreement, the Executive consents to any such examinations which are relevant to a determination of whether he is mentally and/or physically disabled, and which is required by the aforesaid Company physician, and to furnish such medical information as may be reasonably requested, and to waive any applicable physician patient privilege that may arise because of such examination.

5.4     Termination For Cause.

(a)     The Company may, upon action of the Board, terminate the employment of the Executive (and the Employment Period) at any time for “Cause” (as defined below).

(b)     For purposes of this Agreement, “Cause” means:

(i)     a material failure by the Executive to comply with any material obligation imposed by this Agreement (including, without limitation, any violation of Sections 4.1 or 4.2 hereof);

(ii)    gross negligence or willful malfeasance by the Executive in connection with the performance of his material duties under this Agreement that could, in the good faith judgment of the Board, (x) have a material adverse impact on the Company, or (y) result in the incarceration of any officer, director or employee of the Company;;

(iii)    the Executive’s being convicted of, or pleading guilty or nolo contendere to, or subject to Section 5.4(c) below, being indicted for, any felony;

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(iv) theft, embezzlement, or fraud by the Executive in connection with the performance of his duties hereunder;

(v) the abuse by the Executive of drugs or alcohol, or conduct by the Executive involving moral turpitude, that could, in the good faith judgment of the Company Board, have a material adverse impact on the Company;

(vi) subject to Section 5.4(c) below, the Executive’s removal from office or termination of employment by requirement of any governmental authority having jurisdiction over the Company;

(vii) the Executive’s engaging in any activity that gives rise to a material conflict of interest with the Company that shall not be cured following ten (10) days’ written notice and a demand to cure such conflict; or

(viii) subject to Section 5.4(c) below, the misappropriation by the Executive of any material business opportunity of the Company, provided, however, that solely for purposes of this Section 5.4(b)(viii) (x) the Executive shall not be deemed to have misappropriated a material business opportunity of the Company by virtue of any action taken by a Sterling Affiliate unless the Executive knows of such action before the date it occurs (or, if earlier, before the date of a binding commitment to complete such action) and the Executive fails to disclose such action to the Company, and (y) the Executive shall not be deemed to have misappropriated a material business opportunity of the Company by virtue of any action taken by an investment vehicle (that is not an Affiliate of the Executive or his immediate family) in which the Executive owns an interest, unless the Executive knows of such action before the date it occurs (or, if earlier, before the date of a binding commitment to complete such action), the disclosure of such action would not violate any confidentiality or non-disclosure agreement or provision to which the Executive is subject, and the Executive fails to disclose such action to the Company.

(c) With respect to the Executive’s being indicted for a crime under Section 5.4(b)(iii), his removal under Section 5.4(b)(vi), or his being accused of misappropriation under Section 5.4(b)(viii), in addition to satisfying the requirements of Section 5.4(d), and subject to Section 5.7(d), the Company must treat the Executive under Section 5.7(a) or (b), as applicable, as though he has been terminated without Cause unless and until, a Final Determination is made, and shall hold the payments pursuant to Section 5.7(a)(i) and (ii) or 5.7(b)(i) and (ii) in escrow until such time as a Final Determination is made. In addition, the Company must treat any non-vested options held by the Executive and any Options Transferee (to the extent originating with this Agreement) in accordance with Section 5.7(c), and shall hold any non-vested options in escrow until such time as a Final Determination is made. During the time the non-vested options are held in escrow, the Executive may not exercise such option. If the Final Determination is that the Company had Cause for termination under the referenced sections, the Executive shall forfeit and hereby agrees to forfeit his right to any of the amounts or non-vested options held in escrow other than such amounts owed to Executive under Section 5.8, if any. If the Final Determination is that the Company did not have Cause for termination under the referenced sections, the Company shall release to the Executive the amounts plus commercially reasonable interest and the non-vested options held in escrow and shall extend the

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Executive’s right to exercise such options held in escrow so that the Executive may exercise such options until the later of (i) 90 days after a Final Determination is made, or (ii) the last date the options would otherwise be exercisable. For purposes of this Section 5.4(c), a “Final Determination” shall mean with respect to (i) the Executive’s being indicted for a crime under Section 5.4(b)(iii), the Executive has been found not guilty by a court of final adjudication or the indictment has been dismissed or the Executive has pled guilty or nolo contendere to such crime or to a lesser crime in connection with such indictment, (provided that only a conviction of, or guilty or nolo contendere plea to, a felony shall be “Cause”) or (ii) the Executive’s removal under Section 5.4(b)(vi) or the Executive being accused of misappropriation under Section 5.4(b)(viii), a final determination by an arbitrator as to whether the Company had Cause for the termination referenced herein.

(d) Before the Company may terminate the Executive for Cause pursuant to Section 5.4(a) above, the Board shall deliver to the Executive a written notice of the Company’s intent to terminate the Executive for Cause, including the reasons for such termination, the giving of which shall have been authorized by a vote the Board; and the Executive shall have been given a reasonable opportunity to cure any such acts or omissions (which are susceptible of cure as reasonably determined by the Board) within thirty (30) days after the Executive’s receipt of such notice. The Company intends that “Cause” must be based only on material matters and not on matters of minor importance. The Board’s delay in providing such notice shall not be deemed to be a waiver of any such Cause unless and until the Board fails to provide such notice within sixty (60) days after a majority of the Board first becomes aware of the occurrence of the event triggering such Cause, nor does the failure to terminate for one Cause prevent any later Cause termination for a similar or different reason.

5.5 Resignation For Good Reason or Termination without Cause.

(a) The Executive may resign, and thereby terminate his employment (and the Employment Period), at any time for “Good Reason” (as defined below), upon not less than thirty (30) days’ prior written notice (reduced to five days’ notice for failure to pay Base Salary) to the Company specifying in reasonable detail the reason therefor; provided, however, that the Company shall have been given a reasonable opportunity to cure any such Good Reason (which are susceptible of cure) within thirty (30) days after the Company’s receipt of such notice. The Executive’s delay in providing such notice shall not be deemed to be a waiver of any such Good Reason unless and until the Executive fails to provide such notice within sixty (60) days after the Executive first becomes aware of the occurrence of the event triggering such Good Reason, nor does the failure to resign for one Good Reason prevent any later Good Reason resignation for a similar or different reason.

(b) For purposes of this Agreement, “Good Reason” means, without the Executive’s prior written consent:

(i) a material failure by the Company to comply with any material obligation imposed by this Agreement;

(ii) the Executive is demoted from the position of Chief Executive Officer of the Company (but not if the Executive is removed from the position of

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Chief Executive Officer of Holdings for any reason), or the Executive’s duties and responsibilities with respect to the Company (but not with respect to Holdings) are materially and substantially diminished as a whole;

(iii) any reduction in the Executive’s Base Salary;

(iv) the removal or failure to re-elect the Executive as a member of the Board or the Holdings Board, other than as a result of the Executive’s voluntary resignation or choice not to stand for reelection or reappointment;

(v) the Company’s requiring the Executive to be based (excluding regular travel responsibilities) at any office or location more than 25 miles from the principal office of the Company on the Effective Date; or

(vi) a Change of Control of Holdings or the Company, followed by any assignment to the Executive of any duties inconsistent in any material respect with the provisions of this Agreement relating to his position (including, without limitation, his status, office, title, or reporting relationship), authority, control, duties, or responsibilities.

Notwithstanding anything herein to the contrary, in no event shall (A) any action otherwise meeting the definition of Good Reason under clauses (i) through (vi) above taken by the Company for Cause, or (B) the removal of the Executive as Chairman of the Board or Chairman of the Holdings Board for any reason constitute, or be deemed to constitute, grounds for Good Reason termination hereunder.

(c) The Company may terminate Executive’s employment without Cause and thereby terminate Executive’s employment (and the Employment Period) under this Agreement at any time upon not less than thirty (30) days’ prior written notice.

5.6 Resignation other than for Good Reason. The Executive may resign and thereby terminate his employment (and the Employment Period) under this Agreement at any time upon not less than thirty (30) days’ prior written notice.

5.7 Payments Upon Termination Without Cause or Resignation for Good Reason.

(a) In the event the Executive’s employment is terminated prior to the third anniversary of the Effective Date (i) by the Company without “Cause,” or (ii) by the Executive for “Good Reason,” then the following provisions shall apply:

(i) The Company shall continue to pay the Executive the Base Salary to which the Executive would have been entitled pursuant to Section 3.1 hereof (at the Base Salary rate during the year of termination) had the Executive remained in the employ of the Company, until the later of the first anniversary of the date of termination or the third anniversary of the Effective Date (the “Termination Payment Period”), with all such amounts payable in accordance with the Company’s payroll system in the same manner and at the same time as though the Executive remained employed by the Company.

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(ii) The Company shall pay to the Executive the bonus pursuant to Section 3.2(a) hereof that the Executive would have been entitled to had he worked the full year during which the termination occurred. The bonus shall be payable in full within forty-five days following the determination of the amount thereof and in accordance with the Company’s normal payroll practices and procedures.

(iii) Unless prohibited by law or, with respect to any insured benefit, the terms of the applicable insurance contract, the Executive shall continue to participate in, and be covered under, the Company’s group life, disability, sickness, accident and health insurance programs on the same basis as other executives of the Company through the first to occur of (x) the first anniversary of the Executive’s termination, or (y) the end of the Termination Payment Period. In addition, the Company shall continue to provide the Executive with the insurance described in Section 3.4(b) of this Agreement during such period.

(b) In the event the Executive’s employment is terminated following the third anniversary of the Effective Date (i) by the Company without “Cause,” or (ii) by the Executive for “Good Reason,” then the following provisions shall apply:

(i) The Company shall continue to pay the Executive the Base Salary to which the Executive would have been entitled pursuant to Section 3.1 hereof (at the Base Salary rate during the year of termination) had the Executive remained in the employ of the Company, until the later of the first anniversary of the date of termination or the expiration of the Employment Period without giving effect to any further extensions pursuant to Section 2.2 hereof, with all such amounts payable in accordance with the Company’s payroll system in the same manner and at the same time as though the Executive remained employed by the Company.

(ii) The Company shall pay to the Executive the bonus pursuant to Section 3.2(a) hereof that the Executive would have been entitled to had he worked the full year during which the termination occurred. The bonus shall be payable in full within forty-five days following the determination of the amount thereof and in accordance with the Company’s normal payroll practices and procedures.

(iii) Unless prohibited by law or, with respect to any insured benefit, the terms of the applicable insurance contract, the Executive shall continue to participate in, and be covered under, the Company’s group life, disability, sickness, accident and health insurance programs on the same basis as other executives of the Company through the the first anniversary of the Executive’s termination. In addition, the Company shall continue to provide Executive with the insurance described in Section 3.4(b) of this Agreement during such period.

(c) In the event Executive’s employment ends under either Section 5.7(a) or (b) but not as a result of Section 5.5(b)(vi), the Option shall automatically vest and be exercisable as to the greater of the then vested shares or 1,150,000 shares, effective as of the day immediately preceding the Executive’s termination date, and, the Option shall remain outstanding and exercisable for the longer of two (2) years from the date of termination (six (6) months in the event such termination of employment occurs at any time following an IPO) or the duration provided in the Plan and/or the applicable option agreement, but in no event shall such Option be exercisable following the expiration date. In the event Executive’s employment ends

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under Section 5.5(b)(vi), the Option shall vest and be exercisable in accordance with Section 3.5.

(d) The Executive agrees to release the Company and its respective Affiliates, officers, directors, stockholders, employees, agents, representatives, and successors from and against any and all claims that the Executive may have against any such person relating to the Executive’s employment by the Company and the termination thereof, such release to be in form and substance reasonably satisfactory to the Company; provided, however, that (i) in lieu of accepting any payments or other benefits under Section 5.7, the Executive may decline to sign the release and preserve any rights to sue, and (ii) the release does not cover any claims the Executive may have to or about equity interests or with respect to his equity ownership in Holdings and/or the Company that were not granted or purchased in connection with his employment hereunder. The parties intend for the release to cover any claims the Executive may have to or about equity interests or with respect to his equity ownership in Holdings or the Company that the Executive was granted pursuant to Section 3.5 or any employee benefit plan or arrangement of Holdings or the Company.

5.8 Payments Upon Termination for Cause or Resignation Without Good Reason.

(a) In the event the Executive’s employment is terminated by the Company for “Cause,” or (ii) by the Executive without “Good Reason,” the Executive shall be entitled to receive all amounts of accrued but unpaid Base Salary and benefits through the date of such termination, but all other rights of the Executive (and all obligations of the Company) hereunder shall terminate as of the date of such termination, other than with respect to equity compensation as to which there will be no further vesting (but vested options will remain exercisable).

5.9 Change of Control. “Change of Control” means the occurrence of any one or more of the following events:

(a) any merger or consolidation of Holdings or the Company with or into any Person in one transaction or a series of related transactions, if, immediately after giving effect to such transaction(s), any “person” or “group” (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, regardless of whether applicable), becomes the “beneficial owner,” directly or indirectly, of more than 50% of the total voting power in the aggregate of the equity interests of Holdings or the Company, as applicable, normally entitled to vote in the election of directors, managers, or trustees, as applicable, of the transferee(s) or surviving entity or entities;

(b) any sale, transfer or other conveyance, whether direct or indirect, of all or substantially all of the assets of Holdings or the Company, in one transaction or a series of related transactions;

(c) any “person” or “group” (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, regardless of whether applicable), other than Holdings or the Company or any of their respective Affiliates, becomes the “beneficial owner,”

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directly or indirectly, of more than 50% of the total voting power in the aggregate of the equity interests of Holdings or the Company then outstanding normally entitled to vote in elections of members of the Board or the Holdings Board, as applicable; or

(d) Holdings or the Company dissolves or adopts a plan of complete liquidation.

6. Miscellaneous

6.1 ARBITRATION. SUBJECT TO THE RIGHTS UNDER SECTION 4.4 TO SEEK INJUNCTIVE OR OTHER EQUITABLE RELIEF AS SPECIFIED IN THIS AGREEMENT, ANY DISPUTE BETWEEN THE PARTIES HERETO ARISING UNDER OR RELATING TO THIS AGREEMENT OR THE EXECUTIVE’S EMPLOYMENT BY THE COMPANY (INCLUDING, BUT NOT LIMITED TO, THE AMOUNT OF DAMAGES, THE NATURE OF THE EXECUTIVE’S TERMINATION OR THE CALCULATION OF ANY BONUS OR OTHER AMOUNT OR BENEFIT DUE) SHALL BE RESOLVED IN ACCORDANCE WITH THE PROCEDURES OF THE AMERICAN ARBITRATION ASSOCIATION, PROVIDED, HOWEVER, THAT THE PARTIES AGREE THAT ANY ARBITRATOR OR ARBITRATORS SELECTED OR APPOINTED TO HEAR THE ARBITRATION SHALL BE EITHER A RETIRED JUDGE OF THE CIRCUIT OR APPELLATE COURTS OF MARYLAND OR A PRACTICING ATTORNEY WITH AT LEAST FIFTEEN (15) YEARS OF EXPERIENCE IN MATTERS REASONABLY RELATED TO THE ISSUE OR ISSUES IN DISPUTE. ANY RESULTING HEARING SHALL BE HELD IN THE BALTIMORE, MARYLAND AREA. THE RESOLUTION OF ANY DISPUTE ACHIEVED THROUGH SUCH ARBITRATION SHALL BE BINDING AND ENFORCEABLE BY A COURT OF COMPETENT JURISDICTION. COSTS AND FEES INCURRED IN CONNECTION WITH SUCH ARBITRATION SHALL BE BORNE BY THE PARTIES AS DETERMINED BY THE ARBITRATION.

6.2 Entire Agreement; Waiver. This Agreement contains the entire agreement between the Executive and the Company with respect to the subject matter hereof, and supersede any and all prior understandings or agreements, whether written or oral. No modification or addition hereto or waiver or cancellation of any provision hereof shall be valid except by a writing signed by the party to be charged therewith. No delay on the part of any party to this Agreement in exercising any right or privilege provided hereunder or by law shall impair, prejudice or constitute a waiver of such right or privilege.

6.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maryland, without regard to principles of conflict of laws.

6.4 Successors and Assigns; Binding Agreement. The rights and obligations of the parties under this Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives, successors and permitted assigns. This Agreement is a personal contract, and, except as specifically set forth herein, the rights and interests of the Executive herein may not be sold, transferred, assigned, pledged or hypothecated

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by any party without the prior written consent of the others. As used herein, the term “successor” as it relates to the Company, shall include, but not be limited to, any successor by way of merger, consolidation, or sale of all or substantially all of such Person’s assets or equity interests.

6.5 No Mitigation. In the event the Executive’s employment is terminated (i) by the Company without Cause, or (ii) by the Executive for any reason, then the Company waives, releases and remises (x) any obligation or duty under applicable law on the part of the Executive to seek or obtain other engagements or employment or to otherwise mitigate any damages to which the Executive may be entitled to by reason of any termination of this Agreement; and (y) any right in or claim to any remuneration or compensation received by the Executive pursuant to any engagements or employment subsequent to the termination of this Agreement.

6.6 Representation by Counsel. Each of the parties hereto acknowledges that (i) it or he has read this Agreement in its entirety and understands all of its terms and conditions, (ii) it or he has had the opportunity to consult with any individuals of its or his choice regarding its or his agreement to the provisions contained herein, including legal counsel of its or his choice, and any decision not to was his or its alone, and (iii) it or he is entering into this Agreement of its or his own free will, without coercion from any source.

6.7 Interpretation. The parties and their respective legal counsel actively participated in the negotiation and drafting of this Agreement, and in the event of any ambiguity or mistake herein, or any dispute among the parties with respect to the provisions hereto, no provision of this Agreement shall be construed unfavorably against any of the parties on the ground that he, it, or his or its counsel was the drafter thereof.

6.8 Survival. The provisions of Sections 4, 5.7, 5.8 and 6 hereof shall survive the termination of this Agreement.

6.9 Notices. All notices and communications hereunder shall be in writing and shall be deemed properly given and effective when received, if sent by facsimile or telecopy, or by postage prepaid by registered or certified mail, return receipt requested, or by other delivery service which provides evidence of delivery, as follows:

If to the Company, to:

Educate Operating Company, LLC

1001 Fleet Street, 9th Floor

Baltimore, MD 21202

Attn: Board of Directors

with a copy (which shall not constitute notice) to:

Skadden, Arps, Slate, Meagher & Flom LLP

300 South Grand Avenue, Suite 3400

Los Angeles, California 90071-3144

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Attention: Jeffrey Cohen, Esq.

Telephone: (213) 687-5000

Facsimile: (213) 687-5600

If to the Executive, to:

R. Christopher Hoehn-Saric

c/o Educate Operating Company, LLC

1001 Fleet Street, 9th Floor

Baltimore, MD 21202

or to such other address as one party may provide in writing to the other party from time to time.

6.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

6.11 Captions. Paragraph headings are for convenience only and shall not be considered a part of this Agreement.

6.12 No Third Party Beneficiary Rights. Except as otherwise provided in this Agreement, no entity shall have any right to enforce any provision of this Agreement, even if indirectly benefited by it.

6.13 Withholding. Any payments provided for hereunder shall be paid net of any applicable withholding required under Federal, state or local law and any additional withholding to which Executive has agreed.

[THIS SPACE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties have duly executed this Agreement, intending it as a document under seal, as of the date first above written.

WITNESS/ ATTEST:		EDUCATE OPERATING COMPANY, LLC
/s/	By:	/s/	(SEAL)
		Name: Title:
		EXECUTIVE
/s/		/s/  R. Christopher Hoehn-Saric	(SEAL)
		R. Christopher Hoehn-Saric

THE UNDERSIGNED has duly executed this Agreement, intending it as a document under seal, as of the date first above written, solely for purposes of Sections 1.1, 1.2, 3.4(e) and 3.5 hereof.

WITNESS/ ATTEST:		EDUCATE, INC.
/s/	By:	/s/	(SEAL)
		Name: Title:

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Schedule 1.2

Sterling Capital Partners

Sterling Venture Partners

Sylvan Learning Systems

Marvelous Markets Inc.

National Technological University, Inc.

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Schedule 3.2

The Company’s “EBITDA” goal for the 2003 calendar year shall be equal to Forty Million Three Hundred Thousand Dollars ($40,300,000), as appropriately adjusted from time to time by the Board in its sole discretion in the event of any acquisition, disposition or other extraordinary transaction or event affecting the Company. “EBITDA” means as to any measurement period, shall have the meaning set forth in the Credit Agreement by and among the Company, Holdings, J.P. Morgan Securities Inc. and JPMorgan Chase Bank.

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EX-10.8

Exhibit 10.8

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (“Agreement”) is made and entered into this 30th day of June, 2003 (the “Effective Date”), by and between Educate, Inc., a Delaware corporation (the “Company”), and R. Christopher Hoehn-Saric (“Indemnitee”).

WHEREAS, at the request of the Company, Indemnitee currently serves as an officer and director of the Company and its subsidiaries and may, therefore, be subjected to claims, suits or proceedings arising as a result of his service; and

WHEREAS, as an inducement to Indemnitee to continue to serve as such officer and director, the Company has agreed to indemnify and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the fullest extent permitted by law; and

WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification;

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1.    Definitions.    For purposes of this Agreement:

(a)    “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the “Act”), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities without the prior approval of at least a majority of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least a majority of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 1, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company’s stockholders was approved by a vote of at a majority of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

(b)    “Corporate Status” means the status of a person who is or was a director, trustee, officer, employee, or agent of the Company or of any other corporation, partnership, joint venture,

trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company.

(c)    “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(d)    “Effective Date” means the date set forth in the preamble.

(e)    “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

(f)    “Independent Counsel” means a law firm, or a member of a law firm, selected by the Board of Directors by vote as set forth in Section 8(b), that is experienced in matters of corporate law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(g)    “Proceeding” includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee (i) pursuant to Section 10 of this Agreement to enforce his rights under this Agreement or (ii) in violation of Section 14 of this Agreement.

Section 2.     Services by Indemnitee.    Indemnitee agrees to serve as an officer and director of the Company and its subsidiaries and may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position.

Section 3.    Indemnification – General.    The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) to the fullest extent permitted by Delaware law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided in this Section 3 shall include, but shall not be limited to, the rights set forth in the other sections of this Agreement.

Section 4.    Proceedings Other Than Proceedings by or in the Right of the Company.    Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be, made a party or witness to any threatened, pending, or completed Proceeding, other than a Proceeding by or in the right of the Company. Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with

2

a Proceeding by reason of his Corporate Status unless it is established that (i) Indemnitee failed to act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company, or (ii) in the case of any criminal Proceeding, Indemnitee had reasonable cause to believe or should have believed that his conduct was unlawful.

Section 5.     Proceedings by or in the Right of the Company.    Indemnitee shall be entitled to the rights of indemnification provided in this Section 5 if, by reason of his Corporate Status, he is made a party or witness to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 5, Indemnitee shall be indemnified against all amounts paid in settlement and all Expenses actually and reasonably incurred by him or on his behalf in connection with any such Proceeding unless it is established that (i) Indemnitee failed to act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company, or (ii) with respect to any claim, issue or matter, Indemnitee is adjudged liable to the Company, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as the Court of Chancery or such other court shall deem proper.

Section 6.     Indemnification for Expenses of a Party Who is Wholly or Partly Successful.    Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, made a party to and is successful, on the merits or otherwise, in the defense of any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 6 against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 7.     Advancement of Expenses.    To the extent permitted by applicable law, the Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding to which Indemnitee is, or is threatened to be, made a party, within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written affirmation by the Indemnitee of the Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized by law and by this Agreement has been met and a written undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that such standard of conduct has not been met or as required by Section 6 if Indemnitee is actually or partly unsuccessful.

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Section 8.    Procedure for Determination of Entitlement to Indemnification.

(a)    To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

(b)    Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case:

(i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or

(ii) if a Change of Control shall not have occurred,

(A) by the Board of Directors by a majority vote of Disinterested Directors, or

(B) if there are no such directors or if such directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or

(C) if so directed by a majority of the members of the Board of Directors, by the stockholders of the Company.

If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or Expenses (including reasonable attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

Section 9.    Presumptions and Effect of Certain Proceedings.

(a)    If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making

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such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making of any determination contrary to that presumption.

(b)    The termination of any Proceeding by judgment, order, or settlement conviction, or a plea of nolo contendere or its equivalent, does not create a presumption that the Indemnitee did not meet the requisite standard of conduct described herein for indemnification.

Section 10.    Remedies of Indemnitee.

(a)    If (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 6 of this Agreement within ten days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification, then Indemnitee shall be entitled to an adjudication in the Court of Chancery of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 6 of this Agreement.

(b)    If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 10 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(c)    If a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification.

(d)    In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and

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shall be indemnified by the Company against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

Section 11.    Non-Exclusivity; Survival of Rights; Insurance; Subrogation.

(a)    The rights of indemnification and advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the charter or Bylaws of the Company, any agreement, a vote of stockholders or a resolution of the board of directors, or otherwise.

(b)    To the extent that the Company maintains an insurance policy or policies providing liability insurance for, officers, directors, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such, officer, director, employee or agent under such policy or policies.

(c)    In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d)    The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

Section 12.    Duration of Agreement.    This Agreement shall continue until and terminate ten years after the date that Indemnitee shall have ceased to serve as a director, trustee, officer, employee, or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; provided, that the rights of Indemnitee hereunder shall continue until the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators.

Section 13.    Severability.    If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not in any way be affected or

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impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

Section 14.    Exception to Right of Indemnification or Advancement of Expenses.    Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors.

Section 15.    Identical Counterparts.    This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

Section 16.    Headings.    The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

Section 17.    Modification and Waiver.    No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

Section 18.    Notice by Indemnitee.    Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder.

Section 19.    Notices.    All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

(a)     If to Indemnitee, to: The address set forth in the signature pages hereto.

(b)     If to the Company to:

Educate, Inc.

1001 Fleet Street, 9th Floor

Baltimore, MD 21202

Attn: Board of Directors

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or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

Section 20.    Governing Law.    The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware.

Section 21.     Miscellaneous.    Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.

(Signatures Follow)

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.

ATTEST:	EDUCATE, INC.
/s/	By:	/s/  Kevin Shaffer
Secretary	Name: Kevin Shaffer Title:    Vice President

WITNESS:	INDEMNITEE
/s/	/s/  R. Christopher Hoehn-Saric
	R. Christopher Hoehn-Saric c/o Educate, Inc. 1001 Fleet Street, 9th Floor Baltimore, MD 21202

EX-10.13

Exhibit 10.13

NOMINATING AGREEMENT

This Nominating Agreement (this “Agreement”), dated as of             , 2004, by and among Educate, Inc., a Delaware corporation (the “Company”), Apollo Sylvan, LLC, a Delaware limited liability company (“Apollo Sylvan”), and Apollo Sylvan II, LLC, a Delaware limited liability company (“Apollo Sylvan II”).

WHEREAS, the Company has determined that it is in its best interests to effect an initial public offering (“IPO”) of shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”);

WHEREAS, in connection with the IPO, the Company and Apollo (as defined below) desire to enter into this Agreement setting forth certain rights and obligations with respect to the shares of Common Stock owned by Apollo.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

SECTION 1. Definitions. As used in this Agreement, the following terms shall have the following respective meanings:

(a) “Affiliate” has the meaning given to that term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

(b) “Apollo” means, Apollo Sylvan, Apollo Sylvan II, Affiliates of Apollo Sylvan and Apollo Sylvan II and any shares of Common Stock over which Apollo Sylvan, Apollo Sylvan II or any of their Affiliates have voting or dispositive power.

(c) “person” means any individual, firm, corporation, general or limited partnership, limited liability company, trust, joint venture or other entity or association, including without limitation any governmental authority, and shall include any successor (by merger or otherwise) of such entity.

(d) “Organizational Documents” means the Certificate of Incorporation and By-Laws of the Company.

SECTION 2. Board Representation.

(a) Until such time as (x) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of Common Stock outstanding at any time, and (y) Apollo (excluding any individuals who own shares of Common Stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors of the Company (the “Board

of Directors”)) has, subsequent to the IPO (and any related overallotment option), sold at least one share of Common Stock to a person that is not an Affiliate of Apollo, the Company shall support the nomination of, and cause the Board of Directors to include in the slate of nominees recommended to stockholders for election as directors, four persons (the “Apollo Designees”) designated at any time and from time to time by Apollo Management IV, L.P., a Delaware limited partnership (“Apollo Management”);

(b) Until such time as (x) Apollo no longer beneficially owns at least 50% of the total number of shares of Common Stock outstanding at any time, and (y) Apollo (excluding any individuals who own shares of Common Stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors of the Company (the “Board of Directors”)) has, subsequent to the IPO (and any related overallotment option), sold at least one share of Common Stock to a person that is not an Affiliate of Apollo:

(i) the Company shall not, and shall cause the Board of Directors not to, allow the size of the Board of Directors to be less than four or more than nine members without the prior written consent of Apollo Management; and

(ii) upon written request from Apollo Management, the Company promptly shall take all action as shall be necessary to, and shall cause the Board of Directors of the Company to, increase the size of the Board of Directors by the greater of (a) two, or (b) such greater number that will cause Apollo Designees to constitute a majority of the positions on the Board of Directors, and the Company shall cause the Board of Directors promptly to fill the vacancies created by such increase with Apollo Designees and shall, at the annual stockholder meeting following such written request from Apollo Management, support the nomination of, and cause the Board of Directors to include in the slate of nominees recommended to stockholders for election as directors, Apollo Designees to fill such vacancies (in addition to the four Apollo Designees referred to in clause (ii));

provided, however, that, notwithstanding the foregoing subsections (a) and (b), the Company shall not be required to take any action which it reasonably believes is unlawful, and the Company shall be allowed to take any action the omission of which it reasonably believes would be unlawful.

(c) Until such time as (x) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of Common Stock outstanding at any time, and (y) Apollo (excluding any individuals who own shares of Common Stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the IPO (and any related overallotment option), sold at least one share of Common Stock to a person that is not an Affiliate of Apollo, vacancies arising through the death, resignation or removal of an Apollo Designee nominated by Apollo Management to the Board of Directors pursuant to Section 2(a) hereto may be filled only by a majority of the directors nominated by Apollo Management then in office and the directors so chosen shall hold

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office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.

(d) Until such time as (x) Apollo no longer beneficially owns at least 50% of the total number of shares of Common Stock outstanding at any time and (y) Apollo (excluding any individuals who own shares of Common Stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the IPO (and any related overallotment option), sold at least one share of Common stock to a person that is not an Affiliate of Apollo, vacancies arising from an increase in the number of directors pursuant to Section 2(b)(ii) hereof may be filled only by a majority of the directors nominated by Apollo Management then in office and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal.

(e) Until this Agreement is terminated pursuant to Section 3(n) hereof, the Company shall not amend its Organizational Documents in a manner that adversely affects the rights of Apollo hereunder.

(f) Notwithstanding the provisions of this Section 2, Apollo Management shall not be entitled to designate any person as a nominee to the Board of Directors if the Company receives a written opinion of its outside legal counsel of national reputation that such person would not be qualified under any applicable law, rule or regulation to serve as a director of the Company. Other than with respect to the issue set forth in the preceding sentence, neither the Company nor any other stockholder shall have the right to object to any Apollo Designee.

The Company shall notify Apollo Management in writing of the date on which proxy materials are expected to be mailed by the Company in connection with an election of directors (and such notice shall be delivered to Apollo Management at least 30 days prior to such expected mailing date). The Company shall notify Apollo Management of any objection to an Apollo Designee sufficiently in advance of the date on which such proxy materials are to be mailed by the Company in connection with such election of directors so as to enable Apollo Management to propose a replacement Apollo Designee in accordance with the terms of this Agreement.

SECTION 3. Apollo Approval Rights.

(a) Subject to the provisions of subsection (b), without the approval of a majority of the entire Board of Directors, which must include the approval of a majority of the directors nominated by Apollo Management, the Company may not, and no subsidiary of the Company shall, take any of the actions set forth on Exhibit A hereto.

(b) The foregoing approval rights shall terminate at such time as (i) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of Common Stock outstanding at any time, and (ii) Apollo (excluding any individuals who

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own shares of Common Stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors) has, subsequent to the IPO (and any related overallotment option), sold at least one share of Common Stock to a person that is not an Affiliate of Apollo.

SECTION 4. Miscellaneous.

(a) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to its principles of conflicts of laws.

(b) Certain Adjustments. The provisions of this Agreement shall apply to the full extent set forth herein with respect to any and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution for the shares of Common Stock, by combination, recapitalization, reclassification, merger, consolidation or otherwise and the term “Common Stock” shall include all such other securities. In the event of any change in the capitalization of the Company, as a result of any stock split, stock dividend or stock combination or otherwise, the provisions of this Agreement shall be appropriately adjusted.

(c) Enforcement. The parties expressly agree that the provisions of this Agreement may be specifically enforced against each of the parties hereto in any court of competent jurisdiction.

(d) Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto.

(e) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof and supersedes all prior oral or written (and all contemporaneous oral) agreements or understandings with respect to the subject matter hereof.

(f) Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, return receipt requested, postage prepaid or otherwise delivered by hand, messenger or facsimile transmission, addressed: (a) if to Apollo or Apollo Management, c/o Apollo Management IV, L.P., 1301 Avenue of the Americas, 38th Floor, New York, New York 10019, Attention: Laurence M. Berg, with a copy (which shall not constitute notice) to Apollo Management, L.P., 10250 Constellation Blvd., Suite 2900, Los Angeles, California 90067, Attention: Michael D. Weiner, Esq., or (b) if to the Company, at 1001 Fleet Street, Baltimore, Maryland 21202, Attention: Peter Cohen, with a copy (which shall not constitute notice) to Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Suite 3400, Los Angeles, California 90071, Attention: Jeffrey H. Cohen, or at such other address as the Company shall have furnished to Apollo in writing.

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Each such notice or other communication shall for all purposes of this Agreement be treated as effective or as having been given when delivered, if delivered by hand or by messenger (or overnight courier), 24 hours after confirmed receipt if sent by facsimile transmission or at the earlier of its receipt or on the fifth day after mailing, if mailed, as aforesaid.

(g) Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party hereto upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any party, shall be cumulative and not alternative.

(h) Counterparts. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the parties hereto, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument.

(i) Severability. If any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

(j) Amendments and Waivers. The provisions of this Agreement may be amended at any time and from time to time, and particular provisions of this Agreement may be waived or modified, with and only with an agreement or consent in writing signed by the Company, Apollo Sylvan, Apollo Sylvan II and Apollo Management.

(k) Jurisdiction. The parties hereto irrevocably submit, in any legal action or proceeding relating to this Agreement, to the jurisdiction of the courts of the United States located in the State of Delaware or in any Delaware state court and consent that any such action or proceeding may be brought in such courts and waive any objection that they may now or hereafter have to the venue of such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient forum.

(l) Further Assurances. The parties agree to use their best efforts and act in good faith in carrying out their obligations under this Agreement. The parties also agree, without further consideration, to execute such further instruments and to take such further actions as may be necessary or desirable to carry.

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(m) Enforcement. The parties expressly agree that the provisions of this Agreement may be specifically enforced against each of the parties hereto in any court of competent jurisdiction. out the purposes and intent of this Agreement.

(n) Termination. This Agreement shall automatically terminate at such time as (a) Apollo no longer beneficially owns at least 33 ¹/3% of the total number of shares of Common Stock outstanding and (b) Apollo (excluding any individuals who own shares of Common Stock directly that were purchased by them or were obtained upon the exercise of options granted to them in their capacity as a member of the Board of Directors of the Company) has, subsequent to the IPO (and any related overallotment option), sold at least one share of Common Stock to a person that is not an Affiliate of Apollo; provided that Section 2(a) shall terminate as provided therein.

[Remainder of page intentionally left blank]

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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first above written.

EDUCATE, INC.

By:

Name:

Title:

APOLLO SYLVAN, LLC

By:

Name:

Title:

APOLLO SYLVAN II, LLC

By:

Name:

Title:

APOLLO MANAGEMENT IV, L.P.
By:	AIF IV Management, Inc.,
its General Partner
By:
Name: Title:

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EXHIBIT A

Apollo Approval Rights

• amendment, modification or repeal of any provision of the Organizational Documents in a manner that adversely affects Apollo;

• the redemption, purchase or acquisition of any securities of the Company or any of its subsidiaries;

• the issuance of additional shares of any class of capital stock (other than the grant of options or the issuance of shares upon the exercise of options);

• the payment or declaration of any dividend or other distribution, with respect to any shares of any class or series of capital stock;

• a consolidation or merger with or into any other entity, or transfer (by lease, assignment, sale or otherwise) of all or substantially all of the Company’s or any of its subsidiaries’ assets to another entity;

• a complete or partial liquidation, dissolution, winding-up, recapitalization, reclassification or reorganization;

• a split, combination or reclassification of any shares of capital stock;

• a disposition of any assets with a value in excess of $5 million in the aggregate;

• consummation of any acquisition of the stock or assets of any other entity involving consideration in excess of $5 million in the aggregate;

• consummation of any transaction, or amendment of the terms of any contract, agreement or understanding (whether oral or written), with any of the Company’s subsidiaries or any Affiliate of the Company;

• the incurrence of indebtedness in one transaction or a series of related transactions aggregating more than $5 million, except that Apollo approval shall not be required for borrowings greater than $5 million under a revolving line of credit, so long as Apollo has previously approved the establishment of such line of credit;

• a change in the Company’s Chief Executive Officer; and

• a change in size of the Company’s Board of Directors.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the captions “Summary Consolidated Financial Data”, “Selected Consolidated Financial Data” and “Experts” and to the use of our reports dated May 3, 2004 (except Note 15, as to which the date is August     , 2004), with respect to the consolidated financial statements and schedules of Educate, Inc. and the combined financial statements and schedule of the Laureate pre-K-12 Business (Predecessor to Educate, Inc.) in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-115496) and related Prospectus of Educate, Inc. dated June 29, 2004.

Baltimore, Maryland

June 23, 2004

The accompanying consent relates to consolidated financial statements that include the effects of a reverse stock split approved by the Company’s Board of Directors on June 29, 2004, and anticipated to be effected prior to the closing of this offering. The above consent is the form which will be signed by Ernst & Young LLP upon consummation of the reverse stock split which is described in Note 15 of the notes to the consolidated financial statements and assuming that from June 29, 2004 to the date of such reverse stock split, no other events have occurred that would effect the accompanying financial statements and notes thereto.

/s/ Ernst & Young LLP

Baltimore, Maryland

June 29, 2004

EX-24.2

Exhibit 24.2

POWER OF ATTORNEY

KNOWN ALL PERSONS BY THESE PRESENTS that the undersigned hereby constitutes, designates and appoints R. Christopher Hoehn-Saric and Peter Cohen as such person’s true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution and full power to act alone and without the other, for the undersigned and in the undersigned’s name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the registration statement on Form S-1 (File No. 333-115496) of Educate, Inc., a Delaware Corporation (“Educate”) (and any registration statement filed pursuant to Rule 462 under the Securities Act of 1933, as amended, for the offering which this registration statement relates) and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

This power of attorney shall be valid from the date hereof until revoked by the undersigned.

IN WITNESS WHEREOF, the undersigned has executed this instrument as of the 23^rd day of June 2004.

/s/ Cheryl Gordon                        

Cheryl Gordon

Director