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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



(Mark One)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | -------------------------------------------------------

SECURITIES AND EXCHANGE ACT OF 1934



For the quarter ended March 31, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934



Commission file number: 333-42530



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eSylvan, Inc.

(Exact name of registrant as specified in its charter)



|Maryland                                                       |  | 52-2257470                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|506 South Central Avenue, Baltimore,
Maryland                  |  | 21202                               
|(Address of principal executive
offices)                       |  | (ZIP Code)                          



(410)
843-2622

(Registrants telephone number, including area code)



---



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



Indicate by a chek mark whether the registrant is an accelerated filer (as defined In Exhange Act Rule
12b-2).  Yes ̈No  x



As of May 12, 2003, the registrant had 14,000,000 outstanding
shares of Common Stock and 2,517,984 outstanding shares of Class A Convertible Common Stock.



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eSylvan,
Inc.



INDEX



|               |  |                                                                                       |  | PAGE
|-------------- |  | ------------------------------------------------------------------------------------- |  | ----
|              
|PART I.        |  |                                                                                       |  |     
|              
|ITEM 1.        |  | Financial Statements (Unaudited):                                                     |  |     
|              
|               |  | Balance Sheets  March 31, 2003 and December 31, 2002                                 |  | 2   
|              
|               |  | Statements of Operations Three Months Ended March 31, 2003 and 2002                  |  | 4   
|              
|               |  | Statements of Cash Flows  Three Months Ended March 31, 2003 and 2002                 |  | 5   
|              
|               |  | Notes to Financial Statements  March 31, 2003                                        |  | 6   
|              
|ITEM 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|              
|ITEM 3.        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 14  
|              
|ITEM 4.        |  | Controls and Procedures                                                               |  | 14  
|              
|PART II.       |  |                                                                                       |  |     
|              
|ITEM 1.        |  | Legal Proceedings                                                                     |  | 15  
|              
|ITEM 2.        |  | Changes in Securities and Use of Proceeds                                             |  | 15  
|              
|ITEM 3.        |  | Defaults upon Senior Securities                                                       |  | 15  
|              
|ITEM 4.        |  | Submission of Matters to a Vote of Security Holders                                   |  | 15  
|              
|ITEM 5.        |  | Other Information                                                                     |  | 15  
|              
|ITEM 6.        |  | Exhibits and Reports on Form 8-K                                                      |  | 15  
|              
|SIGNATURES     |  | 16                                                                                   
|              
|CERTIFICATIONS |  | 17                                                                                   



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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)



eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Balance Sheets



|                                                                                                                                         |  | March 31, 2003 |            |   | December 31, 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ----------------- | -
|                                                                                                                                         |  | (Unaudited)    |            |   |                   |  
|Assets                                                                                                                                   |  |                |            |   |                   |  
|Current assets:                                                                                                                          |  |                |            |   |                   |  
|Cash                                                                                                                                     |  | $              | 38,841     |   |                   | $
|Accounts receivable, net of allowance of $49,284 and $49,844 at March 31, 2003 and
December 31, 2002, respectively                       |  |                | 125,307    |   |                   |  
|Accounts receivable from related party                                                                                                   |  |                | 73,203     |   |                   |  
|Prepaid expenses                                                                                                                         |  |                | 111,806    |   |                   |  
|Prepaid royalties to related party                                                                                                       |  |                | 319,153    |   |                   |  
|                                                                                                                                         |  |                |            |   |                   |  
|Total current assets                                                                                                                     |  |                | 668,310    |   |                   |  
|Property and equipment:                                                                                                                  |  |                |            |   |                   |  
|Furniture and equipment                                                                                                                  |  |                | 1,642,608  |   |                   |  
|Software                                                                                                                                 |  |                | 2,554,848  |   |                   |  
|Educational content                                                                                                                      |  |                | 969,427    |   |                   |  
|Leasehold improvements                                                                                                                   |  |                | 5,897      |   |                   |  
|                                                                                                                                         |  |                |            |   |                   |  
|                                                                                                                                         |  |                | 5,172,780  |   |                   |  
|Accumulated depreciation and amortization                                                                                                |  |                | (4,394,778 | ) |                   |  
|                                                                                                                                         |  |                |            |   |                   |  
|                                                                                                                                         |  |                | 778,002    |   |                   |  
|Intangible assets:                                                                                                                       |  |                |            |   |                   |  
|Participation agreements, net of accumulated amortization of $715,308 and $625,894 at
March 31, 2003 and December 31, 2002, respectively |  |                | 1,430,615  |   |                   |  
|                                                                                                                                         |  |                |            |   |                   |  
|Total assets                                                                                                                             |  | $              | 2,876,927  |   |                   | $
|                                                                                                                                         |  |                |            |   |                   |  



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Balance Sheets (continued)



|                                                                                                                                                                                                               |  | March 31, 2003 |             |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | -
|                                                                                                                                                                                                               |  | (Unaudited)    |             |   |                   |  
|Liabilities and stockholders equity
(deficit)                                                                                                                                                                 |  |                |             |   |                   |  
|Current liabilities:                                                                                                                                                                                           |  |                |             |   |                   |  
|Accounts payable and accrued expenses                                                                                                                                                                          |  | $              | 810,609     |   |                   | $
|Accrued severance costs                                                                                                                                                                                        |  |                | 255,000     |   |                   |  
|Fees payable to related party                                                                                                                                                                                  |  |                | 240,760     |   |                   |  
|Borrowings from related party                                                                                                                                                                                  |  |                | 696,160     |   |                   |  
|Deferred revenue                                                                                                                                                                                               |  |                | 325,952     |   |                   |  
|                                                                                                                                                                                                               |  |                |             |   |                   |  
|Total current liabilities                                                                                                                                                                                      |  |                | 2,328,481   |   |                   |  
|Commitments and contingent liabilities                                                                                                                                                                         |  |                |            |   |                   |  
|Stockholders equity (deficit):                                                                                                                                                                                |  |                |             |   |                   |  
|Series A Convertible Preferred Stock, par value $.001 per share20,000,000 shares
authorized, 19,052,631 and 15,473,684 shares issued and outstanding as of March 31, 2003 and December 31, 2002, respectively |  |                | 19,053      |   |                   |  
|Class A Convertible Common Stock, par value $.001 per share10,000,000 shares
authorized, 2,517,984 shares issued and outstanding as of March 31, 2003 and December 31, 2002                                   |  |                | 2,518       |   |                   |  
|Common stock, par value $.001 per shareauthorized 70,000,000 shares, 14,000,000
shares issued and outstanding as of March 31, 2003 and December 31, 2002                                                      |  |                | 14,000      |   |                   |  
|Additional paid-in capital                                                                                                                                                                                     |  |                | 40,242,915  |   |                   |  
|Accumulated deficit                                                                                                                                                                                            |  |                | (39,730,040 | ) |                   |  
|                                                                                                                                                                                                               |  |                |             |   |                   |  
|Total stockholders equity (deficit)                                                                                                                                                                           |  |                | 548,446     |   |                   |  
|                                                                                                                                                                                                               |  |                |             |   |                   |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                           |  | $              | 2,876,927   |   |                   | $
|                                                                                                                                                                                                               |  |                |             |   |                   |  



See
accompanying notes.



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Statements of Operations (Unaudited)



|                                                             |  | Three months ended March 31, |           
|------------------------------------------------------------ |  | ---------------------------- | ----------
|                                                             |  | 2003                         |           
|Revenues                                                     |  | $                            | 486,169   
|Costs and expenses                                           |  |                              |           
|Direct costs of services provided                            |  |                              | 494,019   
|Sales and marketing                                          |  |                              | 548,609   
|General and administrative                                   |  |                              | 1,526,682 
|Research and development                                     |  |                              | 322,437   
|Management services and facilities usage charges from Sylvan |  |                              | 337,338   
|                                                             |  |                              |           
|Total operating costs and expenses                           |  |                              | 3,229,085 
|                                                             |  |                              |           
|Net loss                                                     |  | $                            | (2,742,916
|                                                             |  |                              |           
|Basic and diluted loss per common share                      |  | $                            | (0.17     
|                                                             |  |                              |           



See
accompanying notes.



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Statements of Cash Flows (Unaudited)



|                                                                            |  | Three months ended March 31, |           
|--------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                            |  | 2003                         |           
|Operating activities                                                        |  |                              |           
|Net loss                                                                    |  | $                            | (2,742,916
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                              |           
|Depreciation and amortization                                               |  |                              | 286,365   
|Changes in operating assets and liabilities:                                |  |                              |           
|Accounts receivable, net                                                    |  |                              | 69,409    
|Accounts receivable from related party                                      |  |                              | (18,486   
|Prepaid expenses                                                            |  |                              | (51,023   
|Prepaid royalties to related party                                          |  |                              | 120,000   
|Accounts payable and accrued expenses                                       |  |                              | (11,519   
|Accrued severance costs                                                     |  |                              | 255,000   
|Fees payable to related party                                               |  |                              | 38,070    
|Deferred revenue                                                            |  |                              | (11,387   
|                                                                            |  |                              |           
|Net cash used in operating activities                                       |  |                              | (2,066,487
|                                                                            |  |                              |           
|Investing activities                                                        |  |                              |           
|Purchase of property and equipment                                          |  |                              |          
|Proceeds from sale of property and equipment                                |  |                              |          
|                                                                            |  |                              |           
|Net cash used in investing activities                                       |  |                              |          
|                                                                            |  |                              |           
|Financing activities                                                        |  |                              |           
|Proceeds from borrowings from related party                                 |  |                              | 1,848,461 
|Payments on line of credit with related party                               |  |                              | (6,637,630
|Sale of Series A Convertible Preferred Stock to related party               |  |                              | 6,800,000 
|                                                                            |  |                              |           
|Net cash provided by financing activities                                   |  |                              | 2,010,831 
|                                                                            |  |                              |           
|Net change in cash                                                          |  |                              | (55,656   
|Cash at beginning of period                                                 |  |                              | 94,497    
|                                                                            |  |                              |           
|Cash at end of period                                                       |  | $                            | 38,841    
|                                                                            |  |                              |           



See
accompanying notes.



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Notes to Financial Statements (Unaudited)



March 31, 2003



1. Basis of Presentation



The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States 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. Certain reclassifications have been made to historical financial statements in order to conform to current period presentation. Operating results for the three-month period ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the eSylvan, Inc. (the Company)
annual report on Form 10-K for the year ended December 31, 2002.



2. Stock Options Granted to Employees and Non-Employees



The Company records compensation expense for its stock-based compensation plan using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation (Statement No. 123) encourages companies to recognize expense for stock-based awards based on their estimated value on the date of grant. Statement No. 123 requires the
disclosure of pro forma income and earnings per share data in the notes to the financial statements if the fair value method is not elected. The Company has supplementally disclosed in the following table the required pro forma information as if the
fair value method had been elected, as required by Statement No. 123.



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Notes to Financial Statements (continued)



2. Stock Options Granted to Employees and Non-Employees (continued)



|                                                                                        |  | Three months ended March 31 |           
|--------------------------------------------------------------------------------------- |  | --------------------------- | ----------
|                                                                                        |  | 2003                        |           
|Net loss, as reported                                                                   |  | $                           | (2,742,916
|Less: Stock-based employee compensation expense as if fair value accounting was applied |  |                             | 26,136    
|                                                                                        |  |                             |           
|Pro forma net loss                                                                      |  | $                           | (2,769,052
|                                                                                        |  |                             |           
|Basic and diluted loss per share:                                                       |  |                             |           
|As reported                                                                             |  | $                           | (0.17     
|Pro forma                                                                               |  | $                           | (0.17     



The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option pricing model for the three months ended December 31, 2003 and 2002, with the following weighted average assumptions:



|Expected volatility     |  | 0.44 |      
|----------------------- |  | ---- | -----
|Risk-free interest rate |  | 4.5  | %    
|Expected lives          |  | 10   | years
|Dividend rate           |  | 0    | %    



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys 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 options.



For purposes of pro forma disclosures for employee options, the estimated fair value of the options is amortized to expense over the options vesting
period.



The Company has also granted stock options to employees
of Sylvan and Sylvan Ventures (non-employee options). The Company measures the fair value of non-employee options at the grant date using the Black-Scholes option pricing model and recognizes that fair value as a dividend to Sylvan.



The Company has 1,243,800 shares reserved for issuance under its
stock option plan.



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Notes to Financial Statements (continued)



3. Restructuring Plan



In February 2003, the Company implemented, with board of directors approval, a restructuring plan. Under the plan the employee workforce was reduced by 14
full time employees, or 33% of the full time workforce. The terminated employees were engaged in providing direct services to customers, sales and marketing, general and administrative and research and development activities. The Company paid
$80,000 in severance benefits to terminated employees in the three month period ended March 31, 2003 and accrued an additional $255,000 as general and administrative expense for severence benefits to be paid in future periods.



4. Income Taxes



The Company is a majority owned subsidiary of Sylvan Ventures, LLC
(Sylvan Ventures). Sylvan Ventures is organized as a limited liability company, and under applicable income tax regulations, is unable to utilize or pass through losses to its members resulting from its investment in the Company. For the
three month period ended March 31, 2003 and 2002, the Company has not reported an income tax benefit from operating losses because of an increase in the valuation allowance for deferred tax assets that result from the inability to determine the
realizability of the net operating loss carry forwards and other deferred tax assets.



5. Loss Per Share



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



|                                                                                |  | Three months ended March 31, |           
|------------------------------------------------------------------------------- |  | ---------------------------- | ----------
|                                                                                |  | 2003                         |           
|Net loss                                                                        |  | $                            | (2,742,916
|                                                                                |  |                              |           
|Weighted-average common and Class A common shares outstanding during the
period |  |                              | 16,517,984
|                                                                                |  |                              |           
|Shares used in computations                                                     |  |                              | 16,517,984
|                                                                                |  |                              |           
|Basic and diluted loss per common share                                         |  | $                            | (0.17     
|                                                                                |  |                              |           



Basic and diluted loss
per common share are equal because the assumed conversion of preferred stock and exercise of outstanding stock options would result in the computation being antidilutive as a result of the net loss in each period presented.



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eSylvan, Inc.

(a Subsidiary of Sylvan Ventures, LLC)



Notes to Financial Statements (Unaudited)



6. Liquidity and Capital Resources



The Company had a revolving credit facility with Sylvan Ventures under which it could borrow, through December 31, 2002, up
to $10,000,000. In light of Sylvan Ventures commitments to purchase additional shares of the Companys Preferred Stock (see below), Sylvan Ventures has continued to advance funds to the Company on the same terms as the now expired line of
credit. At March 31, 2003 and December 31, 2002, the Company had $696,160 and $5,485,329 outstanding under the line of credit, respectively.



In February 2003, the Company issued 3,578,947 additional shares of the Preferred Stock to Sylvan Ventures for a total purchase price of $6,800,000. The
Preferred Stock was issued with the same terms as the existing Preferred Stock. The Company used $6,637,630 of the proceeds to repay the line of credit with Sylvan Ventures and $162,370 to fund operations of the Company.



On March 10, 2003, Sylvan executed a definitive agreement with Apollo
Management LP to sell Sylvan Ventures equity interest in the Company. If consummated, this transaction may impact the Companys access to Sylvan management, the services provided under various management services agreements and the
ability to raise capital. The transaction, which is subject to the approval of various regulatory bodies and third parties, is expected to close in the second quarter of 2003.



On April 1, 2003, Sylvan Ventures agreed to purchase 1,155,263 additional shares of the Preferred Stock for a total purchase
price of $2,195,000. This Preferred Stock will be issued with the same terms and price as the previously issued Preferred Stock. Proceeds will be utilized to repay amounts advanced to the Company and to fund operations of the Company



The Companys operating losses, forecasted operating losses and limited
committed funding sources raise substantial doubt about the Companys ability to continue as a going concern. Management is actively pursuing the expansion of its online tutoring business and is also pursuing additional financing through Sylvan
Ventures and Educate, Inc, the expected successor owner of our preferred shares. However, there can be no assurance that the Company will be able to generate sufficient cash flow from operations or additional financing to meet its development and
operating needs, or that such financing would be available on terms acceptable to the Company.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



All statements contained herein that are not historical facts, including but not limited to the Companys future development plans
and future capital requirements, are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Factors that could cause actual results to
differ materially include the following: the reliability of our technology, our efforts to establish, maintain and strengthen the eSylvan brand, consumer acceptance of online tutoring, our ability to secure additional financing and other risk
factors described in the Companys reports filed from time to time with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.



The Company delivers supplemental education to families and children through a variety of applications on the Internet. From October 1,
1999 (date of inception) through December 31, 2001, the Company was a development stage business. The Companys lack of an operating history makes it difficult to evaluate its business and prospects. The Companys results of operations and
future prospects should be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies dependent upon the relatively new and rapidly evolving Internet
environment.



On March 10, 2003, Sylvan
Learning Systems, Inc. (Sylvan) announced that it will focus exclusively on its international and online university business by selling its K-12 education operating units and disbanding Sylvan Ventures. Under the pending transaction,
substantially all of the Sylvan Learning Center and Sylvan Education Solutions divisions of Sylvan, the ownership interest in eSylvan held by Sylvan Ventures and certain other Sylvan assets will be sold to Educate, Inc., a newly formed entity
associated with Apollo Management LP. Additionally, Sylvan Ventures will be disbanded. We cannot predict how this transaction, if consummated, will impact our business, particularly our access to Sylvan management, the services provided to us by
Sylvan under various management services agreements or our ability to obtain the working capital and /or equity capital we will need to continue to operate our business.



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This transaction, which is subject to the approval of various regulatory bodies and third parties, is
expected to close in the second quarter of 2003.



Results of
Operations



Comparison of results for the three months
ended March 31, 2003 to results for the three months ended March 31, 2002



The Company incurred net losses of $2.7 million and $3.3 million for the three months ended March 31, 2003 and 2002, respectively. The net loss for the three months ended March 31, 2003 includes $0.3
million of incurred and accrued severance costs related to a restructuring plan implemented in February 2003. Under the plan we expect to reduce the size of our annual operating loss and cash flow requirements by enrolling and servicing fewer
students in 2003 than we did in 2002, by enrolling and servicing those students on a more economical basis and by reducing our personnel and other overhead costs. By reducing our enrollments and the number of students enrolled and served in 2003, we
believe we can develop certain software applications and operational processes that will enable us to operate more efficiently as we increase enrollments in the future.



Revenues for the three months ended March 31, 2003 declined 6% to $486,169 from $516,184 for the three months
ended March 31, 2002 as a result of lower enrollments in the current period versus last year. The 56% decline in enrollments and related assessment and registration revenue was offset by an 11% increase in tutoring revenue.



During the three months ended March 31, 2003, total operating
costs and other expenses decreased by $0.6 million, or 14%, to $3.2 million from $3.8 million for the three months ended March 31, 2002.



Direct costs of services provided for the three months ended March 31, 2003 decreased 1% to $494,019 from $498,636 for the three months
ended March 31, 2002. In both periods, direct costs of services provided consisted primarily of labor for instructional, technical and operations support.



Sales and marketing expenses decreased by $0.3 million, or 32%, to $0.5 million for the three months ended March 31, 2003, from $0.8
million for the three months ended March 31, 2002. The decrease in sales and marketing expenses was due to the Companys increased focus on utilizing customer acquisition channels that were more efficient than those utilized in the prior year.
The Company incurs sales and marketing costs for media and marketing campaigns and for establishing and growing the eSylvan brand.



General and administrative expenses decreased 7%, to $1.5 million for the three months ended March 31, 2003, from $1.6 million for the
three months ended March 31, 2002. A decrease in depreciation and amortization expense of $0.3 million was partially



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offset by $0.3 million of severance costs recognized in the three months ended March 31, 2003 in
conjunction with Companys restructuring plan. The company terminated 14 of its full-time personnel, or 33% of total full-time personnel in February 2003. General and administrative expenses consist of personnel costs, professional fees,
maintenance expenses, depreciation and other expenses.



Research and development expenses decreased 26%, to $0.3 million for the three months ended March 31, 2003, from $0.4 million for the three months ended March 31, 2002. The decrease in research and development expenses resulted from
the need for less intensive development of our on-line tutoring technical infrastructure in the 2003 period versus the 2002 period.



Management services and facilities usage charges from Sylvan decreased by $46,000, or 12%, to $0.3 million for the three months ended
March 31, 2003, from $0.4 million for the three months ended March 31, 2002. Under the Companys services agreement with Sylvan, Sylvan provides management services, information systems support services, corporate accounting services, database
management services, human resources and payroll services, general liability insurance and legal services to the Company.



The Company incurred no interest expense for the three months ended March 31, 2003 or for the three months ended March 31, 2002 because
Sylvan Ventures did not charge us interest on amounts advanced to us by Sylvan Ventures.



Liquidity and Capital Resources



The Company used net cash in its operating activities for the three months ended March 31, 2003 of $2.1 million, primarily to fund the $2.5 million loss before depreciation and amortization, compared to net cash used of $2.5 million
in the three months ended March 31, 2002. There were no capital expenditures for the three months ended March 31, 2003, compared to capital expenditures for the three months ended March 31, 2002 of $0.1 million for computer software.



The Company had a revolving credit facility with Sylvan
Ventures that expired on December 31, 2002, under which the Company could borrow up to $10.0 million. However, in light of Sylvan Ventures commitments to purchase addition shares of the Companys Preferred Stock (see below), Sylvan
Ventures has continued to advance funds to the Company on the same terms as the now expired line of credit.



In February 2003, the Company issued 3,578,947 shares of the Preferred Stock to Sylvan Ventures for an aggregate purchase price of $6.8
million. The Company used $6.6 million of the proceeds to repay the then outstanding balance under the line of credit with Sylvan Ventures.



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In April 2003,
Sylvan Ventures agreed to purchase 1,155,263 additional shares of Preferred Stock for a total purchase price of $2,195,000. This Preferred Stock will be issued with the same terms and price as the previously issued Preferred Stock. These shares are
expected to be issued in multiple closings through May 2003.



The Company expects to incur significant negative cash flow from operations for the foreseeable future. The Company believes that the $2.2 million committed by Sylvan Ventures will satisfy its cash requirements through May 2003. The
Company does not expect that its current resources will be sufficient to support its growth and operations until it becomes profitable. Since its founding, the Company has relied upon Sylvan and Sylvan Ventures for the capital necessary to operate
the Companys business. The Company cannot predict whether Educate, Inc. will continue to provide the necessary capital to the Company following Educate, Incs purchase of Sylvans K-12 education operating units. Therefore, the
Company cannot be certain that it will be able to raise additional funds as needed, or, if it can, that it will be able to do so on terms that it deems acceptable. In particular, potential third party investors may be unwilling to invest in the
Company due to Sylvan Ventures, or its successor companys, voting control. The Company is unable to predict the amount of additional financing it will need because the amount is substantially dependent upon the Companys success in
implementing its business plan, including its marketing and advertising efforts and a variety of factors outside the Companys control, such as unexpected technical difficulties with the on-line tutoring infrastructure and other factors
discussed in the Companys most recent Form 10-K filed with the Securities and Exchange Commission. The Companys failure to obtain the funds necessary to establish and grow its business will have a material adverse effect on the business
and the Companys ability to generate and grow revenues. If the Company raises funds through the issuance of equity or equity-related securities, these securities will likely have rights, preferences or privileges senior to those of the rights
of the Companys Common Stock, and current holders of the Common Stock will experience dilution, which may be substantial.



The Companys current and projected operating losses and limited committed funding raise substantial doubt about its ability to
continue as a going concern. The Companys financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may
result from the outcome of this uncertainty.



Effects of Inflation



Inflation
has not had a material effect on the Companys revenues and expenses since inception on October 1, 1999. Inflation is not expected to have a material future effect for the foreseeable future.





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Seasonality in Results of Operations



The Company experiences seasonality in its results of
operations primarily as a result of quarterly fluctuations in the level of student enrollments. The strongest operating results are achieved in the third quarter of the year when we expect to deliver our highest tutoring session volume, while our
marketing and student acquisition expenses are lowest given that the third quarter has been our weakest enrollment quarter. The aforementioned seasonality trend is based upon our very limited operating experience and may not be indicative of actual
operating results, particularly as student enrollments increase or decrease dramatically. Revenues and profits in any period will not necessarily be indicative of results in subsequent periods.



ITEM 3. QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from the changes in the price of financial instruments. The Companys operations are
exclusively in the United States and have been funded exclusively by Sylvan without an interest charge. Therefore, the Company currently has no direct exposure to financial market risks, as we have no exposure to fluctuations in foreign currency
exchange rates, interest rates, equity prices or investment values.



ITEM 4. CONTROLS AND PROCEDURES



As of May 2, 2003 (the Evaluation Date), an evaluation was performed under the supervision and with the participation of the Companys management, including the CEO and Treasurer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. Based on that evaluation, the Companys management, including its CEO and Treasurer, concluded that the Companys disclosure controls and procedures were effective as
of the Evaluation Date to ensure that information required to be disclosed in the reports that the Company files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. There have
been no significant changes in the Companys internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date and no corrective actions with regard to significant deficiencies and
material weaknesses.



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PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



See Note 6 to Notes to Financial Statements (unaudited) filed with this Form 10-Q, which is incorporated herein by reference.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



ITEM 5. OTHER INFORMATION



The Company has filed with the Securities and Exchange Commission the certifications of its principal executive officer and principal financial officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (the Act)
as an exhibit to this Quarterly Report on Form 10-Q. The Certifications required by Section 302 of the Act are included as part of this Quarterly Report on Form 10-Q.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



|    
|----
|99.1
|    
|99.2





(b) Reports on Form 8-K



The Company did not file any reports on Form 8-K during the three months ended March 31, 2003.



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SIGNATURES



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



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|Date: May 14, 2003
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|                  
|Date: May 14, 2003
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|Date: May 14, 2003
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Certification of principal executive officer:



I, R. Christopher Hoehn-Saric, certify, as required by Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:



1. I have reviewed this quarterly report on Form 10-Q of eSylvan, Inc.;



2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4. The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this
quarterly report; and



c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the
registrants board of directors (which performs the equivalent function):



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officer and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.



May 14,
2003



/s/    R. CHRISTOPHER
HOEHN-SARICR. Christopher Hoehn-Saric Chairman and Chief Executive Officer (principal
executive officer)




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Certification of principal financial officer:



I, B. Lee McGee, certify, as required by Section 302 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350), that:



1. I have reviewed this
quarterly report on Form 10-Q of eSylvan, Inc.;



2. Based on my
knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;



3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;



4. The
registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;



5. The registrants other certifying
officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the registrants board of directors (which performs the equivalent function):



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and



6. The
registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



May 14, 2003



/s/    B. LEE MCGEEB. Lee McGee Senior Vice President and Treasurer (principal financial
officer)