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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 June 30, 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 August 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June 30, 2003 and December 31, 2002                                    |  | 2   
|           |  |                                                                                      
|           |  | Statements of OperationsThree Months Ended June 30, 2003 and 2002                    |  | 4   
|           |  |                                                                                      
|           |  | Statements of OperationsSix Months Ended June 30, 2003 and 2002                      |  | 5   
|           |  |                                                                                      
|           |  | Statements of Cash FlowsSix Months Ended June 30, 2003 and 2002                      |  | 6   
|           |  |                                                                                      
|           |  | Notes to Financial StatementsJune 30, 2003                                           |  | 7   
|           |  |                                                                                      
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|           |  |                                                                                      
|ITEM 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 16  
|           |  |                                                                                      
|ITEM 4.    |  | Controls and Procedures                                                               |  | 16  
|           | 
|PART II.   |  |                                                                                      
|           |  |                                                                                      
|ITEM 1.    |  | Legal Proceedings                                                                     |  | 17  
|           |  |                                                                                      
|ITEM 2.    |  | Changes in Securities and Use of Proceeds                                             |  | 17  
|           |  |                                                                                      
|ITEM 3.    |  | Defaults upon Senior Securities                                                       |  | 17  
|           |  |                                                                                      
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 17  
|           |  |                                                                                      
|ITEM 5.    |  | Other Information                                                                     |  | 17  
|           |  |                                                                                      
|ITEM 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 17  
|           | 
|SIGNATURES |  | 18                                                                                   



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##### Table of Contents

|ITEM 1. |  | FINANCIAL STATEMENTS (UNAUDITED)
|------- |  | --------------------------------



eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Balance Sheets



|                                                                                                                                        |  | June 30, 2003 |            |   | December 31,2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | -
|                                                                                                                                        |  | (Unaudited)   |            |   |                  |  
|Assets                                                                                                                                  |  |               |            |   |                  |  
|Current assets:                                                                                                                         |  |               |            |   |                  |  
|Cash                                                                                                                                    |  | $             | 7,694      |   |                  | $
|Accounts receivable, net of allowance of $50,693and $49,844 at June 30, 2003 and December 31, 2002, respectively                        |  |               | 124,415    |   |                  |  
|Accounts receivable from related party                                                                                                  |  |               |           |   |                  |  
|Prepaid expenses                                                                                                                        |  |               | 84,316     |   |                  |  
|Prepaid royalties to related party                                                                                                      |  |               | 199,153    |   |                  |  
|                                                                                                                                        |  |               |            |   |                  |  
|Total current assets                                                                                                                    |  |               | 415,578    |   |                  |  
|Property and equipment:                                                                                                                 |  |               |            |   |                  |  
|Furniture and equipment                                                                                                                 |  |               | 1,653,314  |   |                  |  
|Software                                                                                                                                |  |               | 2,918,552  |   |                  |  
|Educational content                                                                                                                     |  |               | 969,427    |   |                  |  
|Leasehold improvements                                                                                                                  |  |               | 5,897      |   |                  |  
|                                                                                                                                        |  |               |            |   |                  |  
|                                                                                                                                        |  |               | 5,547,190  |   |                  |  
|Accumulated depreciation and amortization                                                                                               |  |               | (4,584,470 | ) |                  |  
|                                                                                                                                        |  |               |            |   |                  |  
|                                                                                                                                        |  |               | 962,720    |   |                  |  
|Intangible assets:                                                                                                                      |  |               |            |   |                  |  
|Participation agreements, net of accumulated amortization of $804,721 and $625,894 at June 30, 2003 and December 31, 2002,
respectively |  |               | 1,341,202  |   |                  |  
|                                                                                                                                        |  |               |            |   |                  |  
|Total assets                                                                                                                            |  | $             | 2,719,500  |   |                  | $
|                                                                                                                                        |  |               |            |   |                  |  



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eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Balance Sheets (continued)



|                                                                                                                                                                                                              |  | June 30, 2003 |             |   | December 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | -
|                                                                                                                                                                                                              |  | (Unaudited)   |             |   |                  |  
|Liabilities and stockholders equity (deficit)                                                                                                                                                                |  |               |             |   |                  |  
|Current liabilities:                                                                                                                                                                                          |  |               |             |   |                  |  
|Accounts payable and accrued expenses                                                                                                                                                                         |  | $             | 878,493     |   |                  |  
|Accrued severance costs Fees payable to related party                                                                                                                                                         |  |               | 154,079    |   |                  |  
|Borrowings from related party                                                                                                                                                                                 |  |               |            |   |                  |  
|Deferred revenue                                                                                                                                                                                              |  |               | 296,033     |   |                  |  
|                                                                                                                                                                                                              |  |               |             |   |                  |  
|Total current liabilities                                                                                                                                                                                     |  |               | 1,328,605   |   |                  |  
|Commitments and contingent liabilities                                                                                                                                                                        |  |               |            |   |                  |  
|Stockholders equity (deficit):                                                                                                                                                                               |  |               |             |   |                  |  
|Series A Convertible Preferred Stock, par value $.001 per share30,000,000 shares authorized, 20,332,515 and 15,473,684
shares issued and outstanding as of June 30, 2003 and December 31, 2002, respectively |  |               | 20,333      |   |                  |  
|Class A Convertible Common Stock, par value $.001 per share10,000,000 shares authorized, 2,517,984 shares issued and
outstanding as of June 30, 2003 and December 31, 2002                                   |  |               | 2,518       |   |                  |  
|Common stock, par value $.001 per shareauthorized 60,000,000 shares, 14,000,000 shares issued and outstanding as of June 30,
2003 and December 31, 2002                                                      |  |               | 14,000      |   |                  |  
|Additional paid-in capital                                                                                                                                                                                    |  |               | 42,673,414  |   |                  |  
|Accumulated deficit                                                                                                                                                                                           |  |               | (41,319,370 | ) |                  |  
|                                                                                                                                                                                                              |  |               |             |   |                  |  
|Total stockholders equity (deficit)                                                                                                                                                                          |  |               | 1,390,895   |   |                  |  
|                                                                                                                                                                                                              |  |               |             |   |                  |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                          |  | $             | 2,719,500   |   |                  | $
|                                                                                                                                                                                                              |  |               |             |   |                  |  



See accompanying
notes.



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eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Statements of Operations (Unaudited)



|                                                 |  | Three months ended June 30, |           
|------------------------------------------------ |  | --------------------------- | ----------
|                                                 |  | 2003                        |           
|Revenues                                         |  | $                           | 487,023   
|Costs and expenses                               |  |                             |           
|Direct costs of services provided                |  |                             | 392,054   
|Sales and marketing                              |  |                             | 85,874    
|General and administrative                       |  |                             | 1,137,042 
|Research and development                         |  |                             | 208,185   
|Management services and facilities usage charges |  |                             | 253,198   
|                                                 |  |                             |           
|Total operating costs and expenses               |  |                             | 2,076,353 
|                                                 |  |                             |           
|Net loss                                         |  | $                           | (1,589,330
|                                                 |  |                             |           
|Basic and diluted loss per common share          |  | $                           | (0.10     
|                                                 |  |                             |           



See accompanying
notes.



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eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Statements of Operations (Unaudited)



|                                                 |  | Six months ended June 30, |           
|------------------------------------------------ |  | ------------------------- | ----------
|                                                 |  | 2003                      |           
|Revenues                                         |  | $                         | 973,192   
|Costs and expenses                               |  |                           |           
|Direct costs of services provided                |  |                           | 886,073   
|Sales and marketing                              |  |                           | 634,484   
|General and administrative                       |  |                           | 2,663,724 
|Research and development                         |  |                           | 530,622   
|Management services and facilities usage charges |  |                           | 590,535   
|                                                 |  |                           |           
|Total operating costs and expenses               |  |                           | 5,305,438 
|                                                 |  |                           |           
|Net loss                                         |  | $                         | (4,332,246
|                                                 |  |                           |           
|Basic and diluted loss per common share          |  | $                         | (0.26     
|                                                 |  |                           |           



See accompanying
notes.



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eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Statements of Cash Flows (Unaudited)



|                                                                            |  | Six months ended June 30, |           
|--------------------------------------------------------------------------- |  | ------------------------- | ----------
|                                                                            |  | 2003                      |           
|Operating activities                                                        |  |                           |           
|Net loss                                                                    |  | $                         | (4,332,246
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |           
|Depreciation and amortization                                               |  |                           | 565,470   
|Non-cash compensation expense                                               |  |                           |          
|Changes in operating assets and liabilities:                                |  |                           |           
|Accounts receivable, net                                                    |  |                           | 70,301    
|Accounts receivable from related party                                      |  |                           | 54,717    
|Prepaid expenses                                                            |  |                           | (23,533   
|Prepaid royalties to related party                                          |  |                           | 240,000   
|Accounts payable and accrued expenses                                       |  |                           | 56,365    
|Accrued severance costs                                                     |  |                           | 154,079   
|Fees payable to related party                                               |  |                           | (202,690  
|Deferred revenue                                                            |  |                           | (41,306   
|                                                                            |  |                           |           
|Net cash used in operating activities                                       |  |                           | (3,458,843
|                                                                            |  |                           |           
|Investing activities                                                        |  |                           |           
|Purchase of property and equipment                                          |  |                           | (374,410  
|Proceeds from sale of property and equipment                                |  |                           |          
|                                                                            |  |                           |           
|Net cash used in investing activities                                       |  |                           | (374,410  
|                                                                            |  |                           |           
|Financing activities                                                        |  |                           |           
|Proceeds from borrowings from related party                                 |  |                           | 3,584,080 
|Payments on line of credit with related party                               |  |                           | (9,069,409
|Sale of Series A Convertible Preferred Stock to related party               |  |                           | 9,231,779 
|                                                                            |  |                           |           
|Net cash provided by financing activities                                   |  |                           | 3,746,450 
|                                                                            |  |                           |           
|Net change in cash                                                          |  |                           | (86,803   
|Cash at beginning of period                                                 |  |                           | 94,497    
|                                                                            |  |                           |           
|Cash at end of period                                                       |  | $                         | 7,694     
|                                                                            |  |                           |           



See accompanying
notes.



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eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Notes to Financial Statements (Unaudited)



June 30, 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 six month period ended June 30, 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.



On June 30, 2003, Sylvan Learning Systems, Inc. (Sylvan) completed the sale of
its K-12 education operating units. Under the transaction, Sylvans ownership interest in the Company, along with certain other Sylvan assets, were sold to Educate Operating Company LLC (Educate), a wholly owned subsidiary of
Educate Inc. To consummate the transaction, Educate purchased from Sylvan Ventures LLC, (Sylvan Ventures) a majority owned subsidiary of Sylvan, 13,857,143 shares of the Companys common stock and 20,332,515 shares of the
Companys Series A Preferred Stock. Educate now owns 83.89% and 100% of the outstanding common and series A preferred stock, respectively, of the Company.



Educate is currently in the process of determining the fair market value of the assets and liabilities it acquired from Sylvan of each specific entity. As of
June 30, 2003, the determination of the amount of the purchase price allocable to the assets and liabilities of the Company has not been completed. Upon the completion of the determination of the amount of the purchase price allocable to the
Companys net assets, the identifiable assets and liabilities of the Company will be remeasured at fair value, with any excess reported as goodwill. Management expects to complete this assessment by September 30, 2003.



|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 Educate, Inc.)



Notes to Financial Statements (continued)



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



|                                                                                       |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|-------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | -
|                                                                                       |  | 2003                        |            |   | 2002                      |  
|Net loss, as reported                                                                  |  | $                           | (1,589,330 | ) |                           | $
|Less stock-based employee compensation expense as if fair value accounting was applied |  |                             | (28,120    | ) |                           |  
|                                                                                       |  |                             |            |   |                           |  
|Pro forma net loss                                                                     |  | $                           | (1,617,450 | ) |                           | $
|                                                                                       |  |                             |            |   |                           |  
|Basic and diluted loss per share:                                                      |  |                             |            |   |                           |  
|As reported                                                                            |  | $                           | (0.10      | ) |                           | $
|Pro forma                                                                              |  | $                           | (0.10      | ) |                           | $



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 measured the fair value of non-employee options at the grant date using the Black-Scholes option pricing model and recognized that fair value as a dividend to Sylvan through June 30, 2003.



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



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eSylvan, Inc.

(a Subsidiary of Educate, Inc.)



Notes to Financial Statements (continued)



|3. |  | Restructuring Plan
|-- |  | ------------------



In February 2003, the Company initiated, 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. Under the restructuring plan, which was completed in May 2003, the Company paid
$200,300 and $280,900 in severance benefits to terminated employees in the three month and six month periods ended June 30, 2003, respectively. In the three and six month periods ended June 30, 2003, general and administrative expense included
$100,000 and $435,000 for severence benefits paid and to be paid, respectively.



|4. |  | Income Taxes
|-- |  | ------------



Through June 30, 2003 the Company was a majority owned subsidiary of 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 six month periods ended June 30, 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 June 30, |            |   | Six months ended June 30, |  
|------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | -
|                                                                                |  | 2002                        |            |   | 2001                      |  
|Net loss                                                                        |  | $                           | (1,589,330 | ) |                           | $
|                                                                                |  |                             |            |   |                           |  
|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                                         |  | $                           | (0.10      | ) |                           | $
|                                                                                |  |                             |            |   |                           |  



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 Educate, Inc.)



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 and to sell its shares to Educate, Inc., Sylvan Ventures has continued to advance funds to the Company on the same terms as the now expired line of
credit. At December 31, 2002, the Company had $5,485,329 outstanding under the line of credit.



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.



In June 2003, the Company issued 1,279,884 additional shares of the Preferred Stock to Sylvan Ventures for a total purchase price of $2,431,779. The Preferred Stock was
issued with the same terms as the existing Preferred Stock. The Company used the proceeds to repay amounts advanced to the Company by Sylvan Ventures.



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 Educate, Inc. While the Company anticipates continued funding from Educate, Inc., at least
through the end of 2003, 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 June 30, 2003, Sylvan Learning Systems, Inc. (Sylvan) completed the sale of its K-12 education operating units. Under the transaction, the
Sylvan Learning Center and Sylvan Education Solutions divisions of Sylvan, the ownership interest in eSylvan and other assets were sold to Educate Operating Co., LLC, a wholly owned subsidiary of Educate, Inc.,. Under these transactions, Educate
Operating Co., LLC purchased from Sylvan Ventures, a majority owned subsidiary of Sylvan, 13,857,143 shares of Common Stock of eSylvan, Inc. and 20,332,515 shares of Series A Preferred Stock of eSylvan, Inc Educate Operating Co., LLC now owns 83.89%
and 100% of the outstanding Common Stock and Series A Preferred Stock of eSylvan, Inc., respectively. We cannot predict how this transaction will impact our business. However, we expect to have access to management resources we need and to the
services previously provided to us by Sylvan under various management services agreements. While we anticipate continued funding from Educate Inc. at least through the end of 2003, there can be no assurance that we will be able to obtain the working
capital and/or equity capital we will need to continue to operate our business on a longer term basis.



Results of Operations



Comparison of
results for the three months ended June 30, 2003 to results for the three months ended June 30, 2002



The Company incurred net losses of $1.6 million and $3.2 million for the three months ended June 30, 2003 and 2002, respectively. The net loss for the
three months



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ended June 30, 2003 includes $0.1 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 June 30, 2003 declined 33% to $0.5 million from $0.7 million for the three months ended June 30, 2002 as a result of a 64% decline in enrollments and related assessment and
registration revenue and a 22% decline in tutoring revenue.



During the three months ended June 30, 2003, total operating costs and other expenses decreased by $1.9 million, or 48%, to $2.1 million from $4.0 million for the three months ended June 30, 2002.



Direct costs of services provided for the three months ended June 30, 2003
decreased 41% to $0.4 million from $0.7 million for the three months ended June 30, 2002. In both periods, direct costs of services provided consisted primarily of labor for instructional, technical and operations support. The decline was
attributable to a 29% decline in the number of tutoring sessions delivered as well as an increase in efficiency in delivering sessions.



Sales and marketing expenses decreased by $0.8 million, or 91%, to $0.1 million for the three months ended June 30, 2003, from $0.9 million for the three
months ended June 30, 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 and an overall reduction
in the number of students we sought to enroll in the three month period ended June 30, 2003. 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 by $0.5 million, or 30%, to
$1.1 million for the three months ended June 30, 2003, from $1.6 million for the three months ended June 30, 2002. A decrease in depreciation and amortization expense of $0.4 million was partially offset by $0.1 million of severance costs recognized
in the three months ended June 30, 2003 in conjunction with Companys restructuring plan. The remainder of the decline in general and administrative expenses was in result of lower costs after implementing our 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 by 50%, to $0.2 million for the
three months ended June 30, 2003, from $0.4 million for the three months ended June 30, 2002. The decrease in research and development expenses resulted from the need for less



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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 $84,437, or 25%, to $253,198 for the three months ended June 30, 2003, from $337,635 for the three months ended June 30, 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. Sylvan and Educate, Inc. have agreed to provide these
services to the Company on the same terms as previously provided.



The Company incurred no interest expense for the three months ended June 30, 2003 or for the three months ended June 30, 2002 because Sylvan Ventures did not charge interest on amounts advanced.



Comparison of results for the six months ended June 30, 2003 to results for the six months
ended June 30, 2002



The Company incurred net losses of
$4.3 million and $6.5 million for the six months ended June 30, 2003 and 2002, respectively. The net loss for the six months ended June 30, 2003 includes $0.4 million of incurred and accrued severance costs related to a restructuring plan
implemented in February 2003.



Revenues for the six months
ended June 30, 2003 declined 22% to $1.0 million from $1.2 million for the six months ended June 30, 2002 as a result of a 63% decline in enrollments and related assessment and registration revenue and an 8% decline in tutoring revenue.



During the six months ended June 30, 2003, total operating costs and other
expenses decreased by $2.4 million, or 33%, to $5.3 million from $7.7 million for the six months ended June 30, 2002.



Direct costs of services provided for the six months ended June 30, 2003 decreased 24% to $0.9 million from $1.2 million for the six months ended June 30,
2002. The decline was attributable to a 10% decline in the number of tutoring sessions delivered as well as an increase in efficiency in delivering sessions.



Sales and marketing expenses decreased by $1.1 million, or 63%, to $0.6 million for the six months ended June 30, 2003, from $1.7 million for the six
months ended June 30, 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 along with an overall
reduction in the number of students we sought to enroll.



General and administrative expenses decreased by $0.6 million, or 19%, to $2.7 million for the six months ended June 30, 2003, from $3.3 million for the six months ended June 30, 2002. A decrease in depreciation and amortization expense of
$0.7



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million was partially offset by $0.4 million of severance costs recognized in the six months ended June 30, 2003 in
conjunction with Companys restructuring plan.



Research
and development expenses decreased by 38%, to $0.5 million for the six months ended June 30, 2003, from $0.9 million for the six months ended June 30, 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 decreased by $0.1 million, or 18%, to $0.6 million for the six months ended June 30, 2003, from $0.7
million for the six months ended June 30, 2002.



The Company
incurred no interest expense for the six months ended June 30, 2003 or for the six months ended June 30, 2002 because Sylvan Ventures did not charge interest on amounts advanced to us.



Liquidity and Capital Resources



The Company used net cash in its operating activities for the six months ended June 30, 2003 of $3.5 million, primarily to fund the $3.8 million loss
before depreciation and amortization, compared to net cash used of $4.9 million in the six months ended June 30, 2002. The Company capitalized $0.4 million of software development costs during the six months ended June 30, 2003, compared to capital
expenditures for the six months ended June 30, 2002 of $0.2 million for computer software.



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.



In June 2003, the Company issued 1,279,884 shares of the Preferred Stock to Sylvan Ventures for an aggregate purchase price of $2,431,779. The Company used the proceeds to repay amounts advanced to the Company by Sylvan Ventures.



The Company expects to incur significant negative cash flow
from operations for the foreseeable future. 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 its investors for
the capital necessary to operate the Companys business. While the Company expects Educate, Inc. to fund the Companys operations at least through the end of 2003, we cannot predict whether Educate, Inc. will continue to provide the
necessary capital to the Company on a longer term basis.



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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 Educate, Inc.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.



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.



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|ITEM 3. |  | QUANTITATIVE 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 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 August 4, 2003 (the Evaluation Date), an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, 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 Chief Executive Officer and Chief Financial Officer, 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
| | --- |  | --------



31.1Certification of principal executive offices under Section 302 of Sarbanes-Oxley Act of 2002.



31.2Certification of principal financial offices under Section 302 of Sarbanes-Oxley Act of 2002.



32.1Certification of principal executive officer under Section 906 of
Sarbanes-Oxley Act of 2002.



32.2Certification of
principal financial officer under Section 906 of Sarbanes-Oxley Act of 2002.



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



The Company did not file any reports on Form 8-K during the three months ended June 30, 2003. However, a Form 8-K was filed July 15, 2003 regarding the
sale of Sylvans K-12 business to Educate, Inc.



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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.



|                      |  | ESYLVAN, INC.                                                                                
|--------------------- |  | ---------------------------------------------------------------------------------------------
|                      | 
|Date: August 14, 2003 |  | /s/    R. CHRISTOPHER
HOEHN-SARIC                                                            
|                      |  | R. Christopher Hoehn-Saric Chairman and Chief Executive Officer (principal executive officer)
|                      | 
|Date: August 14, 2003 |  | /s/    KEVIN E. SHAFFER                                                                      
|                      |  | Kevin E. Shaffer Chief Financial Officer (principal financial officer)                       
|                      | 
|Date: August 14, 2003 |  | /s/    GLENN F. MCAVOY                                                                       
|                      |  | Glenn F. McAvoy Vice PresidentFinance (principal accounting officer)                        



|
|



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