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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                                   (Mark One)

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 2001

                 ----------------------------------------------
                                       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)

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<S>                                                               <C>
                               Maryland                             52-2257470
 -------------------------------------------------------------------------------
 (State or other jurisdiction of incorporation or organization)    (I.R.S. Employer
                                                                  Identification No.)
</TABLE>

               506 South Central Avenue, Baltimore, Maryland 21202
            --------------------------------------------------------
               (Address of principal executive offices) (ZIP Code)

                                 (410) 843-2622
          ------------------------------------------------------------
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

                                           Name Of Each Exchange
                     Title Of Each Class   On Which Registered
                     -------------------   -------------------
                            None                  None

        Securities registered pursuant to Section 12(g) of the Act: None

     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 check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

     On March 25, 2002, the aggregate value of the voting stock held by
non-affiliates of the Registrant, based upon the price at which the Common Stock
was sold, was none (affiliates being, for these purposes only, directors,
executive officers and holders of more than 5% of the Registrant's Common
Stock.)

     As of March 25, 2002, the registrant had 14,000,000 outstanding shares of
Common Stock and 2,452,484 outstanding shares of Class A Convertible Common
Stock.

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                                  ESYLVAN, INC.

                         2001 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

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PART I.                                                                                                PAGE
<S>                                                                                                    <C>
ITEM 1.    Business ..................................................................................    3

ITEM 2.    Properties ................................................................................   17

ITEM 3.    Legal Proceedings .........................................................................   18

ITEM 4.    Submission of Matters to a Vote of Securities Holders .....................................   18

PART II.

ITEM 5.    Market for the Registrant's Common Equity and Related Stockholder Matters .................   18

ITEM 6.    Selected Financial Data ...................................................................   18

ITEM 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations .................................................................   20

ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk ................................   24

ITEM 8.    Financial Statements and Supplementary Data ...............................................   25

ITEM 9.    Changes In and Disagreements with Accountants and Accounting
           and Financial Disclosure ..................................................................   25

PART III.

ITEM 10.   Directors and Executive Officers of the Registrant ........................................   25

ITEM 11.   Executive Compensation ....................................................................   27

ITEM 12.   Security Ownership of Certain Beneficial Owners and Management ............................   31

ITEM 13.   Certain Relationships and Related Transactions ............................................   31

PART IV.

ITEM 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K ...........................   34
</TABLE>

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                                     PART I.

ITEM 1:   BUSINESS

Overview

     eSylvan, Inc., (the Company") was incorporated by Sylvan Learning Systems,
Inc. ("Sylvan") on February 3, 2000 under the laws of the state of Maryland for
the purpose of delivering high quality supplemental education programs to
students through internet-based applications. Prior to incorporation and upon
inception on October 1, 1999, the Company operated as an unincorporated division
of Sylvan. On June 30, 2000, Sylvan contributed substantially all of its
ownership in the Company to a newly formed majority-owned subsidiary of Sylvan,
Sylvan Ventures, LLC ("Sylvan Ventures").

     We are a development stage company that delivers individualized
supplemental education to families and children via applications on the
Internet. Through our fee-based services, we deliver diagnostic and prescriptive
instruction in real time. Our services are comparable to services that Sylvan
provides in its traditional bricks and mortar learning center environment. Since
our inception, we have focused on leveraging our licensed right to use Sylvan
intellectual property, including the Sylvan instructional methodology, the
Sylvan brand, and our marketing partnership with Sylvan to create various
referral opportunities between eSylvan and Sylvan Learning Centers. Using these
assets as a foundation, we have made substantial investments in technology and
education resources and have developed the capability to provide these services
over the internet. In addition to delivering our tutoring services to individual
students, we are also conducting a pilot offering of these services to school
districts.

     We have launched our website, commenced delivering services to the public
and started recognizing revenue in October 2000. Until October 2000, our
operations consisted primarily of organizational and capital raising activities,
research and analysis with respect to Internet education industry opportunities,
and the development of our technical and operational infrastructure.

     We maintain our corporate offices at 506 South Central Avenue, Baltimore,
Maryland 21202. Our telephone number is (410) 843-2622. Our Internet Web Site
address is http://www.esylvan.com

K through 12 Distance Learning Through the Internet

We believe that the broad accessibility of the Internet and its real-time
interactive nature make it an ideal platform for K through12 distance learning.
Learning online encourages students to participate in classes and activities at
times that are convenient for them from a variety of geographic locations,
particularly their own homes. Online learning allows both students and parents
additional flexibility by eliminating transportation requirements. According to
a Nielsen/Net Ratings report issued in January 2002, consumers now spend 2.3
billion hours online each month. We believe that growth in internet usage
provides a rapidly expanding market for distance learning. In order to meet this
demand, we believe that education providers face several challenges in
delivering education over the Internet. We believe that effective online
learning requires that students receive:

..  Comparable experience and results to in-person learning
..  Access to content
..  Access to qualified teachers and tutors
..  The ability to track results

The eSylvan solution

     We offer two- or three-to-one, diagnostic and prescriptive instruction over
the Internet for students who are seeking a highly individualized and convenient
program of supplemental academic help. By providing instructional services at
home, eSylvan makes the tutoring process more convenient for both the student
and the parent, because instructional sessions are conducted without the need to
drive. Modeled after Sylvan's center-based program, our Internet-based program
requires from four to six months to complete and generally comprises 40 to 60
hours of instruction. We provide instruction on average twice a week in one-hour
sessions, and our Academic Directors schedule parent conferences periodically
during the program. Throughout a student's course of study, we test

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students using specially designed mastery tests, and we share the results with
parents on an ongoing basis. We offer our online tutoring programs at prices
that are comparable to the prices of similar programs offered by most private
tutors and learning centers.

     Each of our teachers is a certified teacher who completes a formalized
training program prior to teaching their initial student session. This ensures
that the quality of our services are consistent from teacher to teacher and
allows us to offer our parents a guarantee. eSylvan guarantees that each math
and reading student will progress one full grade-level equivalent in 36 hours of
instruction, or we will provide 12 additional hours of instruction at no
additional charge.

Content

     We use tutoring content for our core reading and math programs based upon
Sylvan's Individual Learning Objectives (ILO) tutoring curricula. The ILO
tutoring curricula provide a measurable academic outcome from a series of
activities or curriculum based programs and has been tested and proven to be
effective through 22 years in the market covering more than one million
students. We have spent a significant portion of our efforts to date in
converting the ILO curricula into an internet-deliverable format. Given the
breadth of the offerings available from Sylvan and the expansion of these
offerings that we have done to date we are not dependent upon other third
parties for educational content.

Marketing

     Our customer acquisition and retention strategy includes the following
marketing activities:

     .    Direct Response Marketing. The majority of our students currently come
          to us through our on-line marketing campaigns. Utilizing knowledge
          gained through our efforts to date and through Sylvan's experiences,
          we have established a network of providers of web based advertising
          and are constantly working to refine this network to ensure that we
          are obtaining the highest quality audience at the lowest possible
          cost. We may expand our sources of students in the future through
          efforts in other media areas that may include radio, television and
          print as well as direct mail. We also believe that as we expand our
          student population that we will see significant numbers of referrals
          from our current and former students.

     .    Sylvan Referrals and Cross Marketing. We intend to capitalize upon the
          distribution strengths of Sylvan to pursue referrals from Sylvan's
          system of products and services. We intend to pursue cross-promotion
          opportunities with existing and former Sylvan customers in
          cross-referral relationships developed with Sylvan's franchised
          learning centers.

     .    Marketing Relationships. We believe that we have an opportunity to
          establish ourselves as the educational services provider of choice for
          other websites that also target the K through 12th grade market, our
          selected demographic. We can work with potential partners to provide a
          revenue sharing or referral fee based payment for students referred to
          us from the partners' web sites. We believe this will result in a
          mutually beneficial relationship as our partners can expand the nature
          of services provided to their visitors and receive a fee for referrals
          while we gain highly desirable leads for potential customers.

Technology

     Our service offerings are supported by a technical infrastructure developed
to provide effective interaction over the Internet for students and instructors
and an operational support environment for effective business operation. Our
technical infrastructure includes commercial technologies that have been
integrated by our technology staff with some outsourcing to consulting firms.

     The primary interface to our learning environment is a personal computer
equipped with a 56K modem connection to the Internet. We supply each student and
instructor with an audio headset, a microphone and a special pen-shaped mouse.
All these components are commonly available retail products. Students gain
access to our online program by entering our website where information on
learning programs is presented. When registered for a learning program, students
interact with instructors in real time through an audio/visual session, where
existing

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technologies permit simultaneous voice and data transmission over the Internet
connection. This learning environment permits the instructor to control a
tutoring session for up to three students per session. Instructors can present
curriculum associated content on a whiteboard on the student's computer, which
both parties can simultaneously reference and markup or annotate. The whiteboard
may also be used without content so that either party in the session can use
freeform drawing tools for illustration purposes. In addition to our technical
infrastructure, we also have licensed access to technology based solutions
developed by Sylvan. Included in this licensed technology are the following key
items:

     .    Teach 2000. The Teach 2000 software delivers content on demand in the
          learning center environment and tracks the instructional delivery
          process as teachers and students work through a personalized
          instruction plan. Based on this software, we have developed an
          application to provide a complete learning environment for students
          and instructors that can be accessed through the Internet.

     .    Shortcut to Success/Sylvan Automated Assessment System. STS/SAAS
          delivers and scores a variety of tests for students that enroll at
          Sylvan. These software systems are seamlessly integrated to deliver
          diagnostic and prescriptive tests that pinpoint a student's skill
          gaps, analyze a student's test results to prepare a personalized
          instruction profile and create initial and on-going parent conference
          reports to monitor progress. We have licensed this program from Sylvan
          and adopted it for use on the Internet.

     Together, these two pieces of software allow us to create unique programs
for each student and to track student progress as the programs are delivered to
students. U.S. patents are pending for these proprietary software programs.
Sylvan will hold the patents and the software will be used under license from
Sylvan.

We have also developed and continue to develop several administrative
applications to support our learning environment. Our customer relationship
management system permits us to retrieve student-specific data including
specific tutoring session schedules.

Competition

     We believe that the key competitive factors in our market are:

     .    Technology, expertise and capabilities
     .    Brand recognition
     .    Content and instructional methodology
     .    Access to capital

We compete in the tutoring market against both traditional bricks and mortar
providers of educational services and companies that are implementing an online
business plan.

     .    Individual Tutors. We compete with individual home tutors who serve
          high-income families. In most geographic areas, individual tutors form
          the largest share of the tutoring market. We may also compete with
          state and local education agencies that fund individual tutoring. Our
          experience to date indicates we do not substantially compete with
          traditional Sylvan Learning Centers who serve a segment of the market
          highly desirous of face-to-face services.

     .    Online Providers. We compete with several companies that currently
          participate in the online tutoring market. Further, we expect that
          many existing bricks and mortar tutoring companies, and others, will
          begin to distribute their services over the Internet in the near
          future. We believe that our services differ significantly from those
          currently offered by these companies. Other online providers currently
          provide a portion of our services, but we are not aware of any other
          companies that provide the full range of services that we provide.
          Current competitors generally provide either a chat-only homework help
          service, or provide only a whiteboard for instruction with no
          available assessment, content or measurable results. Others may
          provide a synchronous access to content, but no live instruction. A
          variety of models like these, though they differ from ours, will
          compete with us for market share.

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     .    New Entrants. As Internet and broadband services become more widely
          deployed in the K through 12 market, we believe new and as yet
          unidentified companies will enter the market. Traditional media
          companies and rapidly expanding Internet companies represent potential
          new competition.

     Many of our current and potential competitors have longer operating
histories and greater customer or user bases, brand recognition and greater
financial, marketing and other resources than we do. In addition, many of these
competitors can devote substantially greater resources to product development,
marketing and promotional campaigns and website and systems development than we
can.

Relationship with Sylvan and Sylvan Ventures

     Sylvan has created eSylvan as a stand-alone corporation to separate its
online educational services business plan from Sylvan's other businesses and to
facilitate capital raising. Although we have hired a seasoned management team
and built a staff, we will continue to be dependent for the foreseeable future
upon the resources provided by Sylvan and Sylvan Ventures for the execution of
our business plan. Currently, 100% of our funding requirements are derived from
commitments from Sylvan Ventures.

Sylvan Learning Centers

     Sylvan seeks to provide educational services with consistent, quantifiable
results, and has delivered its core educational services to more than 1.2
million students primarily in grades three through eight over the past 22 years.
In 2001, Sylvan provided services to over 140,000 students through its nearly
900 centers in North America. Sylvan offers programs for students of all ages
and skill-levels who want to catch up, keep up or get ahead. Sylvan's range of
programs includes beginning, academic and accelerated reading; basic math,
algebra I and II and geometry; writing and composition; study skills; and
SAT/ACT preparation. In addition, Sylvan offers certified high school courses
for credit in geometry, algebra I and II, trigonometry, pre-calculus and English
9, 10 and 11.

Services provided to us by Sylvan

Professional Services Agreement

     Student Referrals. We may elect to participate in a cross referral program
whereby we and Sylvan receive payments for each student referred to each other.
Under the referral program, we will receive or pay amounts equal to five
percent, up to a maximum of $100, of all revenues received by Sylvan or us,
respectively, for the programs to which each referred student initially
subscribes, including testing and registration fees. For each student enrollment
a Sylvan franchisee generates for us, we will pay Sylvan a sales commission of
five percent, up to a maximum of $100, of the revenues we receive for the first
programs to which such student initially subscribes through the franchisee's
center.

     Professional Services. Prior to assigning a diagnostic and prescriptive
instructor to a referred student, we must request Sylvan to provide an
instructor for a committed period. In the event Sylvan does not provide an
instructor, we may use instructors that are not provided by Sylvan. In the event
Sylvan makes personnel available for committed periods, we shall reimburse
Sylvan for the salary of such instructors or other personnel at an hourly rate
based on the base compensation such person receives from Sylvan. In addition to
salary reimbursement, Sylvan shall receive a 30% management fee for each hour of
direct instruction or test administration, including some specified preparation
time, or parent conferences (calculated as a salary reimbursement multiplied by
30%). Additional services to be provided to us by center personnel and
corresponding fees may be arranged subsequently. If Sylvan refers instructors to
us on an independent contractor basis, we will pay Sylvan a referral fee of
$100.

     Co-Marketing. We have agreed with Sylvan that we will provide a link to
Sylvan's website on our website and Sylvan will provide a link to our website on
its website. Sylvan has agreed to adhere to our reasonable directives concerning
promotion of our business including displaying posters or other promotional
materials in Sylvan-owned centers and requesting its franchisees to display
posters or other promotional materials in their centers.

License Agreement

     We have entered into a license agreement with Sylvan under which we have
licensed certain of the materials that we believe are necessary to implement our
business plan as follows:

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     .    "eSYLVAN," "eSYLVAN.COM", and the associated Internet domain name,
          "1-800-eSylvan", "SYLVAN", "SYLVAN LEARNING CENTER," "SYLVAN LEARNING
          CENTERS," "SYLVAN LEARNING SYSTEMS" and such other trade names,
          trademarks, service marks, associated logos and symbols as may be
          designated by Sylvan in writing.

     .    The Sylvan system, which includes, but is not limited to, Sylvan's
          proprietary programs, systems and techniques and certain copyrighted
          materials, all software and computer programs necessary to offer the
          online educational services and such other content as may be
          designated by Sylvan in writing.

     .    New materials, modifications, enhancements and improvements related to
          the above (subject to an additional license fee).

     The licenses of Sylvan's trademarks and content as described in the bullets
above are limited to use in connection with our Internet business in the United
States and Canada. For the duration of this agreement and for one year
thereafter, we have agreed not, directly or indirectly, to engage in or compete
with any of Sylvan's site based businesses or centers offering certain
educational services. For the duration of this agreement and for one year
thereafter, Sylvan has agreed not, directly or indirectly, to engage in or
compete with any of our fee-based educational services that are provided online
to students, other than those services provided online to students at any of
Sylvan's site based businesses or centers.

     Under this agreement, we have agreed to co-develop with Sylvan a
confidential operations manual, which may be revised by Sylvan from time to
time, to govern the use of Sylvan's intellectual property in our business. We
have agreed that in order to promote Sylvan's intellectual property in
connection with our business, we will expend quarterly at least six percent of
our prior quarter's gross revenues on advertising approved by Sylvan.

     Under this agreement, we have the right to modify Sylvan's intellectual
property or create derivative works and Sylvan has the right to modify any
software or materials that we create or develop for our business or create
derivative works from our software and materials. We will own any copyright in
the derivative works created by us and we have agreed to license to Sylvan these
derivative works for no additional consideration. We have agreed that Sylvan
will own any copyright in the derivative works created by it from our
intellectual property and that Sylvan will license to us these derivative works
for no additional consideration. With respect to certain other intellectual
property that we develop for our business, including software and other
materials, Sylvan will have 30 days from the date it receives notice that we
have developed this material to notify us of its desire to license it. Any
license will be for a reasonable fee designed to permit us to recoup our
development costs on a proportional basis across all the products or services in
which we will commercialize the material. We will have 30 days from the date we
receive notice that Sylvan has developed or created any new intellectual
property, including software or other materials, related to its learning center
business to notify Sylvan if we desire to obtain a license of that content. Any
license will be for a fee based on financial terms offered to all of its
franchise licensees.

     We have paid Sylvan an initial license fee of $1 million and we have agreed
to pay Sylvan a periodic, running royalty equal to four percent of our net
revenues (gross revenues less discounts and refunds) and an additional amount
equal to any sales, gross receipts or similar tax imposed on Sylvan. The initial
license fee of $1 million was agreed to be an initial capital contribution by
Sylvan, and no cash was paid for the initial license fee. During 2001 there will
be no guaranteed minimum royalty, but for each calendar year thereafter, there
will be a guaranteed minimum royalty equal to 120% of the prior year's minimum
royalty, with the guaranteed minimum royalty for calendar year 2002 of $400,000.
As part of our arrangement with Sylvan, Sylvan has agreed to reduce future
royalty payments due under the terms of the license agreement by the amounts
that we paid to Sylvan franchisees who received shares of our Class A
Convertible Common Stock. We have accounted for the payments to Sylvan
franchises as prepaid royalties under our agreement with Sylvan.

     This agreement has an initial term of five years and it will terminate on
the fifth anniversary of the effective date; provided, however, that the license
with respect to content is for the duration of the applicable copyrights and
will not otherwise terminate. We have the option to serially renew the agreement
for unlimited consecutive five-year terms and no initial license fee will be
owned for such renewal terms.

     We have agreed to cooperate with Sylvan for the protection of the
intellectual property licensed to us. Sylvan has agreed, at its expense, to
defend and indemnify us from certain claims brought against us in the United
States based upon any infringement of United States intellectual property rights
with respect to only the licensed

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trademarks and service marks and not the licensed content; provided, however,
that Sylvan's liability is limited to the amount of royalties paid by us within
the one year preceding the date upon which we make a demand for indemnification.
We have agreed to defend any action, suit or proceeding brought against Sylvan
based upon or arising out of our operation of our business.

Services Agreement

     Sylvan has agreed to provide management services, MIS support services,
corporate accounting services, PeopleSoft (database management) services, human
resources/payroll services and legal services to us on an independent contractor
basis at fees that are fair and reasonable, as jointly determined by us and
Sylvan for the services provided based on our utilization of such services. Fees
that have been billed but that have not been paid within 30 days shall accrue
simple interest at the prime rate plus one percent per annum. This agreement,
which had an initial term of one-year, has been extended through June 30, 2002
and can be terminated at any time on 60 days notice.

Facility Use Agreement

     Sylvan has agreed to provide us with the use of its facilities for a
monthly use fee based upon Sylvan's good faith estimate of our use of such
facilities. In the event Sylvan owns a facility, the use fee is based on market
rent. In the event Sylvan leases a facility, the use fee is based on Sylvan's
lease payments. We currently occupy office space pursuant to this agreement.
This agreement, which had an initial term of one-year, has been extended through
June 30, 2002 and can be terminated at any time on 60 days notice.

Sylvan Ventures, LLC

     Founded in February 2000, Sylvan Ventures develops and invests in
educational technology companies, providing them with access to brands, content
and resources of its parent company Sylvan.

Funding provided to us by Sylvan Ventures includes:

     .    A revolving line of credit in the amount of $10 million, which
          originally terminated on December 31, 2001, and has been extended
          through December 31, 2002. Sylvan Ventures and the Company have agreed
          that the balance outstanding under the line of credit on December 31,
          2001 will be repaid from the proceeds of the sale of Series A
          preferred stock discussed below.

     .    An investment of $20 million in return for 10,526,316 shares of our
          Series A preferred stock as of December 31, 2001. In February 2002,
          Sylvan Ventures purchased an additional 4,947,368 shares of our Series
          A preferred stock for $9.4 million.

Sylvan Learning Center Franchisees

     During December 2000, we filed a Registration Statement on form S-1 for the
registration of up to 3,000,000 shares of our Class A Convertible Common Stock
to be issued to Sylvan Learning Center franchisees participating in the
offering. On March 30, 2001, we issued 2,452,484 shares of Class A Common Stock
pursuant to the receipt of executed participation agreements from certain Sylvan
Learning Center franchisees that provide for support of the delivery of our
services to students living in the relevant franchisees territory. In connection
with this offering, we were obligated to pay an amount in cash to each Class A
Convertible Common Stock shareholder equal to $0.35 multiplied by the number of
shares received. In April 2001, we paid an aggregate amount of $858,385 to the
shareholders. These payments have been recorded as prepaid royalties to Sylvan
as the license agreement with Sylvan provides for the offset of this payment
against any future royalties due Sylvan. We are not able to deliver our services
to students in territories for which the relevant franchisee has elected not to
participate.

Government Regulation And Legal Uncertainties

     There are an increasing number of laws and regulations pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state and local governments and agencies.
Recently, the United States Congress enacted Internet legislation regarding
children's privacy, copyrights and taxation. Other laws or regulations may be
adopted with respect to online content regulation, user privacy, pricing,

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taxation and quality of products and services. Any new legislation or
regulation, or the application or interpretation of existing laws, may decrease
the growth in the use of the Internet, which could in turn decrease the demand
for our service, increase our cost of doing business or otherwise have a
material adverse effect on our prospects and revenues.

Liability for information retrieved from our website and other websites

         Content may be accessed on our website or on other Internet sites that
are linked to our website. This content may be downloaded by users and
subsequently transmitted to others over the Internet. By providing those links,
we may be exposed to claims that we are liable for wrongful actions by the
owners of these sites. Claims of this nature have been brought, sometimes
successfully, against providers of Internet services. We could also be exposed
to liability with respect to third-party content that may be posted by users in
chat rooms or bulletin boards, which may be offered on our website. We also may
be subject to claims, alleging that we, by directly or indirectly providing
links to other websites, are liable for copyright or trademark infringement or
the wrongful actions of third parties through their respective websites. The
Digital Millennium Copyright Act of 1998 established limited liability for
online copyright infringement by online service providers for listing or linking
to third party websites that include copyright-infringing materials. Although we
hold general liability insurance, that insurance may not cover all potential
claims to which we are exposed and may not be adequate to indemnify us for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could result in significant
expense and cash demands, which would adversely affect operating results and
financial condition. Even to the extent that these claims do not result in
liability, we could incur significant costs in investigating and defending
against these claims, which would also adversely affect our operating results
and financial condition.

Privacy Concerns

         The Children's Online Privacy Protection Act of 1998 makes it unlawful
for an operator of a website or online service directed to children under 13 to
collect, use or distribute personal information from a child under 13 in a
manner which violates regulations to be proscribed by the Federal Trade
Commission (FTC). The FTC has issued final regulations, which concern the scope
of this Act's parental consent requirements. The FTC is also considering
adopting regulations regarding the collection and use of personal identifying
information obtained from individuals when accessing websites. Further, the FTC
has conducted investigations into the privacy practices of companies that
collect information on the Internet. The Children's Online Privacy Protection
Act may apply to our business if we collect personal information on persons
under the age of 13. Accordingly, we may be required to obtain verifiable
parental consent for such collection activities and provide parental access to
personal information we maintain about their children. While we believe we will
be able to comply with the regulations that have been promulgated by the FTC to
implement that Act, the present regulations are subject to clarification through
administrative implementation and amendment and the specific means for complying
remain to be developed. The costs of compliance could be a significant element
of our costs of doing business.

Internet Taxation

         A number of legislative proposals have been made at the federal, state
and local level that would impose additional taxes on the sale of goods and
services over the Internet and some states have taken measures to tax
Internet-related activities. Although Congress recently placed a three-year
moratorium on state and local taxes on Internet access or on discriminatory
taxes on electronic commerce, existing state or local laws were expressly
excepted from this moratorium. Further, once this moratorium is lifted, some
type of federal and/or state taxes may be imposed upon Internet commerce. This
legislation, or other attempts at regulating commerce over the Internet, may
substantially impede the growth of commerce on the Internet and, as a result,
adversely affect our opportunity to derive financial benefit from those
activities.

Jurisdictions

         It is possible that, although our transmissions over the Internet will
originate primarily in Maryland, the governments of other states might attempt
to regulate our transmissions or prosecute us for violations of their laws.
These laws may be modified, or new laws enacted, in the future. Any of these
developments could have a material adverse effect on our prospects, operating
results and financial condition. In addition, as we expect to offer our services
in multiple states and Canada, these jurisdictions may claim that we are
required to qualify to do business as

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a foreign corporation in each of these states or Cananda. As of the date of this
filing, we are not qualified to do business in any state other than Maryland and
California, and our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties and could result in our inability to enforce contracts in these
jurisdictions. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our prospects,
operating results and financial condition.

Employees

         We have approximately 45 full-time and 120 part-time employees. We
expect to hire additional full-time employees as we grow our business. Although
the competition for skilled employees in the Internet and education industries
is intense, we do not now foresee problems in hiring qualified employees to meet
our needs. None of our employees is represented by a union. We consider our
relations with our employees to be good.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         Risks and factors described below are not the only ones we face.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations.

Risks Related to Our Business

Our technology for the online delivery of tutoring services is new.

         Our online program includes live, voice-based, interactive, three
student to one teacher instruction with tutoring curriculum individualized to
the student based upon a needs assessment supplemented by rewards for student
participation. Although some other companies delivering tutoring services over
the Internet have programs that rely on chat or message board homework help,
these companies generally do not have programs that include one or more of the
key features of our online program. This is primarily because the companies'
existing technology is not sufficiently developed to support our program. The
key features of our technology are new and have been internally developed. This
new technology includes our voice-based interactive instruction, our diagnostic
and assessment software and our content search engine. If we fail to integrate
such technology to provide reliable service to our customers, if our technology
remains incompatible with some of our customer's technology, or if the
reliability of our technology decreases as the number of customers in our
program increases, we may fail to become profitable.

We have only recently commenced recognizing revenues, our accumulated operating
loss since inception is $24.8 million as of December 31, 2001, and we expect to
generate significant operating losses and continue to experience negative cash
flow for the foreseeable future.

         We launched our website, commenced delivering services to the public
and started recognizing revenue in October 2000. As of December 31, 2001, we
have generated approximately $476,000 in revenues, and we have incurred expenses
and an accumulated net loss of approximately $24.8 million from inception,
consisting primarily of research and development, sales and marketing, legal,
accounting, consulting, personnel and facilities costs. Our ability to generate
revenue will depend on our ability to attract customers to our online
educational services and improve our content and technology. We believe that our
expenditures for marketing and advertising and personnel will substantially
increase over the next year as we shift from organizational activities, the
development of our technology and initial market testing to the broad based sale
of tutoring services to the public. We also expect to incur substantial expenses
in software and computer hardware, tutoring content and professional fees and
other areas. Because we are a new entrant to the Internet market, these
expenditures may be significantly higher than we anticipate. These expenses are
substantially dependent upon the success of our business plan and marketing and
advertising efforts and factors outside of our control such as lawsuits,
unexpected technical difficulties with our on-line tutoring infrastructure, our
need for additional financing and other factors discussed in this section. Our
expenses generally will precede revenues. If these expenses are not followed by
sufficient revenues, our business

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may not become profitable. If online tutoring fails to gain acceptance, it is
unlikely that eSylvan will become a viable business.

We have operated as a separate entity for less than two years, and for the
foreseeable future we will remain dependent upon our majority stockholder for
operational support and financing.

         From inception on October 1, 1999 through February 2, 2000, we operated
as an unincorporated division of Sylvan, from February 3, 2000 to June 29, 2000,
we operated as a subsidiary of Sylvan. Since June 30, 2000, we have operated as
a majority-owned subsidiary of Sylvan Ventures. Pursuant to separate agreements,
Sylvan provides us with facilities, management services, intellectual property,
including the eSylvan name, marketing referrals and a website link to the Sylvan
website. Our facilities agreement with Sylvan had an initial term of one-year,
has been extended through June 30, 2002 and can be terminated at any time with
60 days notice. Our services agreement with Sylvan had an initial term of
one-year, has been extended through June 30, 2002 and can be terminated at any
time with 60 days notice. Our license agreement with Sylvan has an initial term
of five years; provided, however, that the license with respect to content is
for the duration of the applicable copyrights. We have the option to serially
renew the license agreement for unlimited additional five-year terms. Our
professional services agreement with Sylvan terminates upon the termination or
expiration of the license agreement. Sylvan Ventures has met our financing needs
through December 31, 2001, with a $10 million line of credit, which has been
extended through December 31, 2002, and the purchase of 10,526,316 shares of our
Series A preferred stock for $20 million. In addition, Sylvan Ventures purchased
an additional 4,947,368 shares of our Series A preferred stock in February 2002
for $9.4 million. We believe that we cannot replace the services and
intellectual property that Sylvan provides to us on reasonable terms, if at all.
Accordingly, if Sylvan or Sylvan Ventures terminates its support of our business
plan, we may not be able to continue operations, or if we continue operations,
we may not become profitable. The terms and conditions of these agreements were
not negotiated on an arms-length basis with Sylvan or Sylvan Ventures and,
accordingly, we expect that these terms and conditions may be less favorable to
us than the terms and conditions that might have been negotiated on an
arms-length basis with an unaffiliated third party. We currently have one
independent member of our board of directors.

Fees for diagnostic and prescriptive tutoring services provided to us by Sylvan
may be higher than the cost of such services otherwise available.

         Prior to assigning a diagnostic and prescriptive instructor to a
student, we must request Sylvan to provide an instructor for a committed period.
In the event Sylvan does not provide an instructor, we may use instructors that
are not provided by Sylvan. In the event Sylvan makes personnel available for
committed periods, we shall reimburse Sylvan for the salary of such instructors
or other personnel at an hourly rate based on the base compensation such person
receives from Sylvan. In addition to salary reimbursement, Sylvan shall receive
a 30% management fee for each hour of direct instruction or test administration,
including some specified preparation time, or parent conferences. Additional
services to be provided to us by center personnel and corresponding fees may be
arranged subsequently. If Sylvan refers instructors to us on an independent
contractor basis, we will pay Sylvan a referral fee of $100. The terms and
conditions of this agreement were not negotiated on an arms-length basis with
Sylvan and we believe that the terms and conditions are less favorable to us
than the terms and conditions that might have been negotiated on an arms-length
basis with an unaffiliated party. If the cost of tutoring services under our
agreement with Sylvan is greater than can be obtained on the open market, our
higher expenses could affect our ability to compete with other companies that
can obtain tutoring services at lower costs.

We will need additional financing.

         We expect to experience negative cash flow from operations for the
foreseeable future. We expect that our available funds will be insufficient to
meet our needs for working capital and capital expenditures prior to July 2002.
Accordingly, we will need to raise additional funds prior to July 31, 2002. We
are unable to predict the exact amount of additional financing we will need
because such amount is substantially dependent upon the success of our business
plan and marketing and advertising efforts and factors outside our control such
as lawsuits, unexpected technical difficulties with our on-line tutoring
infrastructure and other factors discussed under this section. We cannot be
certain that additional financing will be available to us on favorable terms
when required or at all. If we fail to secure the necessary financing, we may
not be able to continue operations.

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<PAGE>

Our business strategy is new, evolving, unproven and subject to change and may
not generate sufficient revenue opportunities.

         Our business objective is to become the premier provider of online
tutoring services to the K through 12 market. Our business strategy is new,
evolving and unproven. Due to the rapidly changing nature of the Internet, we
are continuously modifying our business strategy and expect to continue to
modify our strategy in the future. Our business model assumes that we will be
able to attract students and their parents to our fee-based internet tutoring
services. Our current business strategy may not be scalable and, if it is not
scalable, we may not be able to modify it in a timely and successful manner. In
addition, we may not be able to develop successful business strategies to
capitalize on opportunities in new and unproven areas.

Consumers may not accept an online source for tutoring services.

         Our success depends on attracting and retaining online consumers. Some
factors that could prevent consumer acceptance of online tutoring services, and
consequently our ability to generate our revenues, include:

         .   student or parent preference for in-person tutoring relationships,
         .   pricing that does not meet consumer expectations of finding "the
             lowest price on the Internet," and
         .   lack of consumer awareness of our online presence.

We may fail to retain and integrate key personnel.

         Our success depends upon the key members of our management team. Loss
of the services of key members of our senior management team would harm our
business. Our senior management may not perform effectively as individuals or
work together as a team. If we were to lose members of our management team we
may not be able to achieve profitability or raise sufficient capital to allow us
to continue our operations.

We may fail to attract qualified employees.

         Our success also depends on our ability to attract, retain and motivate
skilled employees, including trained instructors and information technology
specialists. Competition for these skilled employees is intense. We expect to
experience difficulty in hiring and retaining skilled employees. We have no
employment contracts with our employees.

If we do not establish, maintain and strengthen our brand we may not attract
customers for our services or generate revenue opportunities.

         We must expend resources to establish the eSylvan brand and promote our
services. We are in competition with a number of Internet companies currently
seeking to establish their names as dominant brands in the online tutoring
market. As such, we face competition for placement of our advertising on web
sites that attract the appropriate prospects for our services and will also face
additional expenses should we decide to expand our marketing efforts to radio,
television and print media.

         We will pursue an aggressive web based direct response marketing
campaign to establish, maintain and grow our brand. Our other advertising
efforts will also be designed to strengthen our brand. Although we commenced
operations in October 2000, we have incurred $3.3 million in sales and marketing
expenses to date through December 31, 2001. In addition, we expect substantial
increases in such expenditures to support our business plan. We expect that the
funds for these efforts will be provided through the sale of our Series A
preferred stock to Sylvan Ventures. See "Management's Discussion and Analysis of
Financial Condition and Plan of Operation-Liquidity and Capital Resources." If
our promotional efforts are unsuccessful, we may fail to generate sufficient
revenues to become profitable.

We face intense competition.

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<PAGE>

         We compete with numerous providers of tutoring services, including
other online companies as well as traditional bricks and mortar tutoring
providers. Sylvan Ventures, our majority stockholder, is controlled by Sylvan, a
bricks and mortar provider of tutoring services through company-owned and
franchised learning centers, and, to the extent that Sylvan's customers find
online tutoring to be more convenient, we may compete with Sylvan. Some of our
competitors have greater access to capital than we do and may use these
resources to engage in aggressive advertising and promotion campaigns such as
offering free services to attract new consumers. The current practice of such
aggressive advertising and promotion may generate pricing pressures to which we
must respond.

         We expect that competition will continue to increase because of the
relative ease with which new websites may be developed. Individual tutors, for
example, can easily and at low cost establish a rudimentary web presence and
compete with us on the Internet in their local markets. Traditional media
companies and existing bricks and mortar companies can also establish a web
presence with relative ease. The nature of the Internet as an electronic
delivery medium for services, which may, among other things, facilitate
competitive entry and price comparisons, may also render it inherently more
competitive than traditional formats of service delivery. Increased competition
may reduce our gross margins, cause us to lose market share, decrease the value
of the eSylvan brand and prevent us from generating revenues and becoming
profitable.

We may lose users if we do not adapt to rapid technological change and provide
tools and features which meet the changing demands of our users.

         The Internet market is characterized by rapidly changing technology,
evolving industry standards and frequent new service announcements. We must
adopt to our rapidly changing market by continuing to improve the performance,
features and reliability of our website and, in particular, its functionality
with new versions of web browsers and other platforms. We also could incur
substantial costs if we need to modify our services or infrastructure in order
to adopt to these changes. If we fail to keep pace with technological
advancements, our consumers may not use our services and instead may use
competitive services. In addition, we must provide informational content,
interactive tools and other features that consumers demand in order to continue
to attract and retain our consumer audiences. We have allocated significant
resources to improve our software and computer hardware and tutoring content.
However, we must properly anticipate, identify and respond to changes in
consumer demands. Notwithstanding these planned expenditures, if we fail to
respond to changes in consumer demand, expand the scope of our content and
services, introduce new services quickly and efficiently, or if our content and
services fail to achieve market acceptance, our ability to retain customers and
generate revenues could be materially and adversely affected.

We may incur expenses for compensation paid to Sylvan for participating in our
program.

         We may incur significant expenses for the consideration we are required
to pay to Sylvan if Sylvan provides us with instructors, education developers
and other professionals. Specifically, prior to assigning a tutor to a referred
student for a diagnostic and prescriptive program, we must request Sylvan to
provide a tutor for a committed period for which we reimburse Sylvan for the
salary of such tutor at an hourly rate based on the base compensation such
person receives, and pay Sylvan a 30% management fee per hour of service. If
Sylvan refers instructors to us, we will pay Sylvan a $100 referral fee. The
amount of these fees was not determined through arms-length negotiation and such
fees may be in excess, perhaps substantially so, of the cost to retain such
professionals on the open market from unaffiliated third parties.

Our computer and communications systems may fail or experience delays.

         Our success, and in particular our ability to provide quality customer
service, depends on the efficient and uninterrupted operation of our computer
systems. Systems interruptions may result from fire, power loss, water damage,
telecommunications failures, vandalism and other malicious acts and problems
related to our software and equipment. Our website may also experience
disruptions or interruptions in service due to failures by third-party
communications providers. We will depend on communications providers and our
website host to provide our consumers with access to our website. In addition,
our consumers depend on their own Internet service providers for access to our
website. Periodic systems interruptions will occur. These occurrences may cause
consumers to

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<PAGE>

perceive our website as not functioning properly and therefore cause them to
stop using our services. Systems interruptions that last more than a few hours
would harm our business.

We are substantially dependent upon Sylvan for our use of the eSylvan brand.

         Sylvan licensed us the right to use the eSylvan name and its other
trademarks and various tutoring content for an initial license fee of $1 million
and a periodic, running royalty equal to four percent of our net revenues and an
additional amount equal to any sales, gross receipts or similar tax imposed on
Sylvan. The initial license fee of $1 million was agreed to be an initial
capital contribution by Sylvan, and no cash was paid for the initial license
fee. During 2001, there was no guaranteed minimum royalty, but for each calendar
year thereafter, there will be a guaranteed minimum royalty equal to 120% of the
prior year's minimum royalty, with the guaranteed minimum royalty for calendar
year 2002 of $400,000. Sylvan has agreed to reduce future royalty payments due
under the terms of the license agreement by the amounts that we paid to Sylvan
franchisees who received shares of our Class A Convertible Common Stock. This
agreement has an initial term of five years and it will terminate on the fifth
anniversary of the effective date; provided, however, that the license with
respect to content is for the duration of the applicable copyrights and will not
otherwise terminate. We have the option to renew the agreement for unlimited
additional five-year terms and no initial license fee will be owed for such
renewal terms. We believe that we cannot replace the intellectual property that
Sylvan has licensed to us under this agreement on reasonable terms, if at all.
Accordingly, if Sylvan terminates the license agreement, we may not become
profitable. The terms and conditions of this agreement were not negotiated on an
arms-length basis with Sylvan and, accordingly, we expect that these terms and
conditions may be less favorable to us than the terms and conditions that might
have been negotiated on an arms-length basis with an unaffiliated third party.

Others may infringe upon or misappropriate our intellectual property rights.

         The intellectual property rights that we license from Sylvan for use on
the Internet are critical to our success. These intellectual property rights
include the use of the eSylvan name, the eSylvan.com website and the Sylvan
tutoring content that we have adapted for the online delivery of tutoring
services. We believe that our ability to leverage Sylvan's existing reputation
with respect to the provision of tutoring services in bricks and mortar centers
to generate brand recognition and loyalty for our online tutoring business is
the key to our marketing plans. We will rely on trademark and copyright law,
trade secret protection and confidentiality, license and other agreements with
customers, other companies and others to protect our proprietary rights. The
steps taken to protect this intellectual property may not be adequate, and third
parties may infringe upon or misappropriate our intellectual property rights.
Our efforts to protect our intellectual property rights may result in
litigation. Intellectual property litigation is expensive and can divert
management's attention from the operation of our business.

The market data upon which we have based our business plan may not be accurate
and has not been verified independently.

         Much of the market and related data upon which we have based our
business plan including our estimates of future revenues, expenses and required
financing, was obtained from industry publications and reports prepared by
independent sources. We have not independently verified the accuracy of such
information. We have not independently generated or verified this market data
because we do not currently have the capacity to do so, nor do we currently have
the resources to acquire the capacity to do so. The methodology typically used
in compiling market and related data, including the fact that such data are
usually based upon a selected sampling of the market or population rather than a
survey of the market or population as a whole, means that the data are subject
to uncertainties and estimations. If the market data upon which we have relied
in developing our business plan is materially inaccurate our estimates with
respect to future revenues, the expenses necessary to generate future revenues,
need for and timing of future financing and profitability are likely to be
inaccurate which, depending on the nature of such inaccuracies, could affect the
viability of our business plan.

Sylvan Ventures' ownership of over 70% of our outstanding voting stock on a
fully diluted basis and the presence of interlocking directors and officers
could prevent a change of control.

         Sylvan Ventures owns a substantial majority of our outstanding voting
stock on a fully diluted basis. Sylvan Ventures is a majority-owned subsidiary
of Sylvan. Christopher Hoehn-Saric, our chairman, chief executive

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<PAGE>

officer and director is a director and former co-chief executive officer and
chairman of Sylvan and chairman, president and a manager of Sylvan Ventures. B.
Lee McGee, our senior vice president, treasurer, assistant secretary and
director is a managing director, chief financial officer and treasurer of Sylvan
Ventures. Robert Zentz, our secretary, assistant treasurer and director is
senior vice president and general counsel of Sylvan and secretary of Sylvan
Ventures. Peter Cohen, our director and assistant secretary, is president of
Sylvan. Susannah Bennett, our assistant secretary, is vice president of Sylvan.
As a result, the directors and officers of Sylvan and Sylvan Ventures will be
able to control our day-to-day operations and the outcome of substantially all
matters submitted to our stockholders for approval, including the election of
directors and any proposed merger, liquidation, transfer or encumbrance of a
substantial portion of our assets, or amendment to our charter to change our
authorized capitalization. This concentration of ownership may also have the
effect of delaying or preventing a change in control of our company.

Our control by Sylvan Ventures and Sylvan and the presence of interlocking
directors and officers could create potential conflicts of interest.

Christopher Hoehn-Saric, our chairman, chief executive officer and director is a
director and former co-chief executive officer and chairman of Sylvan and
chairman, president and a manager of Sylvan Ventures. B. Lee McGee, our senior
vice president, treasurer, assistant secretary and director is a managing
director, chief financial officer and treasurer of Sylvan Ventures. Robert
Zentz, our secretary, assistant treasurer and director is vice president and
general counsel of Sylvan and secretary of Sylvan Ventures. Peter Cohen, our
director and assistant secretary, is president of Sylvan, Susannah Bennett, our
assistant secretary, is vice president of Sylvan. Mr. Hoehn-Saric beneficially
owns less than five percent and three percent of the outstanding equity
securities of Sylvan and Sylvan Ventures, respectively. Each of Messrs. Graves,
Offutt, McGee, Zentz and Cohen and Ms. Bennett beneficially owns less than one
percent of the outstanding equity securities of Sylvan. Because of these
relationships, equity interests and the fact that we currently have only one
independent member on our board of directors, our directors and officers have
conflicts of interest when making decisions related to transactions between us
and Sylvan Ventures or Sylvan. These conflicts of interest include possible
competition between Sylvan and us for tutoring customers, the demands for
management attention placed upon our executive team by the other companies they
serve, whether another company or we should be presented business or financing
opportunities that present themselves to our management team and the extent of
Sylvan resources that will be made available to us under our agreements with
Sylvan for implementation of our business plan. The ability of Sylvan Ventures
and Sylvan to control the outcome of matters submitted to stockholders together
with the potential conflicts of interest of their affiliates who also serve as
our executive officers could adversely affect the operation of our business. In
addition, those persons serving as both our officers and key employees and those
of Sylvan Ventures and Sylvan have not committed to devote any specific
percentage of their business time to us. The competing claims upon each
officer's time and energies could divert attention from our affairs, placing
additional demands on our resources. The efforts of all or any of these
individuals may not be sufficient to meet both our needs and those of Sylvan
Ventures and/or Sylvan. If we were deprived of access to the members of our
management team, or other personnel, or lost access to these services
altogether, we may not be able to meet the objectives set forth in our business
plan.

Risks Related to the Internet

We depend on continued growth in use of the Internet and online commerce.

         Our success depends upon the ability of the Internet infrastructure to
support increased use. The performance and reliability of the Internet may
decline as the number of online users grows or bandwidth requirements increase.
The Internet has experienced a variety of outages due to equipment malfunctions,
human error and physical damage to portions of its infrastructure. If outages or
delays frequently occur in the future, Internet usage, including usage of our
website, could grow slowly or decline. Concerns about inadequate Internet
infrastructure, security, reliability, accessibility, privacy and the
availability of cost-effective, high-speed service also may inhibit growth in
Internet usage. Even if the necessary infrastructure or technologies develop, we
may incur significant costs to adapt our operating strategy.

We may be sued due to privacy or security concerns.

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         Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online service delivery. To transmit confidential information securely, we will
rely on encryption and authentication technology licensed to us by third
parties. Events or developments may result in a compromise or breach of the
encryption software that we use to protect consumer transaction data. Any
penetration of our network security or misappropriation of our consumers'
personal information could subject us to liability.

         Furthermore, our servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any breaches. Our business may be
harmed if our security measures do not prevent security breaches.

         Claims may be based on other misuses of personal information, such as
for unauthorized marketing purposes. Websites typically place identifying data
"cookies" on a user's computer hard drive without the user's express consent. We
may use cookies for a variety of reasons, including the collection of data
derived from the user's Internet activity. Any reduction or limitation in the
use of cookies could limit the effectiveness of our sales and marketing efforts.
Most currently available Internet browsers allow users to remove cookies at any
time or to prevent cookies from being stored on their computer hard drives. In
addition, some commentators, privacy advocates and governmental bodies have
suggested that the use of cookies be limited or eliminated. The FTC and several
states have investigated the use of personal information by online companies. We
may incur expense if regulations regarding the use of personal information are
introduced or if our privacy practices were investigated. Any claims that may be
brought against us would be expensive to defend even if these claims are
determined to be without merit. The Children's Online Privacy Protection Act may
apply to our business if we collect personal information on persons under the
age of 13. Accordingly, we may be required to obtain verifiable parental consent
for such collection activities and provide parental access to personal
information we maintain about their children. While we believe we will be able
to comply with the regulations that have been promulgated by the FTC to
implement that Act, the present regulations are subject to clarification through
administrative implementation and amendment and the specific means for complying
remain to be developed. The costs of compliance could be a significant element
of our costs of doing business.

Government regulation and legal uncertainties could add additional burdens to
doing business on the Internet.

         Laws and regulations applicable to Internet communications, commerce
and advertising are becoming more prevalent. Online commerce is new and rapidly
changing, and federal, state and foreign regulations relating to the Internet
and online commerce are evolving. Due to the increasing popularity of the
Internet, it is probable that new laws and regulations will be enacted to
address issues such as user privacy, pricing, content, copyrights, distribution,
antitrust matters and the qualify of products and services. The adoption of
these laws or regulations could reduce the rate of growth of the Internet, which
could potentially decrease the usage of our website and could otherwise harm our
business. In addition, many existing laws governing issues such as advertising,
property ownership, copyrights and other intellectual property issues, libel,
obscenity and personal privacy are now being applied to the Internet. Most of
these laws were adopted prior to the advent of the Internet and do not
necessarily apply easily to the unique issues of the Internet. New laws
applicable to the Internet may impose substantial burdens on companies
conducting business over the Internet. In addition, the growth and development
of online commerce has already prompted calls for more stringent consumer
protection laws in the United States and abroad. As one example, the European
Union has adopted a privacy directive that may well have an effect on websites
in the United States. Compliance with that directive, or other regulatory
activities of foreign governments, could have a significant effect on our
business.

         Several telecommunications carriers have asked the Federal
Communications Commission (FCC) to regulate telecommunications over the
Internet. Due to the increasing use of the Internet and the burden it has placed
on the telecommunications infrastructure, telephone carriers have requested the
FCC to regulate Internet and online service providers and to impose access fees
on those providers. If the FCC imposes access fees, the costs of using the
Internet could increase dramatically. In this event, our business could be
negatively impacted.

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         The FTC has already promulgated a number of regulations and proposed
regulations that are designed specifically to deal with e-commerce and has
several on-going industry studies that might result in further regulation.

         The Children's Online Privacy Protection Act may apply to our business
if we collect personal information on persons under the age of 13. Accordingly,
we may be required to obtain verifiable parental consent for such collection
activities and provide parental access to personal information we maintain about
their children. While we believe we will be able to comply with the regulations
that have been promulgated by the FTC to implement that Act, the present
regulations are subject to clarification through administrative implementation
and amendment and the specific means for complying remain to be developed. The
costs of compliance could be a significant element of our costs of doing
business.

         Historically the use of encryption on the Internet has provoked
national security concerns among certain governments. While the current posture
of the United States is to permit the use and export of strong encryption, law
enforcement agencies here and abroad are pressing for changes that could have an
adverse effect on our ability to protect customer privacy through encryption.

We may be liable for information displayed on and communicated through our
website.

         We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or other theories relating to the information that we
publish on our website. These claims have been brought against online companies
as well as print publications in the past. Based on hyperlinks that we provide
to other websites, we may also be subjected to claims based upon online content
that we do not control but that is accessible from our website. Any claims that
may be brought against us would be expensive to defend even if these claims are
determined to be without merit.

Registration of similar domain names may result in a diversion of our potential
customers to other websites.

         For the foreseeable future, we will substantially rely on the
eSylvan.com domain name as a significant means of attracting potential customers
to our website. Domain names are registered by a growing number of organizations
around the world. Governing authorities could establish additional top-level
domains, appoint additional domain name registrars or modify the requirements
for holding domain names. As a result, we may not be able to prevent others from
adopting and using domain names that might result in a diversion of our
potential customers to competing websites. While there is a growing number of
cases in which "domain name piracy" has been redressed, the law in this area is
evolving and not totally effective in preventing use of confusingly similar
domain names. While it is possible that others might claim that our own domain
name `eSylvan.com' infringes on their rights, we are not aware of any such claim
and believe we have the right to maintain and use that domain name. However, if
we were subsequently unable to continue using that domain name, we might
experience a significant loss of business.

                           FORWARD-LOOKING STATEMENTS

         Many statements made in this filing under the headings "Business,"
"Management's Discussion and Analysis of Financial Condition and Plan of
Operation" and elsewhere are forward-looking statements that are not based on
historical facts. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including those discussed under "Factors that May Affect Future
Results."

ITEM 2:  PROPERTIES

         Our headquarters is located in Baltimore, Maryland. We currently lease
our facilities from Sylvan pursuant to a facilities use agreement. See
"Business - Services Provided to us by Sylvan." We expect to expand our
facilities as our operations grow. We believe that additional space will be
available on commercially acceptable terms.

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ITEM 3:  LEGAL PROCEEDINGS

         We are not party to any material legal proceedings.

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

         No matters were submitted to be voted on by securities holders during
the fourth quarter ended December 31, 2001.

PART II.

ITEM 5:  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

         There is no established public trading market for our common stock.
10,526,316 shares of our common stock are subject to outstanding options or
warrants to purchase, or securities convertible into, our common stock. None of
the shares of our common stock are available for sale under Rule 144. We have
agreed to register 70,000,000 shares of our common stock under the Securities
Act for sale by our stockholders.

         As of March 25, 2002, there were 14,000,000 shares of our common stock
and 2,452,484 shares of Class A Convertible Common Stock outstanding, held by
approximately 466 holders of record. We have never declared or paid any cash
dividends on our common stock and presently intend to retain our future
earnings, if any, to fund the development and growth of our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.

         On June 30, 2000, 14,000,000 shares of common stock were sold to Sylvan
for cash of $5 million. Subsequent to the purchase of the 14,000,000 shares of
common stock, 13,714,286 of those shares were contributed to Sylvan Ventures. On
June 30, 2000, 10,526,316 shares of Series A preferred stock was subscribed for
purchase by Sylvan Ventures for aggregate proceeds of $20 million issuable and
payable equally over the subsequent six quarters beginning September 30, 2000.
As of December 31, 2001, all of the shares had been fully paid and were issued
and outstanding. During February 2002, Sylvan Ventures purchased an additional
4,947,368 shares of Series A preferred stock for $9.4 million. A portion of the
proceeds of this issuance was used to pay the balance outstanding under the line
of credit agreement between Sylvan Ventures and the Company.

         Through December 31, 2001, we incurred approximately $880,000 in
expenses in connection with the offering of our Class A Convertible common stock
to holders of Sylvan franchise license agreements or area development
agreements. Through the time of conclusion of this offering, 359 franchisees
executed participation agreements, and we were obligated to issue 2,452,484
shares of Class A Convertible common stock and remit $858,385 in exchange for
the franchisees' participation in this offering. We issued these shares and paid
this amount on March 2, 2001. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

ITEM 6:  SELECTED FINANCIAL DATA

         The following table presents the selected financial data of our
business. The financial data for all periods presented have been derived from
and are qualified by reference to, our audited financial statements included
elsewhere in this report.

                                       18

<PAGE>

<TABLE>
<CAPTION>
                                                                                                Period October 1,
                                                                            Period October 1,     1999 (date of
                                                                               1999 (date of       inception)
                                       Year Ended           Year Ended      inception) through      through
                                      December 31,         December 31,        December 31,       December 31,
                                          2001                 2000                1999               2001
                                     ----------------------------------------------------------------------------
<S>                                  <C>                   <C>                <C>                  <C>
Statements of Operations:
Revenues                             $     460,331         $     15,921       $          -         $    476,252
Costs and expenses:
    Direct costs of services
    provided                             1,144,375              151,247                  -            1,295,622
    Sales and marketing                  2,249,905            1,082,431                  -            3,332,336
    General and administrative           6,698,547            5,890,081            376,204           12,964,832
    Research and development             2,326,315            4,883,521             51,690            7,261,526
    Management services and
      facilities usage charges
      from Sylvan                        1,263,587              529,286                  -            1,792,873
    Allocated indirect overhead
      costs                                      -              205,196            219,622              424,818
                                     ----------------------------------------------------------------------------
Total operating costs and
    expenses                            13,682,729           12,741,762            647,516           27,072,007
                                     ----------------------------------------------------------------------------
Loss from operations                  (13,2225,398)         (12,725,841)          (647,516)         (26,595,755)

Non-operating expenses
    (income), net                         (122,362)             127,600                  -                5,238
                                     ----------------------------------------------------------------------------
Loss accumulated during
    development stage                  (13,100,036)         (12,853,441)          (647,516)         (26,600,993)

Allocated income tax benefit                     -            1,516,117            252,337            1,768,454
                                     ----------------------------------------------------------------------------
Net loss accumulated during
    development stage                $ (13,100,036)        $(11,337,324)      $   (395,179)        $(24,832,539)
                                     ============================================================================

Basic and diluted loss per
    common share                     $       (0.82)        $      (1.62)      $        n/a         $      (2.42)
                                     ============================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                               As of December 31,
                                                       2001           2000            1999
                                                  -------------------------------------------
                    <S>                           <C>            <C>                <C>
                    Balance Sheet Data:

                    Cash and cash
                      equivalents                 $    250,880   $          -       $       -
                    Working capital deficit         (4,735,359)    (6,189,540)        (49,595)
                    Total assets                     5,703,097      4,478,448          13,083
                    Current liabilities              6,038,323      6,312,739          49,595
                    Deficiency of assets              (335,226)    (1,834,291)        (36,512)
</TABLE>

                                       19

<PAGE>

ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         The following discussion should be read in conjunction with the
Financial Statements and related Notes thereto included elsewhere in this Annual
Report on Form 10-K.

Results of Operation

         We are a development stage business that delivers individualized
supplemental education to families and children via applications on the
Internet. We launched our website, commenced delivering services to the public
and started recognizing revenue in October 2000. Our lack of operating history
makes it difficult to evaluate our business and prospects. You must consider our
prospects 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. We have no assurance that we will be successful in addressing these
or any other risks, and our failure to do so could have a material adverse
effect on our business, financial condition and results of operations.

         From inception on October 1, 1999 through February 2, 2000, we operated
as an unincorporated division of Sylvan, from February 3, 2000 to June 29, 2000,
we operated as a subsidiary of Sylvan and since June 30, 2000, we have operated
as a majority owned subsidiary of Sylvan Ventures. Until October 2000, our
operations consisted of organizational activities, research and analysis with
respect to the Internet educational services industry, development of our
website and identifying and testing key technology. As of December 31, 2001, we
have generated minimal revenues, our financial statements show a net loss, and
we have incurred expenses and an accumulated operating loss of approximately
$24.8 million from inception, consisting primarily of research and development,
sales and marketing, legal, accounting, consulting, personnel and facilities
costs. Since our inception, Sylvan has provided us with a significant portion of
the administrative personnel and services that we have required.

         During 2002, the expenses we expect to incur in connection with the
implementation of our business plan include:

         .  Improvement of our website,
         .  Improvement of technical infrastructure for online delivery of
            tutoring services,
         .  Improvement of online tutoring content,
         .  Direct marketing, advertising and promotion of the eSylvan brand,
         .  Recruiting and retention of executive, marketing, technical and
            tutoring personnel,
         .  Administration, and
         .  Legal, accounting and investment related fees.

         As of March 25, 2002, we estimate that we will incur $12 to $15 million
in expenditures for marketing and advertising, personnel, professional fees,
software, computer hardware, tutoring content, costs of delivering services and
other expenses during the year ending December 31, 2002. Because we are a
development stage company that commenced operations in October 2000, this
estimate is not based on our historical experience. Instead, it is based upon
the experience of our management team in the tutoring services industry, our
internally developed business plan and strategy and publicly available research
concerning our proposed market. Because we have only recently commenced
operations, we are updating our business plan, and our internal estimate of the
expenses we may incur in the next year, on a weekly and even daily basis to
reflect our operating experience. Since this estimate is based upon less than
eighteen months of operating experience in a limited market, we believe that we
are unable to predict the exact amount of any specific expense and the aggregate
amount of such expenses may exceed our estimated range by $5 million or more.

         For example, though we believe that our expenditures for personnel,
marketing and advertising will substantially increase over the next year as we
shift from organizational activities and the development of our technology to
the sale of tutoring services to the public, the actual level of expenditures
will depend upon the success of our marketing and advertising efforts. If our
marketing and advertising efforts were to raise a demand for our services that
exceeded our capacity, our personnel and infrastructure expense would likely
increase.

                                       20

<PAGE>

Alternatively, if our marketing and advertising are unsuccessful in generating
demand for our services, these efforts would likely be increased beyond our
current plans. Further, unforeseen legal issues, technical difficulties,
problems with our tutoring content and other risks set forth under the heading
"Factors That May Affect Future Results" could require a reallocation of our
resources to cover more urgent items of expense and heavier reliance upon the
funding commitment of Sylvan and Sylvan Ventures than we currently expect.

         Under our professional services agreement with Sylvan, we may elect to
participate in a cross referral program whereby we and Sylvan receive payments
for each student referred to each other. Under the referral program, we will
receive or pay amounts equal to 5%, up to a maximum of $100, of all revenues
received by Sylvan or us, respectively, for the programs to which each referred
student initially subscribes, including testing and registration fees. For each
student enrollment a Sylvan franchisee generates for us, we will pay Sylvan a
sales commission of 5%, up to a maximum of $100, of the revenues we receive for
the first programs to which such student initially subscribes through the
franchisee's center. Also under this agreement, before we assign a diagnostic
and prescriptive instructor to a student, we must request Sylvan to provide an
instructor for a committed period. If Sylvan makes personnel available for
committed periods, we shall reimburse Sylvan for the salary of such instructors
or other personnel at an hourly rate based on the base compensation such person
receives from Sylvan. In addition to salary reimbursement, Sylvan shall receive
a 30% management fee for each hour of direct instruction or test administration,
including some specific preparation time, or parent conferences. If Sylvan
refers instructors to us on an independent contractor basis, we will pay Sylvan
a referral fee of $100.

         We anticipate that, for the foreseeable future, we will incur
substantial operating losses and negative cash flow as we execute our business
plan and acquire and integrate the necessary technology, systems and supporting
infrastructure, enroll students in our service, develop our brand name, hire
employees and contract personnel and expand our business. The extent of these
loses will depend, in part, on the amount and rates of growth in our revenue
from enrolled students.

         Revenue is charged on an hourly basis for diagnostic/prescriptive
instructional programs. Revenue from these services are recognized as hours of
instruction are completed.

         To the extent that revenue does not grow at anticipated rates or that
increases in our operating expenses precede or are not subsequently followed by
commensurate increases in revenue, our business, results of operations and
financial condition will be materially and adversely affected. There can be no
assurance that our operating losses will not increase in the future or that we
will ever achieve or sustain profitability.

         Comparison of results for the year ended December 31, 2001 to results
for the year ended December 31, 2000

         We incurred net losses of $13.1 and $11.3 million for the years ended
December 31, 2001 and 2000, respectively.

         Revenues for the year ended December 31, 2001 were $460,000. We had
revenues of $16,000 during the year ended December 31, 2000, as we did not
commence delivering services until October 2000.

         During the years ended December 31, 2001 and 2000, we incurred $13.7
and $12.7 million, respectively, in operating and other expenses in implementing
our business plan.

         Direct costs of services provided increased by $993,000 to $1.1 million
for the year ended December 31, 2001 from $151,000 for the year ended December
31, 2000. These costs consist primarily of labor for instructional, technical
and operations support related to providing instructional services to our
students. The increase was a direct result of the increase in revenues.

         Sales and marketing expenses increased by $1.1 million to $2.2 million
for the year ended December 31, 2001 from $1.1 million for the year ended
December 31, 2000. Sales and marketing costs are incurred to establish and grow
the "eSylvan" brand. The primary costs incurred were related to advertising on
various third-party web sites and internet-based newsletters and labor costs
related to converting the leads generated from the advertising

                                       21

<PAGE>

campaigns into enrollments. The increase in sales and marketing costs was a
result of promoting our product for a the full year in 2001 versus a partial
year in 2000.

         General and administrative expenses increased by $800,000 to $6.7
million for the year ended December 31, 2001 from $5.9 million for the year
ended December 31, 2000. General and administrative expenses consist of
personnel costs, professional fees, maintenance expenses, depreciation and other
expenses. The increase in general and administrative expenses resulted from
additional personnel and other costs incurred to develop and expand
administrative and operations support systems and services.

         Research and development expenses decreased by $2.6 million to $2.3
million for the year ended December 31, 2001 from $4.9 million for the year
ended December 31, 2000. The decrease in research and development expenses is
attributable to the fact that the development of our online tutoring technical
infrastructure was more intensive during the period prior to the initial launch
of our tutoring services in late 2000.

         Management services and facility usage charges from Sylvan increased by
$734,000 to $1.3 million for the year ended December 31, 2001 from $529,000 for
the year ended December 31, 2000. Under a services agreement with Sylvan, which
commenced in July 2000, 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 us. During 2001, the agreements were in place for the full year,
versus six months in the prior year. Additionally, as our business activities
have expanded, we have increased our utilization of these services thereby
resulting in an increase in the charges.

         Allocated indirect overhead costs from Sylvan decreased by $200,000 to
none for the year ended December 31, 2001 from $200,000 for the year ended
December 31, 2000. Beginning June 30, 2000, upon the transfer of ownership of
the Company from Sylvan to Sylvan Ventures and the adoption of the management
services agreement with Sylvan, indirect overhead costs were no longer allocated
to us.

         During the period October 1, 1999 through June 30, 2000, the Company
and Sylvan operated under a tax sharing agreement that provided for the
allocation to us of any tax benefits realized by Sylvan as a result of including
our operations in its consolidated income tax return. Commencing July 1, 2000,
Sylvan could not realize income tax benefits attributable to our operations as a
result of the transfer of Sylvan's ownership in us to Sylvan Ventures. For the
year ended December 31, 2000, we recorded tax benefits of $1.5 million under
this agreement, related to the period from January 1, 2000 to June 30, 2000. For
the periods subsequent to June 30, 2000, we have not reported a tax benefit from
operating losses because of an increase in the valuation allowance for deferred
tax assets. This results primarily from the inability to determine the
realization of the net operation loss carryforwards generated in those periods.

Liquidity And Capital Resources

         Net cash used in operating activities was $12.6 million in 2001
compared to $9.1 million in 2000. The 2001 cash used in operating activities
resulted primarily from the net loss of $13.1 million, the reduction in accounts
payable and accrued expenses of $1.7 million and the payment of certain fees to
Sylvan totaling $300,000. These items were partially offset by non-cash
depreciation and amortization expense of $2.2 million. The 2000 cash used in
operating activities resulted primarily from the net loss of $11.1 million
partially offset by an increase in accounts payable and accrued expenses of $2.7
million.

         Capital expenditures during 2001 and 2000 were $900,000 and $4.3
million, respectively consisting primarily of increases in software and
educational content during 2001. Expenditures during 2000 consisted primarily of
increases in software and educational content of $2.4 million and computer
equipment and furnishings of $1.7 million.

         Our operations and capital requirements were funded by Sylvan from
inception to June 30, 2000 and by Sylvan Ventures from July 1, 2000 to December
31, 2001.

                                       22

<PAGE>

         On June 30, 2000, we entered into a revolving credit note with Sylvan
Ventures pursuant to which we may borrow up to $10 million. The revolving credit
note expires on December 31, 2002. As of December 31, 2001, $4.5 million was due
under this note. The note is non-interest bearing.

         On June 30, 2000, we also entered into an agreement with Sylvan
Ventures under which we agreed to issue an aggregate of 10,526,316 shares of
Series A preferred stock in six closings. These closings were held on the last
day of each fiscal quarter through December 31, 2001, for an aggregate price of
$20 million, which represents a price per share of $1.90. As of December 31,
2000, we had issued 3,508,772 shares of Series A preferred stock to Sylvan
Ventures for aggregate proceeds of $6.7 million and as of December 31, 2001 we
have issued 10,526,316 shares of Series A preferred stock to Sylvan Ventures for
aggregate proceeds of $20 million. Subsequent to December 31, 2001, the Company
and Sylvan Ventures entered into an additional agreement under which Sylvan
Ventures would acquire an additional 4,947,368 shares of our Series A preferred
stock for $9.4 million which also represents a price per share of $1.90. A
portion of the proceeds from this sale will be used to repay the balance
outstanding on the revolving credit note discussed above, with the balance
available to fund operations.

         We lease certain equipment from Sylvan under an operating lease dated
October 1, 2000. The lease expires on September 30, 2003. Future minimum
payments under this arrangement are $270,127 for 2002 and $202,954 for 2003.

         We have authorized the issuance of 10,000,000 shares of $.001 par value
Class A Convertible Common Stock. On December 14, 2000, we filed a Form S-1
Registration Statement with the Securities and Exchange Commission in connection
with the offering of up to 3,000,000 shares of Class A Convertible Common Stock
to certain holders of Sylvan franchise license agreements or area development
agreements. On March 2, 2001 the offer to issue shares was finalized and on
March 30, 2001 we issued 2,452,484 shares of Class A Convertible Common Stock to
Sylvan franchisees and remitted $858,385 to the holders of the Class A shares.
We received no cash consideration for the Class A Convertible Common Stock
issued to franchisees, instead the investors received a cash payment of $0.35
per share in exchange for execution of the participation agreement, which
requires that the franchisee support our business plan. On March 2, 2001, we
closed on this offering upon receipt of participation agreements and requests to
issue an aggregate of 2,452,484 shares of Class A Convertible Common Stock to
franchisees and the related payment of $858,385.

         We expect to incur significant negative cash flow from operations for
the foreseeable future. Although we believe that the closings on our sale of
Series A preferred stock to Sylvan Ventures will satisfy the majority of our
cash needs through July 31, 2002, we do not expect that our current resources
will be sufficient to support our growth and operations until we are profitable.
We expect that we will need to raise additional capital or other financing prior
to July 31, 2002. We cannot guarantee that we will be able to raise additional
funds, or, if we can, that we will be able to do so on terms that we deem
acceptable. In particular, potential investors may be unwilling to invest in us
due to Sylvan Venture's voting control over us. We are unable to predict the
amount of additional financing we will need prior to July 31, 2002 because such
amount is substantially dependent upon the success of our business plan and
marketing and advertising efforts and factors outside our control such as
lawsuits, unexpected technical difficulties with our on-line tutoring
infrastructure and other factors discussed herein and under the heading "Factors
That May Affect Future Results." Our failure to raise the funds necessary to
establish and grow our business would have a material adverse effect on our
business and our ability to generate and grow revenues. If we raise funds
through the issuance of equity, equity-related or debt securities, these
securities will likely have rights, preferences or privileges senior to those of
the rights of our existing Common stock, and our current Common stockholders may
experience dilution.

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

                                       23

<PAGE>

     In August 2001, the Financial Standards Board issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Statement No.144 Supercedes Statement
No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and provides a single accounting model for long-lived
assets to be disposed of. We will apply the new rules on accounting for the
impairment or disposal of long-lived assets beginning in the first quarter of
2002. Statement No. 144 retains the requirements of Statement No. 121 to
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair value
of the asset. We do not believe that the adoption of the new standard will have
a material impact on its financial position or results of operations.

CRITICAL ACCOUNTING POLICIES

     Our accounting policies are more fully described in Note 1 of the Notes to
Financial Statements. As discussed in this note, the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions about future
events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty; therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.

     We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Valuation of Participation Agreements

     The fair value of the participation agreements was determined based on the
fair value of the underlying Class A Convertible Common Stock that we issued in
exchange for the executed agreements. The assumptions used to calculate the fair
value of these securities included estimates of future operating results and
cash flows as well as discount rates based on specifically identified risks and
assumptions about our weighted average cost of capital. The assigned useful life
of the participation agreements of six years is based upon the estimated
weighted-average useful five of the agreements, which was determined based on an
analysis of the historical useful life of Sylvan franchise agreements.

     If we used different assumptions and estimates in the calculation of the
fair value of the underlying securities and the estimation of the related useful
life, the amounts allocated to this asset, as well as the related amortization
expense, would have been significantly different than the amounts recorded.

Impairment of Participation Agreements

     In assessing the recoverability of the participation agreements, we must
make assumptions regarding estimated future cash flows and other factors to
determine its current fair value. If these estimates or their related
assumptions change in the future, we may be required to record an impairment
charge for this asset not previously recorded.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND INTEREST RATE
RISK

     Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of financial
instruments. We are exposed to market risks primarily through changes in

                                       24



<PAGE>

interest rates. We do not utilize derivatives and therefore exposure to market
risks is managed through our regular operating and financing activities.

     The Company's revolving credit facility with Sylvan Ventures represents its
only significant financial instrument and does not bear interest.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     (a)    1.   Financial Statements.

                 The information required by this Item is set forth on pages
                 F-1 to F-26.

     (b)    2.   Supplementary Data.

                 Not Applicable.

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.


PART III.

ITEM 10: DIRECTORS AND OFFICERS OF THE REGISTRANT

     Our directors and executive officers are as follows:

<TABLE>
<CAPTION>
Name                             Age     Principal Positions
----                             ---     -------------------
<S>                              <C>     <C>
R. Christopher Hoehn-Saric       39      Chairman and Co-Chief Executive Officer
David S. Graves                  44      President and Chief Operating Officer
Barry C. Offutt                  40      Vice President and Chief Financial Officer
B. Lee McGee                     46      Senior Vice President, Treasurer, Assistant
                                         Secretary and Director
Robert W. Zentz                  47      Secretary, Assistant Treasurer and Director
Anna T. Parmer                   32      Vice President of Technology
Catherine Killian                43      Vice President of Sales
Stuart A. Finnigan               51      Vice President of Operations
Susannah Bennett                 36      Assistant Secretary
Peter Cohen                      47      Assistant Secretary and Director
Barry E. Miller                  52      Director
Beth J. Kaplan                   43      Director
</TABLE>


     R. Christopher Hoehn-Saric has served as our chairman since inception and
as a director since June 30, 2000. He has been president, chief executive
officer and director of Sylvan Ventures, LLC, our majority stockholder, since
2000, and a principal in Sterling Capital, Ltd. ("Sterling"), the investment
partnership that led the 1986 acquisition of the predecessor to Sylvan Learning
Systems, Inc. since prior to 1986. Mr. Hoehn-Saric was co-chief executive
officer of Sylvan Learning Systems, Inc. from 1993 to June 2000 and was
president of Sylvan from 1988 to 1992. Before becoming Sylvan's president, Mr.
Hoehn-Saric was involved in Sterling's acquisition of several distribution,
broadcasting and photography businesses. Mr. Hoehn-Saric also serves as a
director of Sylvan Learning Systems, Inc. Mr. Hoehn-Saric serves as an officer
and director at the request of Sylvan Ventures under our services agreement with
Sylvan.

                                       25



<PAGE>

     David S. Graves has been our president since inception. From 1997 to 2000,
he was vice president of marketing for Sylvan. In that role, he served as
president of the SLC National Advertising Fund, Inc., a cooperative advertising
fund managed with the input and support of Sylvan franchisees. Until 2000, he
also served as executive director of Book Adventure, launching this new
interactive, online reading program (www.bookadventure.com) with his team in
1999. From 1996 to 1997, he was vice president/general manager for the Franklin
Mint jewelry and collector plates divisions. From 1988 to 1996, he held
positions of increasing responsibility in brand marketing for Colgate-Palmolive
Company's Hill's Pet Foods division (Science Diet brand), including marketing
manager for US marketing, director of marketing for Europe, and managing
director/general manager of northern European subsidiaries (UK, Ireland,
Belgium, Luxembourg, and Netherlands). He began his marketing career at the
Quaker Oats Company, working on the Gatorade brand and Quaker frozen foods.

     Barry C. Offutt has been our vice president and chief financial officer
since September 1, 2001. He also serves as chief financial officer of MindSurf
Inc., a company partially owned by Sylvan Ventures, and has served in that role
since May 2001. He previously served as chief financial officer of Nexus
Communications from June 2000 until joining Mindsurf. From 1992 to 2000 he was
chief financial officer of HCIA Inc., a publicly traded health care information
provider. During his tenure as CFO at HCIA, the Company acquired ten companies
and completed its Initial Public Offering and three follow-on offerings.

     B. Lee McGee has been our senior vice president, treasurer and assistant
secretary since inception and a director since June 30, 2000. He served as our
chief financial officer from inception through August 2001. He served as chief
financial officer of Sylvan Learning Systems, Inc. or its predecessor entities
from 1987 to 2000 and executive vice president from 1997 to 2000. Mr. McGee has
been a managing director, chief financial officer and treasurer of Sylvan
Ventures, LLC, our majority stockholder, since 2000. Mr. McGee serves as an
officer and director at the request of Sylvan and Sylvan Ventures under our
services agreement with Sylvan.

     Robert W. Zentz has been our secretary, assistant treasurer and director
since inception. He has been secretary of Sylvan Ventures, LLC, our majority
stockholder since 2000, and since 1998, has been vice president and general
counsel to Sylvan Learning Systems, Inc. From 1997 to 1998, Mr. Zentz was a
partner of the law firm of Frank & Kraft. From 1996 to 1997, Mr. Zentz served as
campaign manager in the political campaign of Jack O'Malley. From 1990 to 1996,
he was vice president and general counsel of A.C. Nielsen, Inc., a marketing
research firm. Mr. Zentz serves as an officer and director at the request of
Sylvan and Sylvan Ventures under our services agreement with Sylvan.

     Anna T. Parmer has been our vice president of technology since September
2001 and since April 2000 our Director of Information Technology. For the prior
nine years, she held positions of increasing responsibility related to
applications development, information systems architecture and management of
information systems personnel with the Procter & Gamble Company.

     Catherine Killian has been our vice president of sales since February 2001.
From 1994 through February 2001 she was employed by Sylvan, and since 1995 held
the position of Western regional vice president for Sylvan. In this position,
she was responsible for overseeing daily operations, developing local and
regional management teams, planning local advertising and territory expansion
for 50 locations in six corporate markets. Prior to 1994, she held a series of
sales and operations positions of increasing responsibility at Nutri/Sytems,
Inc.

     Stuart A. Finnigan has been our vice president of operations since August
2000. From 1998 to 2000, he was vice president of operations for Sylvan's ASPECT
language schools, responsible for global operations of 26 immersion ESL (English
as second language) schools in five countries. Prior to ASPECT, he held the
positions of vice president - Europe and vice president of test center
operations for Sylvan's Prometric division from 1993 to 1998. In this position,
he oversaw testing center growth from 80 centers to over 2,000 centers in 130
countries, with direct responsibility for operations in Europe, the Middle East
and Africa.

     Peter Cohen has been our assistant secretary and a director since
inception. He has been president of Sylvan Learning Systems, Inc. since February
2000. From 1996 to February 2000, Mr. Cohen was president of the learning center
division of Sylvan. Prior to joining Sylvan, he was the chief executive officer
of The Pet Practice, an 85 hospital veterinary business. He also served as vice
president of sales for National Media Corporation and senior

                                       26

<PAGE>

vice president of corporate operations for Nutri-System Weight Loss Centers. Mr.
Cohen serves as a director at the request of Sylvan under our services agreement
with Sylvan.

     Susannah Bennett has been our assistant secretary since June 30, 2000. Ms.
Bennett has been vice president and assistant general counsel of Sylvan Learning
Systems, Inc. since 1999 and 1995, respectively. Ms. Bennett serves as an
officer at the request of Sylvan under our services agreement with Sylvan.

     Barry E. Miller has been a member of our board of directors since February
2001. Mr. Miller has served as president of NBM Management, a company which owns
and operates Sylvan Learning Centers and Thomson Prometric, Computer Based
Testing Centers in Northeast Ohio and Western Pennsylvania since 1985. Since
1991 Mr. Miller has served four terms as president of Sylvan Franchise Owners
Association, Inc. (FOA) and was a founding director and officer of SLC National
Advertising Fund, Inc. Mr. Miller is currently a director of Sylvan Franchise
Owners Association, Inc., and has been elected to serve as president of the
board in 2002. He also serves as a director of the Sylvan National Advertising
Fund. Mr. Miller was designated by the FOA and approved by Sylvan as the FOA's
representative to our board of directors under the program agreement between
Sylvan and the FOA.

     Beth J. Kaplan has been a member of our board of directors since March
2001. In May 2001, she founded Axcel Partners, LLC, a venture capital fund
focused on early state start-ups with a focus on retail and consumer good
technology. From 1996 through 1999, she was senior executive vice president of
Rite Aid Drugstores, a national chain of over 4,000 drugstores with $13 billion
in revenue. She was responsible for marketing , merchandising, category
management, store design and logistics. In 1998 she was named Drugstore Marketer
of the Year and identified as "one of the top 20 women to watch" by Advertising
                                                                    -----------
Age. From 1981 through 1996 she held positions of increasing responsibility with
---
Proctor & Gamble, including President of Noxell.

ITEM 11: EXECUTIVE COMPENSATION

Compensation of Executive Officers and Directors

     Compensation of Executive Officers. The following table sets forth
information about the annual and long-term compensation of the four highest paid
executive officers of the Company during the period August 16, 2000 through
December 31, 2001 (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                                                                 Long Term
                                                     Annual Compensation                       Compensation

                                    -------------------------------------------------------   ---------------
                                                                                    Other         Awards
                                                                                    Annual      Securities
Name                                                                                Compen-     Underlying
And                                                                                 Sation        Options/       All Other
                                                                                                                 Compen-
Principal Position                   Fiscal Year     Salary ($)      Bonus ($)      ($)(2)       SARs (#)        sation ($)
------------------                   -----------     ----------      ---------      ------       --------        ---------
<S>                                  <C>           <C>             <C>             <C>           <C>           <C>
David S. Graves (1) ..............       2001      $ 190,000         $  31,063     $ 6,600        180,000      $  4,301(3)
 President and                           2000         73,208                 -       1,750              -             -
 Chief Operating Officer

Anna T. Parmer ...................       2001      $ 140,209         $  15,358     $ 1,925         50,000      $      -
 Vice President of Technology            2000              -                 -           -              -             -

Catherine Killian ................       2001      $ 122,150         $   8,000     $ 5,500         85,000      $ 11,028(4)
 Vice President of Sales                 2000              -                 -           -              -             -

Stuart A. Finnigan ...............       2001      $ 128,333         $  27,525     $ 6,600        100,000      $  1,365(3)
 Vice President of Operations            2000              -                 -           -              -             -
</TABLE>

                                       27

<PAGE>

____________
    (1) Mr. Graves became a full-time employee of the Company on August 16,
        2000.
    (2) This amount represents automobile allowance for each officer.
    (3) This amount represents the Company match on employee 401(k)
        contributions.
    (4) All other compensation represents taxable expenses in connection with
        Ms. Killian's relocation.

        During 2001, our current directors and executive officers, except our
president and chief operating officer, vice president of technology, vice
president of sales and vice president of operations, were employees of Sylvan or
Sylvan Ventures and were not separately compensated by us for services. Ms.
Kaplan, one of our directors, is a consultant to the Company and received
compensation of $135,000 in 2001. Mr. Offutt, our vice president and chief
financial officer, who also serves as vice president and chief financial officer
of another Sylvan Venture company, Mindsurf, Inc., was hired in September 2001.
We pay a portion of his compensation and benefits and Mindsurf, Inc. pays the
remainder. Our portion did not exceed $100,000 for 2001. No other officers'
compensation exceeded $100,000 in 2001. Sylvan did not allocate any of its
corporate overhead for salaries to us during 2001.

        During 2000, our current directors and executive officers, were
employees of Sylvan or Sylvan Ventures and were not separately compensated for
those services. For the period January 1, 2000 through August 15, 2000, David
Graves, our President, was an employee of Sylvan and not separately compensated
by us for his services. Sylvan allocated $205,196 of its corporate overhead for
salaries to us during 2000.

        During 1999, we operated as an unincorporated division of Sylvan.
Accordingly, during 1999, we did not have any directors or executive officers.
Employees of Sylvan, including our current directors and executive officers,
that provided services to us during 1999, were not separately compensated for
those services. Sylvan allocated $219,622 of its corporate overhead for salaries
to us during 1999.

        These allocations were intended to reflect an estimate of all services
that Sylvan and Sylvan Ventures employees provided to us during 2000 and 1999;
however, we believe that any attempt to determine the portion of these
allocations that would have been attributable to our executive officers would be
speculative.

        Option Grants In The Last Fiscal Year. The following table sets forth
information about options to purchase shares of the Common Stock granted to the
Named Executive Officers during the last fiscal year.

<TABLE>
<CAPTION>
                                        Individual Grants
                      ----------------------------------------------------------
                           Number of       Percent of
                           Securities     Total Options                                  Potential Realizable Value
                           Underlying      Granted to      Exercise                      at Assumed Annual Rates of
                            Options       Employees in     Price per   Expiration               Stock Price
Name                        Granted        Fiscal Year     Share(1)      Date           Appreciation for Option Term
----                        -------        -----------     --------      ----           ----------------------------
                                                                                           5%(2)            10% (2)
                                                                                           -----            -------
<S>                        <C>            <C>             <C>          <C>              <C>              <C>
David S. Graves ........    180,000          29.2%        $0.975       Sep 1, 2009       $110,300        $279,900

Anna T.Parmer ..........     50,000           8.1%        $0.975       May 3, 2010       $ 30,650        $ 77,750

Catherine Killian ......     85,000          13.8%        $0.975       May 3, 2010       $ 52,105        $132,175

Stuart A. Finnigan .....    100,000          16.2%        $0.975       Oct 14, 2010      $ 61,300        $155,500
</TABLE>

______________

(1)     The exercise price equaled the fair market value of the Common Stock as
        determined by the Board of Directors on the date of grant. The exercise
        price is payable in cash or by delivery of shares of Common Stock having
        a fair market value equal to the exercise price of options exercised.
(2)     The 5% and 10% assumed annual rates of stock price appreciation used to
        calculate potential gains to optionees are mandated by the rules of the
        Securities and Exchange Commission. The potential realizable value does
        not represent the Company's prediction of its

                                       28

<PAGE>

        stock price performance. There can be no assurance that the stock price
        will actually appreciate over the 10-year option term at the assumed 5
        percent and 10 percent levels or at any other level.

        Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values of eSylvan options. The following table sets forth information
concerning the number and exercise price of the options to purchase Common Stock
of eSylvan exercised by the Named Executive Officers during the last fiscal year
and the number and value of unexercised options to purchase Common Stock of
eSylvan held at the end of the fiscal year by the Named Executive Officers.
Value is considered to be, in the case of exercised options, the difference
between exercise price and fair market value as determined by the board of
directors on the date of exercise, and, in the case of unexercised eSylvan
options and exercisable options, the difference between exercise price and the
fair market value as determined by the board of directors on December 31, 2001.

<TABLE>
<CAPTION>
                                                                      Number of Securities
                                                                     Underlying Unexercised         Value of Unexercised
                                                                          Options Held              In-the-Money Options
                                                                    at Fiscal Year-End (#)(1)      at Fiscal Year-End ($)
                                   Shares
                                 Acquired on          Value                Exercisable/                  Exercisable/
Name                            Exercise (#)      Realized ($)             Unexercisable                 Unexercisable
----                            -------------     -------------            --------------                -------------
<S>                             <C>               <C>               <C>                            <C>
David S. Graves                          -              $  -                   90,000(E)                 $  -(E)
                                         -                 -                   90,000(U)                    -(U)

Anna T. Parmer                           -                                     12,500(E)                 $  -(E)
                                         -              $  -                   37,500(U)                    -(U)
                                                           -
Catherine Killian                        -                                     21,250(E)                 $  -(E)
                                                        $  -                   63,750(U)                    -(U)
                                                           -
Stuart A. Finnigan                       -                                     25,000(E)                 $  -(E)
                                                        $  -                   75,000(U)                    -(U)
                                         -                 -
</TABLE>
_______________
(1)     (E) = Exercisable; (U) = Unexercisable.

        Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values of Sylvan Options. Certain of the Named Executive Officers were
formerly employees of Sylvan. In connection with their employment with Sylvan,
they participated in stock option programs sponsored by Sylvan. The following
table sets forth information concerning the number and exercise price of the
options to purchase Common Stock of Sylvan exercised by the Named Executive
Officers during the last fiscal year and the number and value of unexercised
options to purchase Common Stock of Sylvan held at the end of the fiscal year by
the Named Executive Officers. Value is considered to be, in the case of
exercised options, the difference between exercise price and market price for
Sylvan common stock on the date of exercise and, in the case of unexercised
options and exercisable options, the difference between exercise price and
market price for Sylvan common stock at December 31, 2001.

<TABLE>
<CAPTION>
                                                         Number of Securities
                                                        Underlying Unexercised      Value of Unexercised
                                                             Options Held            In-the-Money Options
                                                       at Fiscal Year-End (#)(1)    at Fiscal Year-End ($)
                            Shares
                         Acquired on       Value             Exercisable/               Exercisable/
Name                     Exercise (#)   Realized ($)        Unexercisable              Unexercisable
----                     ------------   ------------   -------------------------    ----------------------
<S>                      <C>            <C>            <C>                          <C>
David S. Graves           30,000        $232,700              1,250(E)                 $ 11,200(E)
                                                             15,000(U)                 $ 64,425(U)

Anna T. Parmer                 -        $      -                  -(E)                 $      -(E)
                                                                  -(U)                 $      -(U)

Catherine Killian         36,750        $431,608                750(E)                 $  6,720(E)
                                                              2,250(U)                 $ 20,160(U)

Stuart A. Finnigan         8,500        $110,250             24,625(E)                 $174,549(E)
                                               -              7,500(U)                 $ 70,200(U)
</TABLE>
_______________
(1)     (E) = Exercisable; (U) = Unexercisable.

Other Compensation Arrangements

        Services Agreement. Under our services agreement with Sylvan, we have
contracted with Sylvan to provide management services to us. These management
services include the services of members of our management team and board of
directors. Specifically, Messrs. Hoehn-Saric, McGee, Zentz and Cohen and Ms.
Bennett provide services to us at the request of Sylvan and/or Sylvan Ventures
pursuant to this agreement. See "Business-Services provided to us by
Sylvan-Services Agreement."

        Indemnification by Sylvan and Sylvan Ventures Since Messrs. Hoehn-Saric
and McGee serve as officers and directors at the request of Sylvan Ventures,
each is entitled to indemnification from Sylvan Ventures for their activities in
such capacities. Since Mr. Cohen serves as director and Mr. Zentz and Ms.
Bennett serve as officers at the request of Sylvan, each is entitled to
indemnification from Sylvan for their activities in such capacities.

Director's Compensation

        Although the Company has not paid, and has no current plans to pay,
compensation to its directors and executive officers that are employees of
Sylvan or Sylvan Ventures, these individuals may be entitled to stock options
grants under our 2000 Omnibus Stock Plan. During 2001, 120,000 and 15,000 shares
were granted to Messrs. Cohen and Zentz, respectively, on the same terms as
those shares granted to employees of the Company.

                                       29



<PAGE>

Committees of the Board of Directors

     During 2002, the Board of Directors established a Compensation Committee.
The Compensation Committee will establish the compensation for executive
officers of the Company and generally review benefits and compensation for all
officers and employees. It will also administer the Company's stock option
plans. Peter Cohen and Beth J. Kaplan are the initial members of the
Compensation committee.

Series A Preferred Stock Director

     Under our charter, holders of our Series A preferred stock have the right
to elect one member of our board of directors. The Series A preferred
stockholders nominated Barry Miller and he was elected to our board of directors
on February 12, 2001.

Program Agreement

     Sylvan has entered into a program agreement with the FOA, under which,
during the term of our license agreement with Sylvan, Sylvan has agreed to:

     .    cause us to elect a person designated by the FOA and approved by
          Sylvan to our board of directors, and

     .    establish a committee, the eSylvan Committee, comprised of two
          officers of Sylvan and two representatives of the FOA to:

          .    negotiate with us regarding service fees and other modifications
               to the franchise benefits under the participation agreement
               between Sylvan and participating Sylvan franchisees,

          .    review with Sylvan the exploitation of technology and
               content developed by us and which we now or hereafter license to
               Sylvan, pursuant to the license agreement, and to review our
               schedule and priorities for Internet technology transfer to
               Sylvan franchisees, either through direct marketing by us (i.e.,
               wholesaling) or through acquisition from us and distribution of
               technology products,

          .    review and approve proposed modifications to the license
               agreement that may have a material effect on Sylvan franchisees,

          .    review methodology for population analysis by territory for
               purposes of distributing our stock, or for payments of reverse
               royalties as contemplated in the form of participation agreement,

          .    analyze Sylvan franchisee participation levels in our business
               and to develop strategies for increasing participation and
               benefits to Sylvan franchisees,

          .    analyze efficacy data on our programs and determine areas where
               the SYLVAN brand may be negatively impacted, and to propose
               strategies to deal with any related areas of concern,

          .    review audit data and verify proper payments have been made to
               Sylvan franchisees and other relevant financial matters, and

          .    provide such other guidance to Sylvan as the eSylvan Committee
               deems appropriate.

     Deadlocks on the eSylvan Committee shall be resolved by the chief executive
officer of Sylvan. Sylvan has agreed not to consent to certain material
amendments to the license agreement without the affirmative vote of at least
three-quarters of the members of the eSylvan Committee. See
"Business-Relationship with Sylvan and Sylvan Ventures."

2000 eSylvan, Inc. Omnibus Stock Plan

     Our board of directors has established the 2000 eSylvan, Inc. Omnibus Stock
Plan to enable us to grant equity compensation to our directors, officers,
employees and consultants. Our stock plan is administered by our board of
directors. There are currently 3,000,000 shares of our common stock reserved and
authorized for issuance

                                       30

<PAGE>

under the plan. As of December 31, 2001, there were 1,215,500 options
outstanding. The options were issued at their estimated fair market value on the
date of grant, vest over a period of four years and expire ten years from the
date of grant. 1,215,500 options had been granted under the plan as of December
31, 2001.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information about the beneficial ownership
of shares of our common stock and our Series A preferred stock as of December
31, 2001 by (i) each person known by us to own beneficially 5% or more of the
outstanding shares prior to this offering, (ii) each of our directors and
executive officers, (iii) our Chief Executive Officer and (iv) all of our
directors and executive officers as a group. Except as otherwise indicated, we
believe that the beneficial owners of stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares, subject to community property laws where applicable. The
percentages of beneficial ownership of common stock are based on 14 million
shares of common stock outstanding as of December 31, 2001. The percentages of
beneficial ownership of Series A preferred stock are based on 10,526,316 shares
of Series A preferred stock outstanding as of December 31, 2001. No shares of
our Class A Convertible Common Stock were owned by the parties listed below as
of such date.

<TABLE>
<CAPTION>
Name and Address of                                       Common Stock                 Series A Preferred Stock
Beneficial Holder/(1)/                                 Beneficially Owned                 Beneficially Owned
----------------------                                 ------------------                 ------------------

                                                    Number          Percentage         Number          Percentage
                                                    ------          ----------         ------          ----------
<S>                                              <C>                <C>              <C>               <C>
Sylvan Ventures, LLC........................      13,857,143          98.98%          10,526,316          100%
Sylvan Learning Systems, Inc ...............      13,857,143/(2)/     98.98%          10,526,316/(2)/     100%
R. Christopher Hoehn-Saric .................          -                 *                 -                -
David S. Graves ............................          -                 *                 -                -
Barry C. Offutt ............................
B. Lee McGee ...............................          -                 *                 -                -
Robert W. Zentz ............................          -                 *                 -                -
Anna T. Parmer .............................          -                 *                 -                -
Catherine Killian ..........................          -                 *                 -                -
Stuart A. Finnigan .........................          -                 *                 -                -
Peter Cohen ................................          -                 *                 -                -
Susannah Bennett ...........................          -                 *                 -                -
Barry E. Miller ............................          -                 *                 -                -
Beth J. Kaplan .............................          -                 *                 -                -
All directors and Executive Officers as a
group (12 persons) .........................          -                 *                 -                -
</TABLE>

_________________

*Represents beneficial ownership of not more than one percent of the outstanding
common stock.

(1)  The address of each stockholder listed in this table is c/o eSylvan, Inc.,
     506 South Central Avenue, Baltimore, MD 21202.

(2)  Represents shares held by Sylvan Ventures, LLC.  Sylvan Learning Systems,
     Inc. is a controlling security holder of Sylvan Ventures, LLC and certain
     officers and/or directors of Sylvan Learning Systems, Inc. also serve as
     officers and/or managers of Sylvan Ventures, LLC.


ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Christopher Hoehn-Saric, our chairman, chief executive officer and director
is a director and former co-chief executive officer and chairman of Sylvan
Learning Systems, Inc. and chairman, president and a manager of

                                       31

<PAGE>

Sylvan Ventures, LLC. B. Lee McGee, our senior vice president, treasurer,
assistant secretary and director is a managing director, chief financial officer
and treasurer of Sylvan Ventures, LLC. Robert W. Zentz, our secretary, assistant
treasurer and director is vice president and general counsel of Sylvan Learning
Systems, Inc. and secretary of Sylvan Ventures, LLC. Peter Cohen, our director,
is president of Sylvan Learning Systems, Inc. Sylvan Ventures, LLC is a majority
owned subsidiary of Sylvan Learning Systems, Inc. Susannah Bennett, our
assistant secretary, is vice president of Sylvan. Barry C. Offutt, our chief
financial officer, is also chief financial officer of another Sylvan Venture
company, Mindsurf, Inc. Mr. Hoehn-Saric beneficially owns less than five percent
and three percent of the outstanding equity securities of Sylvan and Sylvan
Ventures, respectively. Each of Messrs. Graves, Offutt, McGee, Zentz and Cohen
and Ms. Bennett beneficially owns less than one percent of the outstanding
equity securities of Sylvan.

     Our relationships with Sylvan and Sylvan Ventures are key elements of our
business plan. These relationships are set forth in various contracts between us
that require compensation to Sylvan or Sylvan Ventures in exchange for certain
assets and services. The terms and conditions of these agreements were not
negotiated on an arms-length basis with Sylvan or Sylvan Ventures, and,
accordingly, we expect that these terms and conditions may be less favorable to
us than the terms and conditions that might have been negotiated on an
arms-length basis with an unaffiliated third party. We believe, however, that
the agreements and financing described below would not be available to us from
an unaffiliated third party. At the time these agreements were initiated we had
no independent members of our board of directors; however, the transactions
described below were unanimously approved by our stockholders. After issuing our
Class A Convertible Common Stock on March 2, 2001, we have added one independent
member to our board of directors.

     On June 30, 2000, we entered into a license agreement with Sylvan pursuant
to which we have licensed the materials we deem necessary to implement our
business plan. See "Business-Relationship with Sylvan and Sylvan Ventures." We
have agreed to pay Sylvan an initial license fee of $1 million and we have
agreed to pay Sylvan a periodic, running royalty equal to 4% of our net revenues
(gross revenues less discounts and refunds) and an additional amount equal to
any sales, gross receipts or similar tax imposed on Sylvan. The initial license
fee of $1 million was agreed to be an initial capital contribution by Sylvan,
and no cash was paid for the initial license fee. During the first year of this
agreement, there will be no guaranteed minimum royalty, but for each calendar
year thereafter, there will be a guaranteed minimum royalty equal to 120% of the
prior year's minimum royalty, with the guaranteed minimum royalty for calendar
year 2002 of $400,000. As part of our arrangement with Sylvan, Sylvan has agreed
to reduce future royalty payments due under the terms of the license agreement
by any amounts that we pay to franchisees who enter into a participation
agreement with us. Accordingly, we will not accrue or pay royalties to Sylvan
under this license agreement until the amount of royalties that would otherwise
be payable under this agreement exceeds the amount paid to franchisees.

     On June 30, 2000, we entered into professional services agreement with
Sylvan which sets forth the terms by which we will obtain referrals of students
from Sylvan and its franchisees, make referrals to Sylvan and its franchisees,
compensate Sylvan for providing tutors and other professionals to us and
undertake certain co-marketing arrangements with Sylvan as follows:

     .    Student Referrals. We may elect to participate in a cross referral
          program whereby we and Sylvan receive payments for each student
          referred to each other. Under the referral program, we will receive or
          pay amounts equal to 5%, up to a maximum of $100, of all revenues
          received by Sylvan or us, respectively, for the programs to which each
          referred student initially subscribes, including testing and
          registration fees. For each student enrollment a Sylvan franchisee
          generates for us, we will pay Sylvan a sales commission of 5%, up to a
          maximum of $100, of the revenues we receive for the first programs to
          which such student initially subscribes through the franchisee's
          center.

     .    Professional Services. Prior to assigning a diagnostic and
          prescriptive instructor to a student, we must request Sylvan to
          provide an instructor for a committed period. In the event Sylvan does
          not provide an instructor, we may use instructors that are not
          provided by Sylvan. In the event Sylvan makes personnel available for
          committed periods, we shall reimburse Sylvan for the salary of such
          instructors or other personnel at an hourly rate based on the base
          compensation such person receives from Sylvan. In addition to salary
          reimbursement, Sylvan shall receive a 30% management fee for each hour
          of direct instruction or test administration, including some specified

                                       32

<PAGE>

          preparation time, or parent conferences. Additional services to be
          provided to us by center personnel and corresponding fees may be
          arranged subsequently. If Sylvan refers instructors to us on an
          independent contractor basis, we will pay Sylvan a referral fee of
          $100.

     .    Co-Marketing. We have agreed with Sylvan that we will provide a link
          to Sylvan's website on our website and Sylvan will provide a link to
          our website on its website. Sylvan has agreed to adhere to our
          reasonable directives concerning promotion of our business including
          displaying posters or other promotional materials in Sylvan-owned
          centers and requesting its franchisees to display posters or other
          promotional materials in their centers.

No fees have been incurred or paid under this agreement as of December 31, 2001.

     On June 30, 2000, we entered into a services agreement with Sylvan pursuant
to which Sylvan has agreed to provide management services, information support
services, corporate accounting services, PeopleSoft (database management)
services, human resources/payroll services, general liability insurance and
legal services to us on an independent contractor basis at fees that are fair
and reasonable, as jointly determined by us and Sylvan for the services provided
based on our utilization of such services. Fees that have been billed but that
have not been paid within 30 days shall accrue simple interest at the prime rate
plus one percent per annum. This agreement, which had an initial term of
one-year, has been extended through June 30, 2002 and can be terminated at any
time on 60 days notice. Fees for services under this agreement were $715,098 and
$286,918 for the year ended December 31, 2001 and the six-month period ended
December 31, 2000, respectively.

     On June 30, 2000, we entered into a facility use agreement with Sylvan
pursuant to which Sylvan has agreed to provide us with the use of its facilities
for a quarterly use fee and separate overhead fee based upon Sylvan's good faith
estimate of our use of such facilities. In the event Sylvan owns a facility, the
use fee is based on market rent. In the event Sylvan leases a facility, the use
fee is based on Sylvan's lease payments. We currently occupy office space
pursuant to this agreement This agreement, which had an initial term of
one-year, has been extended through June 30, 2002 and can be terminated at any
time on 60 days notice. Fees for services under this agreement were $548,489 and
$242,386 for the year ended December 31, 2001 and the six-month period ended
December 31, 2000, respectively.

     On June 30, 2000, we entered into revolving credit note with Sylvan
Ventures, LLC pursuant to which we may borrow up to $10 million. The note is
non-interest bearing and expires on December 31, 2002.

     On June 30, 2000, we entered into a contribution agreement with Sylvan
Learning Systems, Inc. under which we agreed to issue 14,000,000 shares of our
common stock to Sylvan, of which 285,714 shares of our common stock were
directed to Ivy West Educational Services, Inc., in exchange for (i) $5 million
in cash, (ii) Sylvan's agreement to enter into the following contracts: eSylvan
license agreement, facilities use agreement, services agreement and program
agreement and (iii) Sylvan's contribution of the following trademarks: 24-7
TUTORS, 24-7TUTORS.COM, ANYTIMETUTORS.COM and ANYTIME TUTORS.

     On June 30, 2000, we entered into a stock purchase agreement with Sylvan
Ventures, LLC under which we have agreed to issue an aggregate of 10,526,316
shares of Series A preferred stock in closings on the last day of each fiscal
quarter through December 31, 2001 for an aggregate price of $20 million, which
represents a price per share of $1.90. In connection with this transaction, we
have also entered into a registration rights agreement under which we have
agreed to register the shares of common stock to be issued on conversion of the
Series A preferred stock under certain circumstances. As of December 31, 2001,
all of the shares had been fully paid and were issued and outstanding.

     During February 2002, Sylvan Ventures purchased an additional 4,947,368
shares of Series A preferred stock for $9.4 million. A portion of these proceeds
was used to pay the balance outstanding under the line of credit agreement
between Sylvan Ventures and the Company.

     During the period from October 1, 1999 through June 30, 2000, we incurred a
net operating loss that was used by Sylvan to reduce consolidated income taxes
payable. We entered into a tax sharing agreement with Sylvan. This agreement
provided that income tax benefits attributable to our operations, which were
realized by Sylvan, would be treated as distributions to Sylvan. During the
period from inception through June 30, 2000, we and Sylvan

                                       33

<PAGE>

estimated that the tax benefits realized by Sylvan arising from our operations
equaled approximately $1.77 million, summarized as follows:

         Tax benefit at U.S. statutory rate of 35%            $(1,588,295)
         Effect of permanent differences                            1,508
         State income taxes, net of federal benefit              (181,667)
                                                              -----------
         Total                                                $(1,768,454)

     Sylvan will not realize income tax benefits in future periods attributable
to our operations as a result of the transfer of Sylvan's ownership in our
company to Sylvan Ventures on June 30, 2000. 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 our company.

Barry E. Miller, who serves as one of our directors, was issued 16,664 shares of
Class A Convertible Common Stock and received a cash payment in the amount of
$5,832. Mr. Miller is the holder of a Sylvan franchise and participated in the
offering of Class A Convertible Common Stock solely on that basis. Mr. Miller is
also a director of Sylvan's FOA and the Sylvan National Advertising Fund.

PART IV.

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

        (a)    1.    Financial Statements
                     --------------------

                     The following financial statements of eSylvan, Inc., are
                     filed as part of this Form 10-K on the pages indicated:

                            Index to Financial Statements              Page
                            -----------------------------              ----

                            Report of Independent Auditors........     F-2

                            Balance Sheets .......................     F-3

                            Statements of Operations .............     F-5

                            Statements of Deficiency of Assets ...     F-6

                            Statements of Cash Flows .............     F-8

                            Notes to Financial Statements ........     F-9

               2.    Financial Statement Schedules
                     -----------------------------

                     None.

        (b)    Reports on Form 8-K

                     None.

        (c)    Exhibits. The exhibits to the Form 10-K have been included  only
               --------
               with the copy of this Form 10-K filed with the Securities and
               Exchange Commission. Copies of individual exhibits will be
               furnished to stockholders upon requests to eSylvan and payment of
               a reasonable fee.

Exhibit Number
--------------

3.1     Form of Articles of Amendment and Restatement of eSylvan, Inc.*

3.2     Form of Bylaws of eSylvan, Inc., as amended.*

                                       34

<PAGE>

4.1     Specimen certificate for shares of common stock.*

10.1    Form of Services Agreement dated June 30, 2000, by and between eSylvan,
        Inc. and Sylvan Learning Systems, Inc.*

10.2    Form of Facilities Use Agreement dated June 30, 2000, by and between
        eSylvan, Inc. and Sylvan Learning Systems, Inc.*

10.3    Form of License Agreement dated June 30, 2000 by and between eSylvan,
        Inc. and Sylvan Learning Systems, Inc.*

10.4    Form of Professional Services Agreement dated June 30, 2000, by and
        between eSylvan, Inc. and Sylvan Learning Systems, Inc.*

10.5    Form of Revolving Credit Facility dated June 30, 2000, by and between
        eSylvan, Inc. and Sylvan Ventures LLC.*

10.6    Stock Purchase Agreement dated as of June 30, 2000, by and between
        eSylvan, Inc. and Sylvan Ventures LLC.*

10.7    Form of eSylvan, Inc., 2000 Omnibus Stock Plan.*

10.8    Form of Subscription Agreement by and between eSylvan, Inc. and the
        Class A Convertible Redeemable Preferred Stockholders.*

10.9    Form of Participation Agreement by and between Sylvan Learning Systems,
        Inc. and the Class A Convertible Redeemable Preferred Stockholders.*

23.1    Consent of Ernst & Young LLP

24.1    Power of Attorney.


* Indicates an exhibit previously filed with the Securities and Exchange
Commission as an exhibit to our Registration Statement on Form S-1, (File No.
333-42530), such exhibit incorporated herein by reference.

                                       35

<PAGE>

                                   SIGNATURES

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

                                                     eSYLVAN, INC.

             March 29, 2002                /s/ R. Christopher Hoehn-Saric
                                      __________________________________________
                                              R. Christopher Hoehn-Saric
                                                Chairman of the Board,
                                                Chief Executive Officer
                                                    and Director
                                            (Principal Executive Officer)

             March 29, 2002                     /s/ Barry C. Offutt
                                      __________________________________________
                                                  Barry C. Offutt
                                      Vice President and Chief Financial Officer
                                             (Principal Financial Officer)

                                       36

<PAGE>

                                  eSylvan, Inc.
                    (a Subsidiary of Sylvan Ventures, LLC and
                         a Development Stage Enterprise)

                          Audited Financial Statements

              Years ended December 31, 2001 and 2000 and the period
          October 1, 1999 (date of inception) through December 31, 1999

                                    Contents

Report of Independent Auditors............................................   F-2

Audited Financial Statements

Balance Sheets ...........................................................   F-3
Statements of Operations .................................................   F-5
Statements of Deficiency of Assets .......................................   F-6
Statements of Cash Flows .................................................   F-8
Notes to Financial Statements ............................................   F-9

                                      F-1

<PAGE>

                         Report of Independent Auditors

The Board of Directors and Stockholders
eSylvan, Inc.

We have audited the accompanying balance sheets of eSylvan, Inc. (a subsidiary
of Sylvan Ventures, LLC), a development stage company, as of December 31, 2001
and 2000, and the related statements of operations, deficiency of assets and
cash flows for the years ended December 31, 2001 and 2000, the period October 1,
1999 (date of inception) through December 31, 1999, and the period October 1,
1999 (date of inception) through December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eSylvan, Inc. at December 31,
2001 and 2000, and the results of its operations and its cash flows for the
years ended December 31, 2001 and 2000, the period October 1, 1999 (date of
inception) through December 31, 1999, and the period October 1, 1999 (date of
inception) through December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

The accompanying financial statements have been prepared assuming that eSylvan,
Inc. will continue as a going concern. As more fully described in Note 13, the
Company's current and projected operating losses and limited committed funding
raise substantial doubt about its ability to continue as a going concern.
Management's plans to address this matter are also described in Note 13. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.

Baltimore, Maryland                                        /s/ Ernst & Young LLP
February 15, 2002

                                      F-2

<PAGE>

                                  eSylvan, Inc.
                      (A Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                                 Balance Sheets

<TABLE>
<CAPTION>

                                                                                           December 31
                                                                                    2001                   2000
                                                                          ---------------------------------------------
<S>                                                                       <C>                         <C>
Assets
Current assets:
   Cash                                                                         $     250,880         $             -
   Accounts receivable, net of allowance of $32,713 in 2001                            85,475                  39,493
   Prepaid expenses                                                                   127,456                  83,706
   Prepaid royalties to Sylvan                                                        839,153                       -
                                                                          ---------------------------------------------
Total current assets                                                                1,302,964                 123,199

Property and equipment:
   Furniture and equipment                                                          1,532,672               1,688,540
   Software                                                                         2,430,969               1,693,633
   Educational content                                                                969,427                 752,938
   Leasehold improvements                                                               4,374                 187,735
                                                                          ---------------------------------------------
                                                                                    4,937,442               4,322,846
   Accumulated depreciation and amortization                                       (2,414,992)               (681,763)
                                                                          ---------------------------------------------
                                                                                    2,522,450               3,641,083

Intangible Assets:
Participation agreements, net of accumulated
       amortization of $268,240                                                     1,877,683                       -
Deferred stock issuance costs                                                               -                 706,920
Other assets                                                                                -                   7,246





                                                                          ---------------------------------------------
Total assets                                                                    $   5,703,097         $     4,478,448
                                                                          =============================================
</TABLE>


                                      F-3


<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                           Balance Sheets (continued)

<TABLE>
<CAPTION>
                                                                                            December 31
                                                                                      2001             2000
                                                                                   -------------   -------------
<S>                                                                                <C>             <C>
Liabilities and deficiency of assets
Current liabilities:
   Accounts payable and accrued expenses                                           $     979,788   $   2,723,262
   Fees payable to Sylvan                                                                201,740         509,325
   Borrowings under line of credit with Sylvan Ventures                                4,469,673       3,078,699
   Deferred revenue                                                                      387,122           1,453
                                                                                   -------------   -------------
Total current liabilities                                                              6,038,323       6,312,739

Commitments and contingent liabilities                                                         -               -

Deficiency of assets:
   Series A Convertible Preferred Stock, par value $.001 per share - 20,000,000
     shares authorized, 10,526,316 shares subscribed, 10,526,316 shares issued
     and outstanding as of December 31, 2001 and 3,508,772 shares issued and
     outstanding as of December 31, 2000                                                  10,526          10,526
   Class A Convertible Common Stock, par value $.001 per share - 10,000,000
     shares authorized, 2,452,484 shares issued and outstanding as of
     December 31, 2001                                                                     2,452               -
   Common stock, par value $.001 per share - 70,000,000 shares authorized,
     14,000,000 shares issued and outstanding as of December 31, 2001 and
     2000                                                                                 14,000          14,000
   Additional paid-in capital                                                         24,019,228      22,755,913
   Less:  Subscription receivable for Series A Convertible Preferred Stock                     -     (13,333,334)
                                                                                   -------------   -------------
                                                                                      24,046,206       9,447,105
   Accumulated deficit                                                               (24,381,432)    (11,281,396)
                                                                                   -------------   -------------
Total deficiency of assets                                                              (335,226)     (1,834,291)
                                                                                   -------------   -------------
Total liabilities and deficiency of assets                                         $   5,703,097   $   4,478,448
                                                                                   =============   =============
</TABLE>


See accompanying notes.

                                      F-4

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                            Statements of Operations



<TABLE>
<CAPTION>
                                                                                       Period              Period
                                                                                   October 1, 1999     October 1, 1999
                                                                                 (date of inception) (date of inception)
                                             Year ended          Year ended        through December    through December
                                          December 31, 2001   December 31, 2000        31, 1999            31, 2001
                                         ------------------- ------------------- ------------------- -------------------
<S>                                      <C>                 <C>                  <C>               <C>
Revenues                                 $         460,331   $          15,921    $             -   $        476,252

Costs and expenses:
Direct costs of services provided                1,144,375             151,247                   -         1,295,622
Sales and marketing                              2,249,905           1,082,431                   -         3,332,336
General and administrative                       6,698,547           5,890,081             376,204        12,964,832
Research and development                         2,326,315           4,883,521              51,690         7,261,526
Management services and facilities
   usage charges from Sylvan                     1,263,587             529,286                   -         1,792,873
Allocated indirect overhead costs from
   Sylvan                                                -             205,196             219,622           424,818
                                         ------------------- ------------------- ----------------- -------------------
Total operating costs and expenses              13,682,729          12,741,762             647,516        27,072,007
                                         ------------------- ------------------- ----------------- -------------------
 Loss from operations                          (13,222,398)        (12,725,841)           (647,516)      (26,595,755)
 Interest and other expenses                       403,291             127,600                   -           530,891
 Interest expense forgiven by Sylvan
  Ventures                                        (525,653)                  -                   -          (525,653)
                                         ------------------- ------------------- ----------------- -------------------
 Loss accumulated during the
  development stage                            (13,100,036)        (12,853,441)           (647,516)      (26,600,993)
Allocated income tax benefit                             -           1,516,117             252,337         1,768,454
                                         ------------------- ------------------- ----------------- -------------------
 Net loss accumulated during the
     development stage                   $     (13,100,036)  $     (11,337,324)   $       (395,179) $    (24,832,539)
                                         =================== =================== ================= ===================

 Basic and diluted loss per common
     share                               $           (0.82)  $           (1.62)                n/a  $          (2.42)
                                         =================== =================== ================= ===================
</TABLE>

See accompanying notes.

                                      F-5

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                       Statements of Deficiency of Assets

<TABLE>
<CAPTION>
                                                                                             Subscription
                                                                                             Receivable
                                                 Series A     Class A                       for Series A
                                      Owner's   Convertible Convertible         Additional  Convertible
                                        Net      Preferred    Common    Common   Paid-In     Preferred    Accumulated
                                     Investment    Stock      Stock     Stock    Capital       Stock        Deficit         Total
                                     ----------------------------------------------------------------------------------------------
<S>                                  <C>        <C>         <C>         <C>     <C>         <C>           <C>           <C>
Contributions from Sylvan for the
  period October 1, 1999 through
  December 31, 1999 (see Note 2)      $ 611,004    $     -        $-        $-  $         - $          -   $         -  $   611,004
Non-cash distributions to Sylvan
  for the period October 1, 1999
  through December 31, 1999
  (see Note 4)                         (252,337)         -         -         -            -            -             -     (252,337)
Net loss for the period
  October 1, 1999 (date of
  inception) through
  December 31, 1999                    (395,179)         -         -         -            -            -             -     (395,179)
                                      ----------------------------------------------------------------------------------------------
Balance at December 31, 1999            (36,512)         -         -         -            -            -             -      (36,512)
Contributions from Sylvan for the
  period January 1, 2000 through
  February 2, 2000 (see Note 2)         383,043          -         -         -            -            -             -      383,043
Non-cash distributions to Sylvan for
  the period January 1, 2000 through
  February 2, 2000 (see Note 4)         (46,526)         -         -         -            -            -             -      (46,526)
Net loss for the period January 1,
  2000 through February 2, 2000         (55,928)         -         -         -            -            -             -      (55,928)
Incorporation and reorganization on
  February 3, 2000                     (244,077)         -         -         -      244,077            -             -            -
Contributions from Sylvan for the
  period February 3, 2000 through
  December 31, 2000 (see Note 2)              -          -         -         -    4,005,953            -             -    4,005,953
Non-cash distributions to Sylvan for
  the period February 3, 2000 through
  December 31, 2000 (see Note 4)              -          -         -         -   (1,469,591)           -             -   (1,469,591)
Sale of 14,000,000 shares of
  common stock to Sylvan
  (see Note 7)                                -          -         -   $14,000      (14,000)           -             -            -
Subscription to purchase 10,526,316
  shares of Series A Preferred Stock
  by Sylvan Ventures (see Note 5)             -     10,526         -         -   19,989,474  (20,000,000)            -            -
Payment of quarterly subscriptions
  to purchase 3,508,772 shares of
  Series A Preferred Stock
  (see Note 5)                                -          -         -         -            -    6,666,666             -    6,666,666
Net loss for the period
  February 3, 2000 (date of
  incorporation) through
  December 31, 2000                           -          -         -         -            -      -         (11,281,396)  11,281,396)
                                      ----------------------------------------------------------------------------------------------
Balance at December 31, 2000          $       -    $10,526        $-   $14,000  $22,755,913 $(13,333,334) $(11,281,396) $(1,834,291)
                                      ----------------------------------------------------------------------------------------------
</TABLE>

  See accompanying notes.

                                      F-6

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                 Statements of Deficiency of Assets (continued)

<TABLE>
<CAPTION>
                                                                       Series A
                                                          Owner's     Convertible     Class A                  Additional
                                                            Net        Preferred    Convertible    Common        Paid-In
                                                        Investment       Stock      Common Stock   Stock         Capital
                                                        --------------------------------------------------------------------
<S>                                                     <C>           <C>           <C>           <C>        <C>
 Balance at December 31, 2000                           $        -    $    10,526   $          -  $ 14,000   $ 22,755,913
 Issuance of Class A
     Convertible Common Stock to Sylvan Franchisees                                        2,452                2,143,471
 Costs related to issuance of Class A Convertible
     Common Stock in exchange for
     participation agreements (see Note 6)                                                                       (880,156)
 Payment of quarterly subscriptions to purchase
       7,017,544 shares of Series A preferred stock
       (see Note 5)
 Net loss for the year ended December 31, 2001
                                                        --------------------------------------------------------------------
 Balance at December 31, 2001                           $        -    $    10,526   $      2,452  $ 14,000   $ 24,019,228
                                                        ====================================================================

<CAPTION>
                                                        Subscription
                                                         Receivable
                                                        for Series A
                                                        Convertible
                                                         Preferred      Accumulated
                                                           Stock          Deficit        Total
                                                        -------------------------------------------
<S>                                                     <C>            <C>            <C>
 Balance at December 31, 2000                           $(13,333,334)  $(11,281,396)  $(1,834,291)
 Issuance of Class A
     Convertible Common Stock to Sylvan Franchisees                                     2,145,923
 Costs related to issuance of Class A Convertible
     Common Stock in exchange for
     participation agreements (see Note 6)                                               (880,156)
 Payment of quarterly subscriptions to purchase
       7,017,544 shares of Series A preferred stock
       (see Note 5)                                       13,333,334                   13,333,334
 Net loss for the year ended December 31, 2001                          (13,100,036)  (13,100,036)
                                                        -------------------------------------------
 Balance at December 31, 2001                           $          -   $(24,381,432)  $  (335,226)
                                                        ===========================================
</TABLE>

See accompanying notes

                                       F-7

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                                            Period           Period
                                                                                           October 1,       October 1,
                                                                                         1999 (date of    1999 (date of
                                                                                           inception)       inception)
                                                          Year ended      Year ended        through          through
                                                         December 31,    December 31,     December 31,     December 31,
                                                             2001            2000             1999             2001
                                                        ----------------------------------------------------------------
<S>                                                      <C>             <C>             <C>              <C>
Operating activities
Net loss                                                 $(13,100,036)   $(11,337,324)      $(395,179)    $(24,832,539)
Adjustments to reconcile net loss to net cash used in
  operating activities:
     Depreciation                                           1,937,781         681,763               -        2,619,544
     Amortization                                             268,240               -               -          268,240
     Allocated income tax benefit                                   -      (1,516,117)       (252,337)      (1,768,454)
     Changes in operating assets and liabilities:
       Accounts receivable                                    (45,982)        (39,493)              -          (85,475)
       Prepaid expenses                                       (43,750)        (83,706)              -         (127,456)
       Prepaid royalties to Sylvan                             19,232               -               -           19,232
       Other assets                                             7,246          (7,246)              -                -
       Accounts payable and accrued expenses               (1,743,474)      2,673,667          49,595          979,788
       Fees payable to Sylvan                                (307,585)        509,325               -          201,740
       Deferred revenue                                       385,669           1,453               -          387,122
                                                        ----------------------------------------------------------------
Net cash used in operating activities                     (12,622,659)     (9,117,678)       (597,921)     (22,338,258)
Investing activities
Purchase of property and equipment                           (930,483)     (4,309,763)        (13,083)      (5,253,329)
Proceeds from disposal of property and equipment              111,335               -               -          111,335
                                                        ----------------------------------------------------------------
Net cash used in investing activities                        (819,148)     (4,309,763)        (13,083)      (5,141,994)
Financing activities
Payment of direct costs incurred in connection with
  Class A Common Stock offering                              (173,236)       (706,920)              -         (880,156)
Payment to Sylvan Franchisees in connection with Class
  A Common Stock offering                                    (858,385)              -               -         (858,385)
Proceeds from borrowings under line of credit with
  Sylvan Ventures                                          14,724,308       9,745,365               -       24,469,673
Payments on line of credit with Sylvan Ventures           (13,333,334)     (6,666,666)              -      (20,000,000)
Sale of Series A Preferred Stock to Sylvan Ventures        13,333,334       6,666,666               -       20,000,000
Cash expenditures by Sylvan made on the Company's
  behalf and accounted for as capital contributions                 -       4,388,996         611,004        5,000,000
                                                        ----------------------------------------------------------------
Net cash provided by financing activities                  13,692,687      13,427,441         611,004       27,731,132
                                                        ----------------------------------------------------------------
Net change in cash and cash at end of period             $    250,880    $          -       $       -     $    250,880
                                                        ================================================================
</TABLE>

See accompanying notes.

                                      F-8

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                          Notes to Financial Statements

                                December 31, 2001

1.       Summary of Significant Accounting Policies

Organization and Operations

eSylvan, Inc., (the "Company") was incorporated by Sylvan Learning Systems, Inc.
("Sylvan") on February 3, 2000 under the laws of the state of Maryland for the
purpose of delivering through Internet-based applications high quality
supplemental education programs to families. Prior to incorporation and upon
inception on October 1, 1999, the Company operated as an unincorporated division
of Sylvan. On June 30, 2000, Sylvan contributed substantially all of its
ownership in the Company to its majority-owned subsidiary, Sylvan Ventures, LLC
("Sylvan Ventures").

Since inception, the Company's activities have consisted primarily of
organizational and research and development activities for its planned principal
operations. Accordingly, no significant revenues have been earned, and the
Company is considered a development stage company at December 31, 2001.

Basis of Financial Statement Presentation

As more fully discussed in Note 2, the accompanying statements of operations
include an allocation of Sylvan's corporate expenses for the period from
inception through June 30, 2000. The allocated expenses and contributions of
Sylvan prior to incorporation were accumulated into a single caption on the
balance sheet entitled "owner's net investment." Subsequent to incorporation on
February 3, 2000 through June 30, 2000, these allocations and contributions were
accounted for as additional paid-in capital.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

All of the accounting judgments, estimates and allocations used in the
preparation of the financial statements are based on assumptions that management
believes are reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the costs that would have resulted
if the Company operated as a separate entity.

                                      F-9

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

1.       Summary of Significant Accounting Policies (continued)

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives. Estimated useful lives of
furniture and equipment, computer software, and educational content range from
two to seven years. Leasehold improvements are depreciated over the lesser of
the lease term or the useful life of the asset.

Educational content consists of payments made to vendors to acquire and develop
educational content to be delivered to the Company's customers through its
Internet-based applications.

Intangible Assets

Intagible assets consists of the fair value of participation agreements executed
with Sylvan Learning Center Franchisees in connection with the issuance of Class
A Convertible Common Stock (see Note 6). Amortization is calculated on a
straight-line basis over the estimated useful life of six years.

Deferred Stock Issuance Costs

Deferred costs at December 31, 2000 represent costs incurred in connection with
the sale of 2,452,484 shares of Class A Convertible Common Stock (see Note 6).
All costs were accounted for as a reduction of additional paid-in capital upon
the completion of the offering.

Impairment of Long-Lived Assets

Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. If an impairment indicator is present,
the Company evaluates whether impairment exists on the basis of undiscounted
expected future cash flows from operations for the remaining amortization
period. If impairment exists, the asset is reduced by the estimated shortfall of
discounted cash flows.

                                      F-10


<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

1.       Summary of Significant Accounting Policies (continued)

Revenue Recognition

Revenues from the delivery of Internet-based educational services are recognized
in the period the services are provided.

Research and Development and Capitalized Software Costs

The Company accounts for web site and software development costs in accordance
with Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Costs incurred in planning the
development of the Company's web site have been expensed as research and
development costs. In July 2000, after completion of the planning stage and the
establishment of the plan's technological feasibility as evidenced by a detailed
program design, the Company began capitalizing the costs of developing software
to operate its web site. These costs are included in property and equipment in
the accompanying balance sheets. Amortization commenced in March 2001 when the
web site and software were substantially complete and in use by customers.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense totaled
$1,306,500 and $1,082,431, respectively, for the years ended December 31, 2001
and December 31, 2000. The Company did not incur any advertising expense during
the period October 1, 1999 (date of inception) through December 31, 1999.

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 these financial statements the required pro forma
information as if the fair value method had been elected.

                                      F-11

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

1.       Summary of Significant Accounting Policies (continued)

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.

Effect of New Accounting Pronouncements

In August 2001, the Financial Standards Board issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Statement No.144 Supercedes Statement
No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and provides a single accounting model for long-lived
assets to be disposed of. The Company will apply the new rules on accounting for
the impairment or disposal of long-lived assets beginning in the first quarter
of 2002. Statement No. 144 retains the requirements of Statement No. 121 to
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair value
of the asset. The Company does not believe that the adoption of the new standard
will have a material impact on its financial position or results of operations.

                                      F-12

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

2.       Related Party Transactions

Allocated Indirect Overhead Costs- October 1, 1999 through June 30, 2000

All obligations of the Company during the period October 1, 1999 (date of
inception) through June 30, 2000 were satisfied by Sylvan and accounted for as
contributions to capital. These obligations included all expenditures for
property and equipment and all expenses directly attributable to the Company's
operations and paid through Sylvan's cash management systems. The Company did
not maintain any cash accounts during the period. In addition, during the period
October 1, 1999 (date of inception) through June 30, 2000, management has
allocated corporate indirect overhead costs to the Company based on an analysis
of the components of corporate general and administrative expenses and the
estimated percentage of each component attributable to the Company. Corporate
general and administrative expenses consisted principally of corporate payroll
and were allocated considering the estimated efforts of individual employees.
Management believes that the method used to allocate these expenses is
reasonable. Allocated indirect overhead costs consisted principally of the
following:

          . Corporate human resources, including labor relations, payroll and
            training
          . Executive, finance and accounting, legal and administration
          . Tax services, including tax return preparation
          . Information technology management services

Services Agreement

On June 30, 2000 the Company entered into a services agreement with Sylvan under
which Sylvan provides certain management, financial, legal, management
information and human resources services and other management or administrative
services upon request. The Company pays a quarterly fee that is based on
Sylvan's good faith estimate of the cost of such services. This agreement which
originally had a one-year term, was renewed for an additional year, and is
terminable by either party with 60 days notice. Sylvan charged the Company
services fees of $715,098 for the year ended December 31, 2001 and $286,918 for
the six-month period ended December 31, 2000.

                                      F-13

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

2.       Related Party Transactions (continued)

Facilities Use Agreement

On June 30, 2000 the Company entered into a facilities use agreement with Sylvan
that provides for the payment of fees to Sylvan for office space used by the
Company located within premises leased or owned by Sylvan. The Company pays a
monthly fee that is based on Sylvan's good faith estimate of square footage
occupied by the Company and market rates for comparable facilities located
nearby. The facilities use fee also includes an overhead charge determined based
on a pro rata allocation of associated overhead costs incurred by Sylvan to
maintain its facilities. This agreement which originally had a one-year term,
was renewed for an additional year, and is terminable by either party with 60
days notice. Sylvan charged the Company $548,489 in facilities usage fees for
the year ended December 31, 2001 and $242,368 for the six-month period ended
December 31, 2000.

License Agreement

On June 30, 2000, the Company entered into a license agreement with Sylvan to
license specified trademarks, service marks and educational content in
connection with its business. In consideration for this license, the Company was
obligated to pay an initial license fee of $1,000,000 and will pay quarterly
royalties in an amount equal to 4% of net revenues of the Company derived from
Internet service delivery. A minimum annual royalty of $400,000 will be payable
commencing in 2002, and the minimum royalty will increase by 20% each year until
the expiration of the agreement. The term of the agreement is 5 years, except
for the content license, which is for the duration of the applicable copyrights.
The Company, at its option, may renew the license for consecutive five-year
terms.

The initial license fee of $1,000,000 due to Sylvan was agreed to be an initial
capital contribution by Sylvan, and no cash was paid for the initial license
fee. Because this was a nonmonetary transaction between a parent and its
subsidiary prior to an initial public offering, the Company was required by
accounting regulations to record the license at its historical cost basis to
Sylvan. Because Sylvan had no basis in the transferred assets, the Company
recorded no amount as the value of the license.

                                      F-14


<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

2.       Related Party Transactions (continued)

Professional Services Agreement

On June 30, 2000, the Company entered into a professional services agreement
with Sylvan. The agreement specifies how the parties to the agreement will
compensate each other for student referrals and exchange instructor services.

Under the student referral program, the Company will receive 5%, up to a maximum
of $100, of all revenues received by Sylvan or a participating franchisee as a
result of a student referral from the Company. The Company will pay an equal
amount to Sylvan or its participating franchisees for a student referral it
receives. In addition, if the Company is obligated to pay a referral fee to a
participating franchisee, the Company will pay to Sylvan a commission of 5%, up
to a maximum of $100, of the revenues that the Company receives for the first
program to which a student initially enrolls. No referral fees have been
incurred or earned by the Company to date.

In accordance with the instructor services section of this agreement, prior to
assigning a diagnostic and prescriptive instructor to a student the Company must
request Sylvan to provide an instructor for a committed period. In the event
that Sylvan does not provide an instructor, the Company will provide its own
instructors. In the event that Sylvan provides instructors for committed
periods, the Company will reimburse Sylvan for the salary of the instructors
during the committed period, plus a 30% management fee. If Sylvan refers
instructors classified as independent contractors to the Company, the Company
will pay a $100 referral fee to Sylvan. No instructor fees have been incurred by
the Company to date.

Leasing Management Services Agreement

Effective October 23, 2000, the Company entered into a leasing management
services agreement with Sylvan under which the Company can lease certain
equipment under Sylvan's master equipment lease. Under this agreement, the
Company is obligated to pay all amounts due related to the equipment that it
leases. In addition, the Company must pay a quarterly lease management service
fee to Sylvan equal to 5% of all lease payments. For the years ended December
31, 2001 and 2000, the Company was charged lease management services fees
totaling $5,652 and $5,067, respectively, which are included in general and
administrative expenses.

                                      F-15


<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

3.       Line of Credit with Sylvan Ventures, LLC

On June 30, 2000, the Company entered into a revolving credit facility with
Sylvan Ventures, a related party, under which it may borrow up to $10,000,000.
The revolving credit facility, which originally expired December 31, 2001, has
been extended through December 31, 2002. As of December 31, 2001 and 2000,
$4,469,673 and $3,078,699, respectively, were due under the facility.

For the year ended December 31, 2001 and the six-month period ended December 31,
2000, interest expense calculated at the prime rate of interest and totaling
$401,105 and $124,548, respectively, was accrued by the Company. Effective
December 31, 2001, Sylvan Ventures agreed to forgive all past and future accrued
interest and accordingly, the Company recognized income of $525,653 in the
accompanying statement of operations as "Interest expense forgiven by Sylvan
Ventures."

4.       Income Taxes

During the period from October 1, 1999 through June 30, 2000, the Company and
Sylvan operated under a tax sharing agreement that provided for the allocation
to the Company of any tax benefits realized by Sylvan as a result of including
the Company's operations in its consolidated income tax return. Any allocated
income tax benefits were treated as a distribution to Sylvan. The Company would
not have recorded these income tax benefits if it recorded an income tax
provision using the separate return method.

During the period from October 1, 1999 through June 30, 2000, the Company
incurred a net operating loss that was used by Sylvan to reduce consolidated
income taxes payable. The Company and Sylvan estimated that the tax benefits
realized by Sylvan arising from the Company's operations equaled approximately
$252,337 and $1,516,117 for the period October 1, 1999 (date of inception)
through December 31, 1999 and the period January 1, 2000 through June 30, 2000,
respectively. The tax benefit is summarized as follows:

<TABLE>
<CAPTION>
                                                                                    Period
                                                                                October 1, 1999
                                                   Period January 1, 2000     (date of inception)
                                                          through                  through
                                                       June 30, 2000          December 31, 1999
                                                  -----------------------------------------------
<S>                                               <C>                          <C>
Loss before income taxes                          $     (3,890,471)            $     (647,516)
                                                  ===============================================
Tax benefit at U.S. statutory rate of 35%         $     (1,361,665)            $     (226,631)
Effect of permanent differences                              1,293                        216
State income taxes, net of federal benefit                (155,745)                   (25,922)
                                                  -----------------------------------------------
Total                                             $     (1,516,117)            $     (252,337)
                                                  ===============================================
</TABLE>

                                      F-16

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)


4.       Income Taxes (continued)

Had the Company not recorded an income tax benefit attributable to its operating
losses, the recorded net loss and net loss per share would have been as follows:

                                                                 Period
                                                         October 1, 1999 (date
                                   Year ended December   of inception) through
                                        31, 2000           December 31, 1999
                                 ---------------------- -----------------------
 Net loss                        $     (12,853,441)     $       (647,516)
 Net loss per share              $           (1.83)     $              -

Commencing July 1, 2000, Sylvan could not realize income tax benefits
attributable to the Company's operations as a result of the transfer of Sylvan's
ownership in the Company to Sylvan Ventures on June 30, 2000. 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.

Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:

                                                   -----------------------------
                                                        2001         2000
                                                   -----------------------------
Deferred tax assets:
   Net operating loss carryforwards                $   8,429,799   $  3,494,482
   Allowance for doubtful accounts                        12,840             98
   Accrued expenses                                            -         56,324
   Depreciation                                          110,257              -
   Deferred revenue                                      153,107              -
                                                   --------------  -------------
Total deferred tax assets                              8,706,002      3,550,904
Deferred tax liability:
   Depreciation                                                -         14,474
                                                   --------------  -------------
Net future income tax benefit                          8,706,002      3,536,430
Valuation allowance for net deferred tax assets       (8,706,002)    (3,536,430)
                                                   --------------  -------------
Net deferred tax asset                             $           -   $          -
                                                   ==============  =============

                                      F-17

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)


5.       Income Taxes (continued)

In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that all or some portion of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible and net operating losses are
utilized. Based on consideration of these factors, the Company has established a
valuation allowance of $8,706,002 and $3,536,430 at December 31, 2001 and 2000,
respectively.

At December 31, 2001, the Company had net operating loss carryforwards for
approximately $21,300,000, which expire in 2020 and 2021 and are available to
offset future U. S. taxable income.

The reconciliation of the reported income tax expense benefits to the amount
that would result by applying the U.S. federal statutory rate to income before
income taxes is as follows:





<TABLE>
<CAPTION>
                                                                                                         Period October 1,
                                                                                                           1999 (date of
                                                                 Year ended            Year ended        inception) through
                                                              December 31, 2001    December 31, 2000     December 31, 1999
                                                             -----------------------------------------------------------
<S>                                                           <C>                  <C>                   <C>
Tax benefit at U.S. statutory rate of 35%                     $ (4,585,013)          (4,498,704)           (226,631)
Effect of permanent differences                                      6,195                7,456                 216
State income taxes, net of federal benefit                        (590,754)            (561,299)            (25,922)
Effect of change in valuation allowance for deferred
  tax assets                                                     5,169,572            3,536,430                   -
                                                              ----------------------------------------------------------
Total                                                         $          -        $  (1,516,117)         $ (252,337)
                                                              ==========================================================
</TABLE>

                                      F-18

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

5.       Preferred Stock

On June 30, 2000, the Company entered into a stock purchase agreement with
Sylvan Ventures under which Sylvan Ventures subscribed to purchase 10,526,316
shares of Series A Convertible Preferred Stock ("Preferred Stock") for aggregate
proceeds of $20,000,000. The Preferred Stock has been issued with the following
terms:

Conversion Rights

The Preferred Stock is convertible into common stock at the option of the holder
at any time. In addition, the Preferred Stock will convert automatically into
shares of common stock upon the closing of an underwritten public offering of at
least $10,000,000 of gross proceeds to the Company with a price to the public of
not less than $4.00 per share. Each share of Preferred Stock is initially
convertible into one share of common stock. Additionally, prior to conversion,
if the Company issues any shares of stock for less then the conversion price,
the conversion ratio will be adjusted based upon a predetermined formula.

Dividends

The holders of the Preferred Stock are entitled to share ratably in any
dividends declared by the Board of Directors, assuming the conversion of all
outstanding convertible securities.

Liquidation

In the event of liquidation, the holders of Preferred Stock are entitled to
share any remaining net assets ratably with holders of all common stock.

Voting Rights

Each holder of Preferred Stock is entitled to five votes for each share of
common stock that the holder could obtain assuming the exercise of conversion
rights. In addition, the holders of Preferred Stock are entitled to elect one
director acting as a separate class.

                                      F-19

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

6.       Class A Convertible Common Stock

During 2000, the Company commenced an offering of up to 3,000,000 shares of
Class A Convertible Common Stock ("Class A") to be issued to Sylvan Learning
Center franchisees that execute participation agreements that provide for the
franchisee's support of the Company's Internet-based delivery of educational
services. Sylvan Learning Centers offer supplemental educational services to
students at all skill levels and ages. The Company has authorized the issuance
of 10,000,000 shares of $0.001 par value Class A.

On March 30, 2001, the Company issued, for no monetary consideration, 2,452,484
shares of Class A pursuant to the receipt of executed participation agreements
from Sylvan Learning Center franchisees. Upon issuance, $880,156 of direct costs
incurred in connection with the stock issuance were removed from deferred stock
issuance costs and recorded as a reduction to additional paid-in-capital. The
Company also recorded an intangible asset entitled participation agreements of
$2,145,923, which is equal to the estimated fair value of the Class A on the
date of issuance. The Company is amortizing this asset over six years, the
estimated average useful life of the participation agreements, using the
straight-line method. At December 31, 2001, accumulated amortization totaled
$268,240.

In connection with this offering, the Company was obligated to pay an amount in
cash to each Class A shareholder equal to $0.35 multiplied by the number of
shares received. In April 2001, the Company paid an aggregate of $858,385 to the
shareholders. These payments have been recorded as prepaid royalties to Sylvan
as the license agreement with Sylvan provides for the offset of this payment
against any future royalties due Sylvan (see Note 2).

The Class A was issued with the following terms:

Redemption Rights

The Class A Convertible Common Stock is redeemable upon the occurrence of
certain events or transactions solely at the discretion of the Company. The
redemption amount is equal to the greater of $0.875 per share or the appraised
value.

                                      F-20


<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

6.       Class A Convertible Common Stock (continued)

Conversion Rights

The Class A will automatically convert into shares of common stock upon the sale
of the Company or upon the closing of an underwritten public offering of at
least $10,000,000 of gross proceeds to the Company with a price to the public of
not less than $4.00 per share. Each share of Class A is convertible into one
share of common stock.

Dividends

The holders of the Class A are entitled to share ratably in any dividends
declared by the Board of Directors, assuming the conversion of all outstanding
convertible securities.

Liquidation

In the event of liquidation, the holders of Class A are entitled to share any
remaining net assets ratably with all stockholders, assuming conversion of all
convertible securities.

Voting Rights

Each share of the Class A has substantially the same voting rights as the number
of shares of common stock into which it can be converted.

Restrictions on Transfer

The transfer of Class A, other than to the Company, is restricted until
September 30, 2010.

7.       Common Stock

On June 30, 2000, 14,000,000 shares of common stock were sold to Sylvan in
exchange for cash of $5,000,000. In connection with the sale, Sylvan also agreed
to transfer or license specified intangible assets to the Company (see Note 2).
In satisfying the purchase price, Sylvan was allowed to reduce the entire amount
due by capital contributions in the form of expenses and expenditures paid on
the Company's behalf. Subsequent to the purchase by Sylvan of 14,000,000 shares
of common stock, 13,857,143 of those shares were contributed by Sylvan to its
majority-owned subsidiary, Sylvan Ventures.

                                      F-21

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

8.       Stock Option Plan

On June 30, 2000, the Company adopted the eSylvan, Inc. 2000 Omnibus Stock Plan.
The plan allows for the grant of up to 3,000,000 shares of common stock to
employees, directors, and consultants in the form of incentive and non-qualified
stock options, stock appreciation rights, stock awards, phantom stock awards,
convertible securities and performance awards.

During 2001, the Company issued options to purchase 616,500 shares of common
stock to the Company's employees ("employee options") and options to purchase
599,000 shares of common stock to Sylvan employees ("non-employee options") for
$0.975 per share, the estimated fair value of common stock on the date of grant.
At December 31, 2001, 179,750 employee options were exercisable and 196,375
non-employee options were exercisable. The options vest over periods of up to
four years and expire ten years from the date of grant. No options have been
exercised or forfeited at December 31, 2001. The weighted average remaining
contractual life at December 31, 2001 is 8.28 years for employee options and
8.35 years for non-employee options. No options had been granted under the plan
as of December 31, 2000.

To determine the pro forma data required by Statement No.123, the Company used
the Black-Scholes option-pricing model to measure the fair value of options at
the date of grant with the following weighted average assumptions: risk-free
interest rate of 4.5%, dividend yield of 0%, volatility factor of the expected
market price of the Company's common stock of 0.44 and an expected life of the
granted options of five years. The weighted average estimated fair value of the
Company's stock options granted utilizing the Black-Scholes option-pricing model
was $0.45.

The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are 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 pro forma expense calculated using Black-Scholes for employee options was
immaterial to the net loss for the year ended December 31, 2001, and would not
change basic and diluted loss per common share.

The aggregate fair value of the non-employee options granted during 2001 of
$269,550 has been treated as a dividend to Sylvan by recording the value of the
options as an increase to additional paid-in capital and the corresponding value
of the dividend as a decrease to additional paid-in capital.

                                      F-22

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

9.       Loss Per Share

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

<TABLE>
<CAPTION>
                                                                                                            Period
                                                                                                        October 1, 1999
                                                                                       Year ended          (date of
                                                              Year ended December     December 31,     inception) through
                                                                   31, 2001              2000           December 31, 2001
                                                             -------------------- -------------------- ------------------
<S>                                                          <C>                  <C>                  <C>
Net loss accumulated during the development stage            $   (13,100,036)     $    (11,337,324)    $   (24,832,539)
                                                             ==================== ==================== ==================

Weighted-average common shares outstanding during the
   period                                                         16,036,924             7,019,178          10,257,366
Dilutive effect of subscribed and unissued preferred stock                 -                     -                   -
                                                             -------------------- -------------------- ------------------
Shares used in computations                                       16,036,924             7,019,178          10,257,366
                                                             ==================== ==================== ==================

Basic and diluted loss per common share                      $         (0.82)     $          (1.62)    $         (2.42)
                                                             ==================== ==================== ==================
</TABLE>

Since the Company was not incorporated until February 3, 2000, no computation
has been presented for the period October 1, 1999 (date of inception) through
December 31, 1999. The subscribed and unissued shares of Series A Convertible
Preferred Stock have not been included in the weighted-average calculation as
they are not eligible to share in dividends until the consideration is paid, and
are therefore considered for purposes of computing loss per share the equivalent
of warrants. The dilutive effect of these subscriptions is computed using the
treasury stock method, whereby the unpaid balance is assumed to be proceeds used
to purchase stock under the treasury stock method. At December 31, 2001 and
2000, no additional dilution from preferred stock resulted from the computation.

                                      F-23

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)

                    Notes to Financial Statements (continued)

10.      Operating Leases

The Company leases certain computer and other equipment under non-cancelable
operating leases that are guaranteed by Sylvan. Future minimum lease payments
under non-cancelable operating leases consisted of the following at December 31,
2001:

2002                                                           $270,127
2003                                                            202,954
                                                               --------
                                                               $473,081
                                                               ========

Rent expense under all operating leases for the years ended December 31, 2001
and 2000 was $276,686 and $101,298, respectively.

11.      Defined Contribution Retirement Plan

Sylvan sponsors a defined contribution retirement plan under section 401(k) of
the Internal Revenue Code. The provisions of this plan allow for voluntary
employee contributions, subject to certain annual limitations, and discretionary
contributions that are allocated to eligible participants based upon
compensation. All employees of the Company are eligible after meeting certain
service requirements. No discretionary contributions have been made to this plan
on behalf of the Company.

12.      Quarterly Financial Data (Unaudited)

The following financial information reflects all normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement of the
results of the interim periods. Summarized operating data is as follows:

                                      F-24

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)
                    Notes to Financial Statements (continued)
<TABLE>
<CAPTION>

12.      Quarterly Financial Data (Unaudited) (continued)

                                                March 31,   June 30,   September 30,   December 31,
Three Months Ended                                2001       2001         2001             2001
----------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>            <C>           <C>
Revenues                                    $     29,255  $     31,346   $    137,756  $    261,974
Operating costs and  expenses                  3,515,171     3,642,244      2,843,921     3,681,393
                                            --------------------------------------------------------
Loss from operations                          (3,485,916)   (3,610,898)    (2,706,165)   (3,419,419)

Non-operating expense (income)                   121,005       108,000         91,100      (442,467)
                                            --------------------------------------------------------
Net Loss                                    $ (3,606,921) $ (3,718,898)  $ (2,797,265) $ (2,976,952)
                                            ========================================================

Basic and diluted loss per common share     $      (.024) $      (0.23)  $      (0.17) $      (0.18)
Shares used in computation                    14,817,495    16,452,484     16,452,484    16,452,484




                                                March 31,   June 30,   September 30,   December 31,
Three Months Ended                                2000        2000         2000             2000
----------------------------------------------------------------------------------------------------
Revenues                                    $          -  $          -   $          -  $     15,921
Operating costs and expenses                  (1,358,167)   (2,532,304)    (3,182,549)   (5,668,742)
                                            --------------------------------------------------------
Loss from operations                          (1,358,167)   (2,532,304)    (3,182,549)   (5,652,821)

Non-operating expense                                  -             -         48,621        78,979
Allocated income tax benefit                     534,528       981,589              -             -
                                            --------------------------------------------------------
Net Loss                                    $   (823,639) $ (1,550,715)  $ (3,231,170) $ (5,731,800)
                                            ========================================================

Basic and diluted loss per common share              n/a  $     (10.08)  $      (0.23) $      (0.41)
Shares used in computation                           n/a       153,846     14,000,000    14,000,000
</TABLE>

During the three months ended December 31, 2001, the Company recognized non-
operating income of $525,653 related to the forgiveness of interest expense from
Sylvan Ventures (see Note 3).

                                      F-25

<PAGE>

                                  eSylvan, Inc.
                      (a Subsidiary of Sylvan Ventures, LLC
                        and a Development Stage Company)


                    Notes to Financial Statements (continued)

13.      Going Concern

The Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities in
the normal course of business. As of December 31, 2001, the Company had $250,880
in cash and a working capital deficiency of $4,735,359. The Company has incurred
net losses of $24,832,539 and used $22,338,258 in its operations since
inception. All of these factors raise substantial doubt about the Company's
ability to continue as a going concern.

The Company has a $10 million revolving line of credit with Sylvan Ventures
expiring on December 31, 2002, of which $4,469,673 is outstanding at December
31, 2001. In addition, the Company executed a stock purchase agreement with
Sylvan Ventures in February 2002, as discussed in Note 14. The Company believes
that its cash will be sufficient to meet its obligations in the ordinary course
of business through July 2002. Management believes sufficient capital can be
obtained to support planned operations through December 31, 2002, however there
can be no assurance that the Company will be able to obtain this financing on
acceptable terms.

14.      Subsequent Event

In February 2002, the Company issued 4,947,368 additional shares of Series A
Preferred Stock to Sylvan Ventures for a total aggregate purchase price of $9.4
million. The Company used $6,205,668 of the proceeds to repay the outstanding
balance on the line of credit to Sylvan Ventures.

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