##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



|x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended September 30, 2004
|- | ------------------------------------------------------------------------------------------------------------------------------------



or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from
 to.
|- | ----------------------------------------------------------------------------------------------------------------------------



Commission File Number 000-50952



---



EDUCATE, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 37-1465722                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|1001 Fleet Street, Baltimore, Maryland   |  | 21202     
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number, including area code: (410) 843-8000



---



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 ̈.    No  x.



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).    Yes ̈.    No  x.



The registrant had 42,574,474 shares of Common Stock outstanding as of
November 1, 2004.



---



---

##### Table of Contents

EDUCATE, INC.



INDEX



|                                |  |           |  |                                                                                                                                                                       |  |         
|------------------------------- |  | --------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                                |  |           | 
|                                |  |           |  |                                                                                                                                                                       |  | Page No.
|                                | 
|PART I. - FINANCIAL INFORMATION |  |          
|                                |  |           | 
|                                |  | Item 1.   |  | Financial Statements (Unaudited)                                                                                                                                      |  |         
|                                |  |           | 
|                                |  |           |  | Consolidated Balance Sheets  September 30, 2004 and December 31, 2003                                                                                                |  | 3       
|                                |  |           | 
|                                |  |           |  | Consolidated Statements of Income  For the three months ended September 30, 2004 and the period from June 30, 2003 (date of inception) through September 30, 2003    |  | 5       
|                                |  |           | 
|                                |  |           |  | Consolidated Statements of Income  For the nine months ended September 30, 2004 and 2003 (pro forma)                                                                 |  | 6       
|                                |  |           | 
|                                |  |           |  | Consolidated Statements of Cash Flows  For the nine months ended September 30, 2004 and the period from June 30, 2003 (date of inception) through September 30, 2003 |  | 7       
|                                |  |           | 
|                                |  |           |  | Notes to Consolidated Financial Statements                                                                                                                            |  | 8       
|                                |  |           | 
|                                |  | Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                 |  | 21      
|                                |  |           | 
|                                |  | Item 3.   |  | Quantitative and Qualitative Disclosure of Market Risk                                                                                                                |  | 31      
|                                |  |           | 
|                                |  | Item 4.   |  | Controls and Procedures                                                                                                                                               |  | 31      
|                                | 
|PART II. -
OTHER INFORMATION    |  |          
|                                |  |           | 
|                                |  | Item 1.   |  | Legal Proceedings                                                                                                                                                     |  | 32      
|                                |  |           | 
|                                |  | Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                           |  | 32      
|                                |  |           | 
|                                |  | Item 3.   |  | Defaults Upon Senior Securities                                                                                                                                       |  | 32      
|                                |  |           | 
|                                |  | Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                                                                   |  | 33      
|                                |  |           | 
|                                |  | Item 5.   |  | Other Information                                                                                                                                                     |  | 33      
|                                |  |           | 
|                                |  | Item 6.   |  | Exhibits                                                                                                                                                              |  | 33      
|                                |  |          
|                                |  | SIGNATURE |  | 34                                                                                                                                                                   

|
|





2



---

##### Table of Contents

Educate, Inc.

Consolidated Balance Sheets



(Dollar amounts in thousands except per share data)



|                                                |  |                   |         |   |                  |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | September 30,2004 |         |   | December 31,2003 |  
|                                                |  | (unaudited)       |         |   |                  |  
|Assets                                          |  |                   |         |   |                  |   |         |  
|Current assets:                                 |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                       |  | $                 | 33,630  |   |                  | $ | 20,226  |  
|                                                |  |                  
|Receivables:                                    |  |                   |         |   |                  |   |         |  
|Accounts receivable                             |  |                   | 29,554  |   |                  |   | 42,664  |  
|Notes receivable                                |  |                   | 121     |   |                  |   | 732     |  
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 29,675  |   |                  |   | 43,396  |  
|Allowance for doubtful accounts                 |  |                   | (4,292  | ) |                  |   | (4,237  | )
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 25,383  |   |                  |   | 39,159  |  
|                                                |  |                  
|Inventory                                       |  |                   | 1,508   |   |                  |   | 920     |  
|Prepaid expenses and other current assets       |  |                   | 2,807   |   |                  |   | 1,791   |  
|Assets of discontinued operations held for sale |  |                   |        |   |                  |   | 6,050   |  
|                                                |  |                   |         |   |                  |   |         |  
|Total current assets                            |  |                   | 63,328  |   |                  |   | 68,146  |  
|                                                |  |                  
|Property and equipment:                         |  |                   |         |   |                  |   |         |  
|Furniture and fixtures                          |  |                   | 7,933   |   |                  |   | 6,137   |  
|Computer equipment and software                 |  |                   | 9,474   |   |                  |   | 5,598   |  
|Leasehold improvements                          |  |                   | 7,868   |   |                  |   | 6,175   |  
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 25,275  |   |                  |   | 17,910  |  
|Accumulated depreciation and amortization       |  |                   | (8,617  | ) |                  |   | (3,148  | )
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 16,658  |   |                  |   | 14,762  |  
|Intangible assets:                              |  |                   |         |   |                  |   |         |  
|Goodwill                                        |  |                   | 61,587  |   |                  |   | 50,370  |  
|Tradenames                                      |  |                   | 131,536 |   |                  |   | 131,737 |  
|Franchise license rights                        |  |                   | 85,782  |   |                  |   | 88,556  |  
|Other intangible assets                         |  |                   | 1,199   |   |                  |   | 1,199   |  
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 280,104 |   |                  |   | 271,862 |  
|Accumulated amortization                        |  |                   | (510    | ) |                  |   | (220    | )
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 279,594 |   |                  |   | 271,642 |  
|Other assets                                    |  |                   | 7,642   |   |                  |   | 7,645   |  
|                                                |  |                   |         |   |                  |   |         |  
|Total assets                                    |  | $                 | 367,222 |   |                  | $ | 362,195 |  
|                                                |  |                   |         |   |                  |   |         |  



See notes to consolidated financial
statements.



3



---

##### Table of Contents

Educate, Inc.

Consolidated Balance Sheets (continued)



(Dollar amounts in thousands, except per share data)



|                                                                                                                                                                                  |  |                   |         |                  |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                  |  | September 30,2004 |         | December 31,2003
|                                                                                                                                                                                  |  | (unaudited)       |         |                 
|Liabilities and stockholders equity                                                                                                                                              |  |                   |         |                  |   |        
|Current liabilities:                                                                                                                                                              |  |                   |         |                  |   |        
|Accounts payable and accrued expenses                                                                                                                                             |  | $                 | 18,522  |                  | $ | 20,886 
|Accrued compensation and related benefits                                                                                                                                         |  |                   | 10,673  |                  |   | 11,006 
|Income taxes payable                                                                                                                                                              |  |                   | 850     |                  |   | 467    
|Current portion of long-term debt                                                                                                                                                 |  |                   | 2,369   |                  |   | 8,301  
|Deferred revenue                                                                                                                                                                  |  |                   | 15,784  |                  |   | 17,791 
|Liabilities of discontinued operations held for sale                                                                                                                              |  |                   |        |                  |   | 2,071  
|                                                                                                                                                                                  |  |                   |         |                  |   |        
|Total current liabilities                                                                                                                                                         |  |                   | 48,198  |                  |   | 60,522 
|                                                                                                                                                                                  |  |                  
|Long-term debt, less current portion                                                                                                                                              |  |                   | 119,987 |                  |   | 159,564
|Other long-term liabilities                                                                                                                                                       |  |                   | 2       |                  |   | 202    
|Deferred income taxes                                                                                                                                                             |  |                   | 4,040   |                  |   |       
|                                                                                                                                                                                  |  |                   |         |                  |   |        
|                                                                                                                                                                                  |  |                  
|Total liabilities                                                                                                                                                                 |  |                   | 172,227 |                  |   | 220,288
|Commitments and contingencies                                                                                                                                                     |  |                   |        |                  |   |       
|                                                                                                                                                                                  |  |                  
|Stockholders equity:                                                                                                                                                             |  |                   |         |                  |   |        
|Common stock, par value $0.01, 55,000,000 shares authorized, 42,574,474 and 36,800,000 shares issued and outstanding as of September 30, 2004
and December 31, 2003, respectively |  |                   | 426     |                  |   | 368    
|Additional paid-in capital                                                                                                                                                        |  |                   | 190,873 |                  |   | 137,336
|Retained earnings                                                                                                                                                                 |  |                   | 903     |                  |   | 1,701  
|Accumulated other comprehensive income                                                                                                                                            |  |                   | 2,793   |                  |   | 2,502  
|                                                                                                                                                                                  |  |                   |         |                  |   |        
|Total stockholders equity                                                                                                                                                        |  |                   | 194,995 |                  |   | 141,907
|                                                                                                                                                                                  |  |                   |         |                  |   |        
|Total liabilities and stockholders equity                                                                                                                                        |  | $                 | 367,222 |                  | $ | 362,195
|                                                                                                                                                                                  |  |                   |         |                  |   |        



See notes to consolidated financial
statements.



4



---

##### Table of Contents

Educate, Inc.

Consolidated Statements of Income



(Dollar amounts in thousands, except per share data)

(unaudited)



|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|--------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | -------------------------------------------------------------------- | - | ------ | -
|                                                                                              |  | Three monthsendedSeptember 30, 2004 |        |   | Period fromJune 30, 2003(date of inception)throughSeptember 30, 2003 |  
|Revenues                                                                                      |  |                                     |        |   |                                                                      |   |        |  
|Learning Center:                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Company-owned centers                                                                         |  | $                                   | 36,276 |   |                                                                      | $ | 32,646 |  
|Franchise services                                                                            |  |                                     | 11,617 |   |                                                                      |   | 10,756 |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Total Learning Center                                                                         |  |                                     | 47,893 |   |                                                                      |   | 43,402 |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Institutional Services                                                                        |  |                                     | 13,750 |   |                                                                      |   | 9,987  |  
|Online Learning Services                                                                      |  |                                     | 718    |   |                                                                      |   | 473    |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Total revenues                                                                                |  |                                     | 62,361 |   |                                                                      |   | 53,862 |  
|                                                                                              |  |                                    
|Costs and expenses                                                                            |  |                                     |        |   |                                                                      |   |        |  
|Instructional and franchise operations costs                                                  |  |                                     | 43,761 |   |                                                                      |   | 39,209 |  
|Marketing and advertising                                                                     |  |                                     | 5,542  |   |                                                                      |   | 4,484  |  
|Depreciation and amortization                                                                 |  |                                     | 2,025  |   |                                                                      |   | 1,652  |  
|General and administrative expenses                                                           |  |                                     | 3,133  |   |                                                                      |   | 3,048  |  
|Non-cash stock compensation expense (* see detail below)                                      |  |                                     | 303    |   |                                                                      |   |       |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Total costs and expenses                                                                      |  |                                     | 54,764 |   |                                                                      |   | 48,393 |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Operating income                                                                              |  |                                     | 7,597  |   |                                                                      |   | 5,469  |  
|                                                                                              |  |                                    
|Other income (expense)                                                                        |  |                                     |        |   |                                                                      |   |        |  
|Interest income                                                                               |  |                                     | 316    |   |                                                                      |   | 92     |  
|Interest expense                                                                              |  |                                     | (2,205 | ) |                                                                      |   | (3,269 | )
|Other financing costs                                                                         |  |                                     | (275   | ) |                                                                      |   |       |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Income from continuing operations before income taxes                                         |  |                                     | 5,433  |   |                                                                      |   | 2,292  |  
|                                                                                              |  |                                    
|Income tax expense                                                                            |  |                                     | (3,496 | ) |                                                                      |   | (871   | )
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Income from continuing operations                                                             |  |                                     | 1,937  |   |                                                                      |   | 1,421  |  
|Loss from discontinued operations, net of income tax benefit of $602 in 2004 and $633 in 2003 |  |                                     | (1,117 | ) |                                                                      |   | (1,175 | )
|Gain on disposal of discontinued operations, net of income tax expense of $51 in 2004         |  |                                     | 83     |   |                                                                      |   |       |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Net income                                                                                    |  | $                                   | 903    |   |                                                                      | $ | 246    |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Earnings per common share - basic and diluted                                                 |  |                                     |        |   |                                                                      |   |        |  
|Income from continuing operations                                                             |  | $                                   | 0.05   |   |                                                                      | $ | 0.04   |  
|Loss from discontinued operations                                                             |  | $                                   | (0.03  | ) |                                                                      | $ | (0.03  | )
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Net income                                                                                    |  | $                                   | 0.02   |   |                                                                      | $ | 0.01   |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|*  Composition of stock compensation:                                                         |  |                                     |        |   |                                                                      |   |        |  
|Instructional and franchise operations costs                                                  |  | $                                   | 94     |   |                                                                      | $ |       |  
|General and administrative expenses                                                           |  | $                                   | 209    |   |                                                                      | $ |       |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  
|Total                                                                                         |  | $                                   | 303    |   |                                                                      | $ |       |  
|                                                                                              |  |                                     |        |   |                                                                      |   |        |  



See notes to consolidated financial
statements.



5



---

##### Table of Contents

Educate, Inc.

Consolidated Statements of Income



(Dollar amounts in thousands, except per share data)

(unaudited)



|                                                                              |  |                                     |         |   |                                     |   |         |  
|----------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | -
|                                                                              |  | Nine months endedSeptember 30, 2004 |         |   | Nine months endedSeptember 30, 2003 |  
|                                                                              |  |                                     |         |   | (pro forma) (See Note 13)           |  
|Revenues                                                                      |  |                                     |         |   |                                     |   |         |  
|Learning Center:                                                              |  |                                     |         |   |                                     |   |         |  
|Company-owned centers                                                         |  | $                                   | 101,584 |   |                                     | $ | 92,435  |  
|Franchise services                                                            |  |                                     | 38,270  |   |                                     |   | 34,411  |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Total Learning Center                                                         |  |                                     | 139,854 |   |                                     |   | 126,846 |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Institutional Services                                                        |  |                                     | 89,895  |   |                                     |   | 53,405  |  
|Online Learning Services                                                      |  |                                     | 2,058   |   |                                     |   | 1,446   |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Total revenues                                                                |  |                                     | 231,807 |   |                                     |   | 181,697 |  
|                                                                              |  |                                    
|Costs and expenses                                                            |  |                                     |         |   |                                     |   |         |  
|Instructional and franchise operations costs                                  |  |                                     | 161,995 |   |                                     |   | 127,843 |  
|Marketing and advertising                                                     |  |                                     | 19,148  |   |                                     |   | 14,821  |  
|Depreciation and amortization                                                 |  |                                     | 5,669   |   |                                     |   | 4,861   |  
|General and administrative expenses                                           |  |                                     | 9,516   |   |                                     |   | 9,481   |  
|Non-cash stock compensation expense (* see detail below)                      |  |                                     | 8,704   |   |                                     |   |        |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Total costs and expenses                                                      |  |                                     | 205,032 |   |                                     |   | 157,006 |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Operating income                                                              |  |                                     | 26,775  |   |                                     |   | 24,691  |  
|                                                                              |  |                                    
|Other income (expense)                                                        |  |                                     |         |   |                                     |   |         |  
|Interest income                                                               |  |                                     | 615     |   |                                     |   |        |  
|Interest expense                                                              |  |                                     | (8,250  | ) |                                     |   | (9,649  | )
|Other financing costs                                                         |  |                                     | (5,117  | ) |                                     |   |        |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Income from continuing operations before income taxes                         |  |                                     | 14,023  |   |                                     |   | 15,042  |  
|Income tax expense                                                            |  |                                     | (6,760  | ) |                                     |   | (6,025  | )
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Income from continuing operations                                             |  |                                     | 7,263   |   |                                     | $ | 9,017   |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Loss from discontinued operations, net of income tax benefit of $1,529        |  |                                     | (2,838  | ) |                                     |   |         |  
|Gain on disposal of discontinued operations, net of income tax expense of $51 |  |                                     | 83      |   |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Net income                                                                    |  | $                                   | 4,508   |   |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Dividends per common share                                                    |  | $                                   | 0.24    |   |                                     |   |         |  
|Earnings per common share - basic and diluted                                 |  |                                     |         |   |                                     |   |         |  
|Income from continuing operations                                             |  | $                                   | 0.19    |   |                                     | $ | 0.25    |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Loss from discontinued operations                                             |  | $                                   | (0.07   | ) |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Net income                                                                    |  | $                                   | 0.12    |   |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|*  Composition of stock compensation:                                         |  |                                     |         |   |                                     |   |         |  
|Instructional and franchise operations costs                                  |  | $                                   | 694     |   |                                     |   |         |  
|General and administrative expenses                                           |  | $                                   | 8,010   |   |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  
|Total                                                                         |  | $                                   | 8,704   |   |                                     |   |         |  
|                                                                              |  |                                     |         |   |                                     |   |         |  



See notes to consolidated financial
statements.



6



---

##### Table of Contents

Educate, Inc.

Consolidated Statements of Cash Flows



(Dollar amounts in thousands)

(unaudited)



|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | -------- | - | ---------------------------------------------------------------------- | - | -------- | -
|                                                                                                                                |  | Nine months endedSeptember 30, 2004 |          |   | Period from June 30,2003 (date of inception)through September 30,
2003 |  
|Operating activities                                                                                                            |  |                                     |          |   |                                                                        |   |          |  
|Income from continuing operations                                                                                               |  | $                                   | 7,263    |   |                                                                        | $ | 1,421    |  
|Adjustments to reconcile income from continuing operations to net cash provided by continuing operations                        |  |                                     |          |   |                                                                        |   |          |  
|Depreciation                                                                                                                    |  |                                     | 5,373    |   |                                                                        |   | 1,587    |  
|Amortization                                                                                                                    |  |                                     | 296      |   |                                                                        |   | 65       |  
|Bad debt expense                                                                                                                |  |                                     | 849      |   |                                                                        |   | 860      |  
|Deferred income taxes                                                                                                           |  |                                     | 677      |   |                                                                        |   |         |  
|Non-cash stock compensation                                                                                                     |  |                                     | 8,704    |   |                                                                        |   |         |  
|Other financing costs                                                                                                           |  |                                     | 4,842    |   |                                                                        |   |         |  
|Gain on investments                                                                                                             |  |                                     | (229     | ) |                                                                        |   |         |  
|Other non-cash items                                                                                                            |  |                                     | 398      |   |                                                                        |   | (70      | )
|Changes in operating assets and liabilities:                                                                                    |  |                                     |          |   |                                                                        |   |          |  
|Receivables                                                                                                                     |  |                                     | 12,142   |   |                                                                        |   | 9,476    |  
|Prepaid expenses and other current assets                                                                                       |  |                                     | (1,196   | ) |                                                                        |   | (1,737   | )
|Inventory                                                                                                                       |  |                                     | (588     | ) |                                                                        |   | 408      |  
|Accounts payable and accrued expenses                                                                                           |  |                                     | (6,963   | ) |                                                                        |   | 7,895    |  
|Income taxes payable                                                                                                            |  |                                     | 3,998    |   |                                                                        |   | 289      |  
|Deferred revenue                                                                                                                |  |                                     | (2,069   | ) |                                                                        |   | (4,849   | )
|Accrued compensation and related benefits                                                                                       |  |                                     | (333     | ) |                                                                        |   | 314      |  
|Other current liabilities                                                                                                       |  |                                     | 411      |   |                                                                        |   | 12       |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Net cash provided by continuing operations                                                                                      |  |                                     | 33,575   |   |                                                                        |   | 15,671   |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Loss from discontinued operations                                                                                               |  |                                     | (2,755   | ) |                                                                        |   | (1,175   | )
|Adjustments to reconcile loss from discontinued operations to net cash used in discontinued operations:                         |  |                                     |          |   |                                                                        |   |          |  
|Gain on disposal of discontinued operations                                                                                     |  |                                     | (83      | ) |                                                                        |   |         |  
|Changes in operating assets and liabilities                                                                                     |  |                                     | 642      |   |                                                                        |   | (1,060   | )
|Depreciation and other non-cash items                                                                                           |  |                                     | 301      |   |                                                                        |   | 65       |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Net cash used in operations of discontinued operations                                                                          |  |                                     | (1,895   | ) |                                                                        |   | (2,170   | )
|Net cash provided by operating activities                                                                                       |  |                                     | 31,680   |   |                                                                        |   | 13,501   |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Investing activities                                                                                                            |  |                                     |          |   |                                                                        |   |          |  
|Cash paid for acquired pre-K-12 business, net of cash acquired (including acquisition costs of $176 in 2004 and $3,870 in
2003) |  |                                     | (492     | ) |                                                                        |   | (110,204 | )
|Cash paid for acquired businesses, net of cash acquired (including acquisition costs of $70 in 2004)                            |  |                                     | (4,085   | ) |                                                                        |   | (333     | )
|Proceeds from sale of discontinued operations                                                                                   |  |                                     | 2,166    |   |                                                                        |   |         |  
|Purchase of property and equipment                                                                                              |  |                                     | (7,549   | ) |                                                                        |   | (1,234   | )
|Change in other assets                                                                                                          |  |                                     | (1,251   | ) |                                                                        |   | (247     | )
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Net cash used in investing activities                                                                                           |  |                                     | (11,211  | ) |                                                                        |   | (112,018 | )
|                                                                                                                                |  |                                    
|Financing activities                                                                                                            |  |                                     |          |   |                                                                        |   |          |  
|Proceeds from exercise of options and proceeds from issuance of restricted common stock                                         |  |                                     | 638      |   |                                                                        |   |         |  
|Issuance of common stock upon formation                                                                                         |  |                                     |         |   |                                                                        |   | 30,000   |  
|Proceeds from issuance of common stock less cash paid for direct costs incurred of $4,949                                       |  |                                     | 50,051   |   |                                                                        |   |         |  
|Deferred financing costs                                                                                                        |  |                                     | (2,499   | ) |                                                                        |   | (3,705   | )
|Cash received upon issuance of debt                                                                                             |  |                                     | 170,000  |   |                                                                        |   | 110,000  |  
|Dividends paid                                                                                                                  |  |                                     | (9,000   | ) |                                                                        |   |         |  
|Payments on debt                                                                                                                |  |                                     | (216,009 | ) |                                                                        |   | (2,158   | )
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Net cash provided by (used in) financing activities                                                                             |  |                                     | (6,819   | ) |                                                                        |   | 134,137  |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Effect of exchange rate changes on cash                                                                                         |  |                                     | (280     | ) |                                                                        |   | 91       |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Net change in cash and cash equivalents                                                                                         |  |                                     | 13,370   |   |                                                                        |   | 35,711   |  
|Cash and cash equivalents at beginning of period                                                                                |  |                                     | 20,260   |   |                                                                        |   |         |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Cash and cash equivalents at end of period                                                                                      |  | $                                   | 33,630   |   |                                                                        | $ | 35,711   |  
|                                                                                                                                |  |                                     |          |   |                                                                        |   |          |  
|Supplemental Cash Flow Information                                                                                              |  |                                     |          |   |                                                                        |   |          |  
|Interest paid                                                                                                                   |  | $                                   | 11,961   |   |                                                                        | $ | 1,519    |  
|Income taxes paid                                                                                                               |  | $                                   |         |   |                                                                        | $ | 20       |  



See notes to consolidated financial
statements.



7



---

##### Table of Contents

Educate, Inc.

Notes to Consolidated Financial Statements

September 30, 2004

(Dollar
amounts in thousands, except per share data)



1.
Organization, Basis of Presentation, and Summary of Significant Accounting Policies



Description of Business



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



| |  | The Learning Center segment develops and delivers trusted, personalized tutoring programs through a network of more than 1,000 franchised and company-owned learning centers in North
America operated under the Sylvan brand name, and more than 940 European franchised and company-owned learning centers operated under the Schulerhilfe brand name.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | The Online Learning Services segment provides online tutoring programs modeled after those offered in Sylvan Learning Centers. These online services are delivered using a
internet-based application that enables teachers and students to talk and interact in real time over a dial-up or broadband connection.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Basis of Presentation



The unaudited interim financial information as of September 30, 2004, for the three-month and nine-month periods then ended, and for the period from June
30, 2003 (date of inception) through September 30, 2003, has been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys final prospectus filed September 23, 2004 for the period as
of and through June 30, 2004.



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



8



---

##### Table of Contents

Educate, Inc.



The Company was formed by an investor group led by affiliates of Apollo Advisors, L.P. (Apollo), a private
equity investor and controlling stockholder of the Company, and certain management stockholders on June 30, 2003 to acquire the pre-K-12 educational services business of Laureate Education, Inc. (formerly known as Sylvan Learning Systems,
Inc.)(Laureate). The accompanying financial statements include an unaudited pro forma consolidated statement of income for the nine months ended September 30, 2003, which has been derived from the statement of income of our predecessor
for the six months ended June 30, 2003, and our statement of income for the period from June 30, 2003 (date of inception) through September 30, 2003, adjusted to give effect to the acquisition as if it occurred as of January 1, 2003. See Note 13 for
additional information.



On September 20, 2004, Educate, Inc.
sold its subsidiary Connections Academy, Inc., an operator of K-8 virtual public and charter schools. As a result of this sale transaction, the accompanying consolidated financial statements present the results of operations of Connections Academy
as discontinued operations. See also Note 2.



In connection
with a public offering of the Companys common stock, on June 29, 2004 the Board of Directors approved a 1.00 for 1.25 reverse stock split of the Companys common stock, which was effected on September 20, 2004. All share and per share
amounts in the accompanying consolidated financial statements have been restated for all periods to give retroactive effect to the reverse stock split.



Certain amounts previously reported for 2003 have been reclassified to conform to the 2004 presentation.



Summary of Significant Accounting Policies



Stock Compensation



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



During 2003 and 2004, the Company granted stock options and restricted common stock to employees and directors. These grants are discussed more fully in Note 7.



Pro forma net income and earnings per share data have been determined as if
the Company had accounted for its stock-based awards using prescribed fair value based methods. For all grants prior to May 14, 2004, the date the Company filed a registration statement with the Securities and Exchange Commission to sell its common
stock in a public offering, the Company used the minimum value method. The minimum value method assumes that the fair value of an award is equal to the excess of the fair value of the underlying common stock at the date of grant over the present
value of both the exercise price and the expected dividend payments, each discounted at the risk-free rate, over the expected life of the option.



For all stock options granted after May 14, 2004, the Company used the Black-Scholes option pricing model. The Black-Scholes option pricing model was
developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Black-Scholes and other option valuation models require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Companys stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards.



9



---

##### Table of Contents

Educate, Inc.



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



|                                |  |                                    |   |  |                                                                       |           |  |                                   |          
|------------------------------- |  | ---------------------------------- | - |  | --------------------------------------------------------------------- | --------- |  | --------------------------------- | ---------
|                                |  | Three monthsendedSeptember 30,2004 |   |  | Period from June 30,2003 (date ofinception) throughSeptember 30, 2003 |           |  | Nine monthsendedSeptember 30,2004 |          
|Risk-free interest rate (range) |  | 3.13                               | % |  | 2.48                                                                  | % - 2.99% |  | 2.81                              | % - 3.55%
|Expected dividend yield         |  | 0.00                               | % |  | 0.00                                                                  | %         |  | 0.00                              | %        
|Expected life                   |  | 4 years                            |   |  | 4 years                                                               |           |  | 4 years                           |          
|Stock price volatility          |  | 46                                 | % |  | (                                                                     | *)        |  | 46                                | %        

---

|(*) | Assumption is not applicable to minimum value method
|--- | ----------------------------------------------------



The weighted average estimated fair value of stock based awards was $0.44 for the period from June 30, 2003 through September 30, 2003, $4.60 for the
three months ended September 30, 2004 and $7.41 for the nine months ended September 30, 2004.



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



|                                                                                                      |  |                                     |      |   |                                                                       |   |      |                                   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ---- | - | --------------------------------------------------------------------- | - | ---- | --------------------------------- |  | - | ------ | -
|                                                                                                      |  | Three monthsendedSeptember 30, 2004 |      |   | Period from June 30,2003 (date ofinception) throughSeptember 30, 2003 |   |      | Nine monthsendedSeptember 30,2004 | 
|                                                                                                      |  | (unaudited)                         |      |   | (unaudited)                                                           |   |      | (unaudited)                       | 
|Net income as reported                                                                                |  | $                                   | 903  |   |                                                                       | $ | 246  |                                   |  | $ | 4,508  |  
|Stock-based employee compensation expense included in net income as reported, net of tax              |  |                                     | 240  |   |                                                                       |   |     |                                   |  |   | 5,450  |  
|Stock-based employee compensation expense as if the minimum value method had been applied, net of tax |  |                                     | (252 | ) |                                                                       |   | (55  | )                                 |  |   | (5,626 | )
|                                                                                                      |  |                                     |      |   |                                                                       |   |      |                                   |  |   |        |  
|Pro forma net income                                                                                  |  | $                                   | 891  |   |                                                                       | $ | 191  |                                   |  | $ | 4,332  |  
|                                                                                                      |  |                                     |      |   |                                                                       |   |      |                                   |  |   |        |  
|Earnings per common sharebasic                                                                       |  |                                     |      |   |                                                                       |   |      |                                   |  |   |        |  
|As reported                                                                                           |  | $                                   | 0.02 |   |                                                                       | $ | 0.01 |                                   |  | $ | 0.12   |  
|Pro forma                                                                                             |  | $                                   | 0.02 |   |                                                                       | $ | 0.01 |                                   |  | $ | 0.12   |  
|Earnings per common sharediluted                                                                     |  |                                     |      |   |                                                                       |   |      |                                   |  |   |        |  
|As reported                                                                                           |  | $                                   | 0.02 |   |                                                                       | $ | 0.01 |                                   |  | $ | 0.12   |  
|Pro forma                                                                                             |  | $                                   | 0.02 |   |                                                                       | $ | 0.01 |                                   |  | $ | 0.11   |  



2. Discontinued Operations



On September 20, 2004, the Company sold for cash of
$2,100 its ownership interest in Connections Academy, Inc., a subsidiary, to an entity controlled by certain of the Companys stockholders including its majority shareholder. As a result, the Company recorded a gain of $83, net of tax expense
of $51, which represented the difference between the net proceeds received and the net assets sold. Upon acquisition of the business in June 2003, the Company agreed to pay up to $10,000 of contingent consideration to the prior owners if Connections
Academy achieved specified levels of earnings through December 31, 2007. As part of the sale, the Company transferred this contingent liability to the buyer. The accompanying consolidated balance sheet at December 31, 2003 classifies the assets and
liabilities of Connections Academy as current assets and liabilities of discontinued operations held for sale.



10



---

##### Table of Contents

Educate, Inc.



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



|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |        |  
|----------------------------------------------------- |  | ---------------------------------- | ------ | - | ------------------------------------------------------------------- | - | ------ | --------------------------------- |  | - | ------ | -
|                                                      |  | Three monthsendedSeptember 30,2004 |        |   | Period fromJune 30, 2003(date of inception)throughSeptember 30,2003 |   |        | Nine monthsendedSeptember 30,2004 | 
|                                                      |  | (unaudited)                        |        |   | (unaudited)                                                         |   |        | (unaudited)                       | 
|Revenues                                              |  | $                                  | 545    |   |                                                                     | $ | 835    |                                   |  | $ | 5,160  |  
|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |        |  
|Loss from discontinued operations before income taxes |  |                                    | (1,719 | ) |                                                                     |   | (1,808 | )                                 |  |   | (4,367 | )
|Income tax benefit                                    |  |                                    | 602    |   |                                                                     |   | 633    |                                   |  |   | 1,529  |  
|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |        |  
|Loss from discontinued operations                     |  | $                                  | (1,117 | ) |                                                                     | $ | (1,175 | )                                 |  | $ | (2,838 | )
|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |        |  



3. Goodwill



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



|                                                                            |  |                |        |                       |   |       |  |   |       
|--------------------------------------------------------------------------- |  | -------------- | ------ | --------------------- | - | ----- |  | - | ------
|                                                                            |  | LearningCenter |        | InstitutionalServices |   | Total
|                                                                            |  |                |        |                       |   |       |  |   |       
|Goodwill at December 31, 2003                                               |  | $              | 41,126 |                       | $ | 9,244 |  | $ | 50,370
|Acquisition of franchised learning Centers                                  |  |                | 5,775  |                       |   |      |  |   | 5,775 
|Adjustment to allocation of purchase price of pre K-12 business of Laureate |  |                | 4,287  |                       |   | 169   |  |   | 4,456 
|Foreign currency translation adjustment                                     |  |                | 986    |                       |   |      |  |   | 986   
|                                                                            |  |                |        |                       |   |       |  |   |       
|Goodwill at September 30, 2004 (unaudited)                                  |  | $              | 52,174 |                       | $ | 9,413 |  | $ | 61,587
|                                                                            |  |                |        |                       |   |       |  |   |       



4. Other Intangible Assets



A summary of other intangible assets at September 30,
2004 is as follows:



|                                                                |  |                     |  |                     |         |                         |   |      |                   |  |   |        
|--------------------------------------------------------------- |  | ------------------- |  | ------------------- | ------- | ----------------------- | - | ---- | ----------------- |  | - | -------
|                                                                |  | Usefullife in Years |  | GrossCarryingAmount |         | AccumulatedAmortization |   |      | NetCarryingAmount
|Intangible assets subject to amortization:                      |  |                     |  |                     |         |                         |   |      |                   |  |   |        
|Acquired backlog                                                |  | 0.5                 |  | $                   | 115     |                         | $ | (115 | )                 |  | $ |       
|Contract rights                                                 |  | 5                   |  |                     | 1,084   |                         |   | (270 | )                 |  |   | 814    
|Schulerhilfe franchise license rights                           |  | 25                  |  |                     | 3,782   |                         |   | (125 | )                 |  |   | 3,657  
|                                                                |  |                     |  |                     |         |                         |   |      |                   |  |   |        
|Total intangible assets subject to amortization                 |  |                     |  |                     | 4,981   |                         |   | (510 | )                 |  |   | 4,471  
|                                                                |  |                     |  |                    
|Indefinite-lived intangible assets not subject to amortization: |  |                     |  |                     |         |                         |   |      |                   |  |   |        
|Tradenames                                                      |  | N/A                 |  |                     | 131,536 |                         |   |     |                   |  |   | 131,536
|Learning Center franchise license rights                        |  | N/A                 |  |                     | 82,000  |                         |   |     |                   |  |   | 82,000 
|                                                                |  |                     |  |                     |         |                         |   |      |                   |  |   |        
|Total indefinite-lived intangible assets                        |  |                     |  |                     | 213,536 |                         |   |     |                   |  |   | 213,536
|                                                                |  |                     |  |                     |         |                         |   |      |                   |  |   |        
|Total other intangible assets                                   |  |                     |  | $                   | 218,517 |                         | $ | (510 | )                 |  | $ | 218,007
|                                                                |  |                     |  |                     |         |                         |   |      |                   |  |   |        



11



---

##### Table of Contents

Educate, Inc.



Estimated future amortization expense of intangible assets subject to amortization is as follows:



|                        |  |   |      
|----------------------- |  | - | -----
|Year ended December 31: |  |   |      
|2004                    |  | $ | 276  
|2005                    |  |   | 483  
|2006                    |  |   | 473  
|2007                    |  |   | 464  
|2008                    |  |   | 351  
|Thereafter              |  |   | 2,424
|                        |  |   |      
|                        |  | $ | 4,471
|                        |  |   |      



5. Long-Term Debt



Long-term debt consists of the following:



|                                                                                                                                                                                                                                                                                       |  |                   |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                                                                                                       |  | September 30,2004 |         |   | December 31, 2003 |  
|Senior term loan payable to a bank (2003 Term Loan) in quarterly installments through December 2008. The loan bears interest at
the banks prime rate or the Eurodollar rate, plus specified margins, as elected by the Company (aggregating to 5.42% per annum at December 31 2003) |  | $                 |        |   |                   | $ | 108,750 |  
|Subordinated note payable to Laureate, due on June 30, 2009 and bearing interest at 12.00% annum                                                                                                                                                                                       |  |                   |        |   |                   |   | 55,000  |  
|Senior term loan payable to a bank (2004 Term Loan) in quarterly installments through March 2011. The loan bears interest at the
banks prime rate or the Eurodollar rate, plus specified margins, as elected by the Company (aggregating to 4.64% per annum at September 30, 2004)  |  |                   | 119,150 |   |                   |   |        |  
|Note payable to Laureate, due in quarterly installments through June 30, 2009. The note does not bear interest, and is recorded net of a
discount of $499 at December 31, 2003 and $383 at September 30, 2004                                                                          |  |                   | 2,002   |   |                   |   | 2,165   |  
|Various notes payable bearing interest at fixed rates ranging from 5.00% to 8.00% per annum                                                                                                                                                                                            |  |                   | 1,204   |   |                   |   | 1,950   |  
|                                                                                                                                                                                                                                                                                       |  |                   |         |   |                   |   |         |  
|                                                                                                                                                                                                                                                                                       |  | $                 | 122,356 |   |                   | $ | 167,865 |  
|Less: current portion of long-term debt                                                                                                                                                                                                                                                |  |                   | (2,369  | ) |                   |   | (8,301  | )
|                                                                                                                                                                                                                                                                                       |  |                   |         |   |                   |   |         |  
|Total long-term debt                                                                                                                                                                                                                                                                   |  | $                 | 119,987 |   |                   | $ | 159,564 |  
|                                                                                                                                                                                                                                                                                       |  |                   |         |   |                   |   |         |  



On April 27, 2004, the
Company repaid the 2003 Term Loan and the subordinated note payable to Laureate and terminated the original revolving credit agreement with the proceeds of the 2004 Term Loan, initially in the amount of $170,000. The new credit agreement includes a
five-year $30,000 revolving credit facility. Upon satisfaction of the 2003 Term Loan, $3,188 of previously capitalized debt issuance costs were expensed as other financing costs. In addition, approximately $1,929 of other financing costs were
incurred and charged to expense related to a terminated debt financing transaction.



From April 27, 2004 through September 28, 2004, the 2004 Term Loan bore interest at a rate of LIBOR plus 3.0% per annum.



On September 28, 2004, the Company paid down $50,000 of its 2004 Term Loan primarily with the net proceeds from its initial public offering. Due to
interest rate reductions specifically tied to reduced leverage ratios, this payment reduced the interest rate to LIBOR plus 2.5% per annum beginning on September 29, 2004.



12



---

##### Table of Contents

Educate, Inc.



Aggregate maturities of long-term debt at September 30, 2004 are as follows:



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 661    
|2005       |  |   | 2,425  
|2006       |  |   | 2,357  
|2007       |  |   | 2,330  
|2008       |  |   | 2,288  
|Thereafter |  |   | 112,295
|           |  |   |        
|           |  | $ | 122,356
|           |  |   |        



6. Income Taxes



The Companys income tax provisions for all periods consist of federal,
state, and foreign income taxes. The tax provision for the nine-month period ended September 30, 2004 is based on the estimated effective tax rate applicable for the full year. Currently, the effective tax rate for the Company for the year ending
December 31, 2004 is expected to be 48%. This forecasted rate has changed from the 38% rate estimated as of June 30, 2004 based on the determination in the third quarter that certain stock compensation which was recorded in the quarter ended June
30, 2004 will result in a permanently lower income tax deduction compared to the related compensation expense recorded for financial statement purposes. The effect of this change in estimate was to reduce income from continuing operations and net
income in the three month period ended September 30, 2004 by approximately $900, or $.02 per diluted common share. Due to potential changes in the mix of earnings between tax jurisdictions, the Companys consolidated effective tax rate may
fluctuate further in 2004.



7. Stockholders Equity



Changes in the Companys stockholders equity during the period
December 31, 2003 through September 30, 2004 are summarized as follows:



|                                                                                                      |  |             |     |                          |   |         |                  |  |   |                                     |   |                          |   |       |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | --- | ------------------------ | - | ------- | ---------------- |  | - | ----------------------------------- | - | ------------------------ | - | ----- |  | - | ------- | -
|                                                                                                      |  | CommonStock |     | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   | TotalStockholdersEquity |  
|Balance at December 31, 2003                                                                          |  | $           | 368 |                          | $ | 137,336 |                  |  | $ | 1,701                               |   |                          | $ | 2,502 |  | $ | 141,907 |  
|Options exercises for purchase of 170,474 shares of common stock, including income tax benefit of $84 |  |             | 2   |                          |   | 715     |                  |  |   |                                    |   |                          |   |      |  |   | 717     |  
|Issuance of 604,000 shares of restricted common stock to employees for cash and services              |  |             | 6   |                          |   | 7,598   |                  |  |   |                                    |   |                          |   |      |  |   | 7,604   |  
|Issuance of 5,000,000 shares of common stock (less direct costs of $7,223)                            |  |             | 50  |                          |   | 47,727  |                  |  |   |                                    |   |                          |   |      |  |   | 47,777  |  
|Issuance of options to purchase common stock to employees for cash and services                       |  |             |    |                          |   | 1,191   |                  |  |   |                                    |   |                          |   |      |  |   | 1,191   |  
|Cash dividends to stockholders                                                                        |  |             |    |                          |   | (3,694  | )                |  |   | (5,306                              | ) |                          |   |      |  |   | (9,000  | )
|Comprehensive income:                                                                                 |  |             |     |                          |   |         |                  |  |   |                                     |   |                          |   |       |  |   |         |  
|Net income for the nine months ended September 30, 2004                                              |  |             |    |                          |   |        |                  |  |   | 4,508                               |   |                          |   |      |  |   | 4,508   |  
|Other comprehensive income:                                                                           |  |             |     |                          |   |         |                  |  |   |                                     |   |                          |   |       |  |   |         |  
|Change in fiar value of derivative financial instrument, net of tax of $57                            |  |             |    |                          |   |        |                  |  |   |                                    |   |                          |   | 149   |  |   | 149     |  
|Foreign currency translation adjustment                                                               |  |             |    |                          |   |        |                  |  |   |                                    |   |                          |   | 142   |  |   | 142     |  
|                                                                                                      |  |             |     |                          |   |         |                  |  |   |                                     |   |                          |   |       |  |   |         |  
|Total comprehensive income                                                                            |  |             |    |                          |   |        |                  |  |   | 4,508                               |   |                          |   | 291   |  |   | 4,799   |  
|                                                                                                      |  |             |     |                          |   |         |                  |  |   |                                     |   |                          |   |       |  |   |         |  
|Balance at September 30, 2004                                                                         |  | $           | 426 |                          | $ | 190,873 |                  |  | $ | 903                                 |   |                          | $ | 2,793 |  | $ | 194,995 |  
|                                                                                                      |  |             |     |                          |   |         |                  |  |   |                                     |   |                          |   |       |  |   |         |  



13



---

##### Table of Contents

Educate, Inc.



In June 2004, the Company issued 604,000 shares of restricted common stock for $0.01 per share to certain employees that
vested immediately. These shares of common stock are restricted as to resale over a three- to five-year period. The Company estimated that due to the restrictions on resale, the common stock had an estimated fair value of $12.60 at the grant date,
or 90% of the estimated fair value of an unrestricted share of common stock. The Company recorded aggregate compensation expense of $7,598 in June 2004 related to these common stock grants.



In June 2004, the Company declared and paid a dividend to its existing
stockholders in the amount of $9,000, or $0.24 per common share.



On September 23, 2004, the Company sold 5,000,000 shares of common stock and certain of its stockholders sold 10,000,000 shares of common stock for $11.00 per share in an initial public offering. Proceeds received by the Company, net of
underwriting commissions and other estimated expenses, totaled $47,777. The Company used the entire proceeds of the offering to pay down a portion of its 2004 Term Loan. Subsequently, the underwriters exercised their over-allotment option in full
and the selling stockholders sold 2,250,000 shares of common stock on October 1, 2004.



8. Comprehensive Income



The components of comprehensive income, net of related taxes, are as follows:



|                                                                                                                                      |  |                                    |       |   |                                                                     |   |                                   |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----- | - | ------------------------------------------------------------------- | - | --------------------------------- |  | - | -----
|                                                                                                                                      |  | Three monthsendedSeptember 30,2004 |       |   | Period fromJune 30, 2003(date of inception)throughSeptember 30,2003 |   | Nine monthsendedSeptember 30,2004
|                                                                                                                                      |  | (unaudited)                        |       |   | (unaudited)                                                         |   | (unaudited)                      
|Net income                                                                                                                            |  | $                                  | 903   |   |                                                                     | $ | 246                               |  | $ | 4,508
|Foreign currency translation adjustment                                                                                               |  |                                    | 487   |   |                                                                     |   | 91                                |  |   | 142  
|Change of fair value derivative financial instrument, net of tax $78 and $(91) for the three and nine months ended September 30,
2004 |  |                                    | (125  | ) |                                                                     |   |                                  |  |   | 149  
|                                                                                                                                      |  |                                    |       |   |                                                                     |   |                                   |  |   |      
|Comprehensive income                                                                                                                  |  | $                                  | 1,265 |   |                                                                     | $ | 337                               |  | $ | 4,799
|                                                                                                                                      |  |                                    |       |   |                                                                     |   |                                   |  |   |      



9. Earnings Per Share



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



14



---

##### Table of Contents

Educate, Inc.



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



|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------------------------------------------- | - | ------ | --------------------------------- |  | - | ----------------------------------- | - |  | - | ------
|                                            |  | Three monthsendedSeptember 30,2004 |        |   | Period fromJune 30, 2003(date of inception)throughSeptember 30, 2003 |   |        | Nine monthsendedSeptember 30,2004 |  |   | Nine months endedSeptember 30, 2003
|                                            |  | (unaudited)                        |        |   | (unaudited)                                                          |   |        | (unaudited)                       |  |   | (unaudited)                        
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   | (pro forma Note 13)                
|Numerator                                   |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Income from continuing operations           |  | $                                  | 1,937  |   |                                                                      | $ | 1,421  |                                   |  | $ | 7,263                               |   |  | $ | 9,017 
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Loss from discontinued operations           |  |                                    | (1,034 | ) |                                                                      |   | (1,175 | )                                 |  |   | (2,755                              | ) |  |   |       
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Net income                                  |  | $                                  | 903    |   |                                                                      | $ | 246    |                                   |  | $ | 4,508                               |   |  |   |       
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Denominator (shares in 000s)               |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Basic:                                      |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Weighted-average shares outstanding         |  |                                    | 37,974 |   |                                                                      |   | 36,800 |                                   |  |   | 37,341                              |   |  |   | 36,800
|Diluted:                                    |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Weighted-average shares outstanding         |  |                                    | 37,974 |   |                                                                      |   | 36,800 |                                   |  |   | 37,341                              |   |  |   | 36,800
|Dilutive effect of stock options            |  |                                    | 1,334  |   |                                                                      |   |       |                                   |  |   | 1,095                               |   |  |   |      
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Total                                       |  |                                    | 39,308 |   |                                                                      |   | 36,800 |                                   |  |   | 38,436                              |   |  |   | 36,800
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Earnings per common sharebasic and diluted |  |                                    |        |   |                                                                      |   |        |                                   |  |   | .                                   |   |  |   |       
|Income from continuing operations           |  | $                                  | 0.05   |   |                                                                      | $ | 0.04   |                                   |  | $ | 0.19                                |   |  | $ | 0.25  
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Loss from discontinued operations           |  |                                    | (0.03  | ) |                                                                      |   | (0.03  | )                                 |  |   | (0.07                               | ) |  |   |       
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       
|Net income                                  |  | $                                  | 0.02   |   |                                                                      | $ | 0.01   |                                   |  | $ | 0.12                                |   |  |   |       
|                                            |  |                                    |        |   |                                                                      |   |        |                                   |  |   |                                     |   |  |   |       



10. Stock Option Plan



During 2003, the Company adopted a stock option plan that
provides for the granting of options to purchase up to 3,680,000 shares of common stock to selected employees and directors of the Company. All options granted during 2003 were issued with an exercise price of $3.71 per share, which is equal to the
estimated fair value of the common stock at the date of the grant, vest over a four-year period, and expire 10 years after the date of the grant.



15



---

##### Table of Contents

Educate, Inc.



During the period from January 1, 2004 through September 30, 2004, the Company issued options to purchase 598,800 shares of
common stock to employees and directors of the Company with a weighted-average exercise price of $7.22 per share. Certain options vested immediately, and other options will vest over three- and four-year periods. The Company estimates that it will
record approximately $3,312 of aggregate compensation expense related to these option grants, including $387 and $1,190 in the three and nine month periods ended September 30, 2004, respectively, based on an estimate of the fair value of common
stock at the grant date of $11.00 to 14.00 per share.



At
September 30, 2004 the Company has outstanding options to purchase 3,707,578 shares of common stock at a weighted average exercise price of $4.28 per share.



11. Commitments and Contingencies



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



The shared services agreement requires that the Company receive net payments each month of $204 during the term of the
agreement. These payments amounted to $612 for the period from June 30, 2003 through September 30, 2003 and $363 and $1,587 for the three and nine month periods ended September 30, 2004, respectively, and are accounted for as a reduction of general
and administrative expenses. The agreement also allows for specified volume-based increases to the fees attributable to the services.



In connection with the sale of Connections Academy on September 20, 2004 the Company and Connections Academy entered into a transition services agreement.
Under the agreement, the Company will provide certain back office accounting and human resources services to Connections Academy for the remainder of 2004 and potentially 2005 and 2006 at specified rates. No receipts have been received through the
period ending September 30, 2004.



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



The
Company maintains a number of standby letters of credit totaling $830 as of September 30, 2004 to guarantee its insurance program and potential payment under a franchisee acquisition through 2008.





The Company has guaranteed certain bank loans of franchisees related to financing the purchase of educational programs and other purchased instructional material. Of the $1.0 million of available credit under this program, $0.2 million was
outstanding at September 30, 2004. These guarantees are secured by the assets of the business of the individual franchisee utilizing this financing arrangement.



12. Businesses and Geographic Segment Information



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



| |  | Learning Center segment develops and delivers trusted, personalized tutoring programs primarily through a network of franchised and company-owned learning centers in North America
operated under the Sylvan brand name, and more than 940 European franchised and company-owned learning centers operated under the Schulerhilfe brand name.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



16



---

##### Table of Contents

Educate, Inc.



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



The following tables set forth information
on the Companys reportable segments:



|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------ |  | --------------- | ------- | - | ---------------------- | - | ------ | --------------- |  | - | ------ | - |  | - | ------- | -
|Three months ended September 30,
2004                                    |  | LearningCenter  |         |   | InstitutionalServices  |   |        | OnlineLearning  |  |   | Total  |  
|Revenues                                                                 |  | $               | 47,893  |   |                        | $ | 13,750 |                 |  | $ | 718    |   |  | $ | 62,361  |  
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment profit (loss) before depreciation and amortization               |  |                 | 15,406  |   |                        |   | (1,389 | )               |  |   | (958   | ) |  |   | 13,059  |  
|Depreciation and amortization                                            |  |                 | (924    | ) |                        |   | (599   | )               |  |   | (76    | ) |  |   | (1,599  | )
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment profit (loss)                                                    |  | $               | 14,482  |   |                        | $ | (1,988 | )               |  | $ | (1,034 | ) |  | $ | 11,460  |  
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment assets                                                           |  | $               | 298,180 |   |                        | $ | 34,769 |                 |  | $ | 797    |   |  | $ | 333,746 |  
|Total expenditures for additions to long-lived assets                    |  |                 | 3,204   |   |                        |   | 1,148  |                 |  |   | 14     |   |  |   | 4,366   |  
|                                                                         |  |                 |         |  
|Period from June 30, 2003 (date
of inception) through September 30, 2003 |  | Learning Center |         |   | Institutional Services |   |        | Online Learning |  |   | Total  |  
|                                                                         |  |                 |        
|Revenues                                                                 |  | $               | 43,402  |   |                        | $ | 9,987  |                 |  | $ | 473    |   |  | $ | 53,862  |  
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment profit (loss) before depreciation and amortization               |  |                 | 12,789  |   |                        |   | (1,675 | )               |  |   | (945   | ) |  |   | 10,169  |  
|Depreciation and amortization                                            |  |                 | (842    | ) |                        |   | (249   | )               |  |   | (148   | ) |  |   | (1,239  | )
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment profit (loss)                                                    |  | $               | 11,947  |   |                        | $ | (1,924 | )               |  | $ | (1,093 | ) |  | $ | 8,930   |  
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment assets                                                           |  | $               | 282,833 |   |                        | $ | 23,246 |                 |  | $ | 1,626  |   |  | $ | 307,705 |  
|Total expenditures for additions to long-lived assets                    |  |                 | 924     |   |                        |   | 65     |                 |  |   | 146    |   |  |   | 1,135   |  
|                                                                         |  |                 |         |  
|Nine months ended September 30,
2004                                     |  | Learning Center |         |   | Institutional Services |   |        | Online Learning |  |   | Total  |  
|                                                                         |  |                 |        
|Revenues                                                                 |  | $               | 139,854 |   |                        | $ | 89,895 |                 |  | $ | 2,058  |   |  | $ | 231,807 |  
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment profit (loss) before depreciation and amortization               |  |                 | 43,708  |   |                        |   | 10,079 |                 |  |   | (3,122 | ) |  |   | 50,665  |  
|Depreciation and amortization                                            |  |                 | (2,581  | ) |                        |   | (1,635 | )               |  |   | (244   | ) |  |   | (4,460  | )
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment profit (loss)                                                    |  | $               | 41,127  |   |                        | $ | 8,444  |                 |  | $ | (3,366 | ) |  | $ | 46,205  |  
|                                                                         |  |                 |         |   |                        |   |        |                 |  |   |        |   |  |   |         |  
|Segment assets                                                           |  | $               | 298,180 |   |                        | $ | 34,769 |                 |  | $ | 797    |   |  | $ | 333,746 |  
|Total expenditures for additions to long-lived assets                    |  |                 | 9,988   |   |                        |   | 2,748  |                 |  |   | 59     |   |  |   | 12,795  |  



17



---

##### Table of Contents

Educate, Inc.



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



|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------- | ------ | - | ------------------------------------------------------------------- | - | ------ | --------------------------------- |  | - | ------- | -
|                                                      |  | Three monthsendedSeptember 30,2004 |        |   | Period fromJune 30, 2003(date of inception)throughSeptember 30,2003 |   |        | Nine monthsendedSeptember 30,2004 | 
|Segment profit                                        |  | $                                  | 11,460 |   |                                                                     | $ | 8,930  |                                   |  | $ | 46,205  |  
|Corporate depreciation and amortization               |  |                                    | (427   | ) |                                                                     |   | (413   | )                                 |  |   | (1,210  | )
|General and administrative costs                      |  |                                    | (3,133 | ) |                                                                     |   | (3,048 | )                                 |  |   | (9,516  | )
|Non-cash stock compensation expense                   |  |                                    | (303   | ) |                                                                     |   |       |                                   |  |   | (8,704  | )
|Other income (expense)                                |  |                                    | (2,164 | ) |                                                                     |   | (3,177 | )                                 |  |   | (12,752 | )
|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |         |  
|Income from continuing operations before income taxes |  | $                                  | 5,433  |   |                                                                     | $ | 2,292  |                                   |  | $ | 14,023  |  
|                                                      |  |                                    |        |   |                                                                     |   |        |                                   |  |   |         |  



Revenues by geographic
area is as follows:



|                   |  |                                    |        |                                                                     |   |                                   |  |   |        
|------------------ |  | ---------------------------------- | ------ | ------------------------------------------------------------------- | - | --------------------------------- |  | - | -------
|                   |  | Three monthsendedSeptember 30,2004 |        | Period fromJune 30, 2003(date of inception)throughSeptember 30,2003 |   | Nine monthsendedSeptember 30,2004
|United States      |  | $                                  | 55,835 |                                                                     | $ | 48,711                            |  | $ | 210,182
|Other              |  |                                    | 6,526  |                                                                     |   | 5,151                             |  |   | 21,625 
|                   |  |                                    |        |                                                                     |   |                                   |  |   |        
|Consolidated total |  | $                                  | 62,361 |                                                                     | $ | 53,862                            |  | $ | 231,807
|                   |  |                                    |        |                                                                     |   |                                   |  |   |        



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



13. Unaudited Pro Forma Consolidated Statement of Income  Nine Months Ended
September 30, 2004



On June 30, 2003, the Company acquired
substantially all of the pre-K-12 business of Laureate, its predecessor. The accompanying unaudited pro forma consolidated statement of income for the nine months ended September 30, 2003 is derived from the consolidated statement of income of the
Company for the period from June 30, 2003 (date of inception) through September 30, 2003 and the unaudited combined statement of income of the predecessor for the six months ended June 30, 2003, adjusted to give effect to the acquisition as if it
occurred as of January 1, 2003. The pro forma adjustments are described below and have been determined in accordance with the regulations of the Securities and Exchange Commission for the presentation of pro forma financial information following a
business combination. These adjustments are based upon available information and certain assumptions that management believes are reasonable. The unaudited pro forma consolidated statement of income does not purport to represent what the results of
operations would actually have been had the acquisition in fact occurred on such date or to project the results of operations for any future date or period. The unaudited pro forma consolidated statement of income should be read in conjunction with
the Companys historical consolidated financial statements and the historical financial statements of the Companys predecessor included in the Companys Registration Statement on Form S-1, declared effective by the Securities and
Exchange Commission on September 23, 2004.



18



---

##### Table of Contents

Educate, Inc.



|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|-------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ------------------------------------------------------------- | - | ------ | -------------------- |  | - | --------------------------------- | -------- |  | - | ------- | -
|                                                                     |  | Historical                             |         |   |                                                               |   |        | Pro Forma            | 
|                                                                     |  | PredecessorSix monthsendedJune 30,2003 |         |   | Educate, Inc.Period fromJune 30, 2003throughSeptember 30,2003 |   |        | Pro FormaAdjustments |  |   | Nine monthsendedSeptember 30,2003 |         
|Revenues                                                             |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Learning Center:                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Company-owned centers                                                |  | $                                      | 59,789  |   |                                                               | $ | 32,646 |                      |  | $ |                                  |          |  | $ | 92,435  |  
|Franchise services                                                   |  |                                        | 23,655  |   |                                                               |   | 10,756 |                      |  |   |                                  |          |  |   | 34,411  |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Total Learning Center                                                |  |                                        | 83,444  |   |                                                               |   | 43,402 |                      |  |   |                                  |          |  |   | 126,846 |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Institutional Services                                               |  |                                        | 43,418  |   |                                                               |   | 9,987  |                      |  |   |                                  |          |  |   | 53,405  |  
|Online Learning Services                                             |  |                                        | 973     |   |                                                               |   | 473    |                      |  |   |                                  |          |  |   | 1,446   |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Total revenues                                                       |  |                                        | 127,835 |   |                                                               |   | 53,862 |                      |  |   |                                  |          |  |   | 181,697 |  
|                                                                     |  |                                        |         |  
|Costs and expenses                                                   |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Instructional and franchise operations costs                         |  |                                        | 88,634  |   |                                                               |   | 39,209 |                      |  |   |                                  |          |  |   | 127,843 |  
|Marketing and advertising                                            |  |                                        | 10,337  |   |                                                               |   | 4,484  |                      |  |   |                                  |          |  |   | 14,821  |  
|Depreciation and amortization                                        |  |                                        | 4,221   |   |                                                               |   | 1,652  |                      |  |   | (1,012                            | )(1),(2) |  |   | 4,861   |  
|General and administrative expenses                                  |  |                                        | 6,433   |   |                                                               |   | 3,048  |                      |  |   |                                  |          |  |   | 9,481   |  
|Non-cash stock compensation expense                                  |  |                                        |        |   |                                                               |   |       |                      |  |   |                                  |          |  |   |        |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Total costs and expenses                                             |  |                                        | 109,625 |   |                                                               |   | 48,393 |                      |  |   | (1,012                            | )        |  |   | 157,006 |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Operating income                                                     |  |                                        | 18,210  |   |                                                               |   | 5,469  |                      |  |   | 1,012                             |          |  |   | 24,691  |  
|Other income (expense)                                               |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|                                                                     |  |                                        |         |  
|Interest expense, net                                                |  |                                        | 12      |   |                                                               |   | (3,177 | )                    |  |   | (6,484                            | )(3)     |  |   | (9,649  | )
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Income from continuing operations before income taxes                |  |                                        | 18,222  |   |                                                               |   | 2,292  |                      |  |   | (5,472                            | )        |  |   | 15,042  |  
|                                                                     |  |                                        |         |  
|Income tax expense                                                   |  |                                        | (8,943  | ) |                                                               |   | (871   | )                    |  |   | 3,789                             | (4)      |  |   | (6,025  | )
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Income from continuing operations                                    |  | $                                      | 9,279   |   |                                                               | $ | 1,421  |                      |  | $ | (1,683                            | )        |  |   | 9,017   |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  
|Income from continuing operations per common share basic and diluted |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  | $ | 0.25    |  
|                                                                     |  |                                        |         |   |                                                               |   |        |                      |  |   |                                   |          |  |   |         |  



19



---

##### Table of Contents

Educate, Inc.



Summary of Pro Forma Adjustments



(1) Adjustment to reduce depreciation expense by $1,020 for the nine months ended September 30, 2003. This adjustment accounts for the annual effect on depreciation for
the revaluation of property and equipment to fair value at the acquisition date, and includes the effects of depreciating property and equipment over shorter lives for the full year in accordance with the depreciation policies of the Company.



(2) Adjustment to increase amortization expense by $8 for the nine months
ended September 30, 2003. Amortization expense has been adjusted to eliminate amortization expense of $299 related to intangible assets of the predecessor. In addition, amortization expense was increased by $307 for the nine months ended September
30, 2003 to provide for the full year effect of amortizing intangibles acquired by the Company on June 30, 2003.



(3) Adjustment to increase interest expense by $6,484 for the nine months ended September 30, 2003. To acquire the pre-K-12 business of Laureate, the Company on June 30,
2003 borrowed $110,000 from banks and other lenders, issued a $55,000 note to Laureate, and agreed to a deferred payment to Laureate of $2,300. The interest rates for the above long-term borrowings range from 5.5% to 12% per annum, with a weighted
average interest rate of 7.75% per annum. The $55,000 note issued to Laureate in connection with the acquisition bears interest at 12% per annum.



(4) Adjustment to record pro forma income tax expense related to pro forma adjustments to the estimated effective income tax rate of 40%.



20



---

##### Table of Contents

Educate, Inc.



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



The following discussion of our financial condition and results of operations should be
read in conjunction with the consolidated financial statements and the notes to those statements included in Part I-Item I of this Quarterly Report and the consolidated financial statements and notes thereto in the Companys final prospectus
dated September 22, 2004 and filed with the SEC on September 23, 2004 under Rule 424(b) of the Securities Act.



For the nine months ended September 30, 2003, the Company has presented unaudited pro forma consolidated financial results which has been derived from the statement of
income of our predecessor (Laureate) for the six months ended June 30, 2003 and our statement of income for the period June 30, 2003 (date of inception) through September 30, 2003 adjusted to give effect to the acquisition as if it
occurred as of January 1, 2003. See Note 13 of our consolidated financial statements for additional information.



Information Regarding Forward-Looking Statements



The statements contained herein include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include information about possible or assumed results of operations, business strategies, financing plans, competitive position and potential growth opportunities. Forward-looking statements include all statements that are
not historical facts and are generally accompanied by words such as may, will, intend, anticipate, believe, estimate, expect, should or similar
expressions. These statements also relate to the Companys contingent payment obligations relating to acquisitions, future capital requirements, potential acquisitions and the Companys future development plans and are based on current
expectations. Forward-looking statements involve various risks, uncertainties and assumptions. The Companys actual results may differ materially from those expressed in these forward-looking statements.



Future events and actual results could differ materially from those set forth in the
forward-looking statements as a result of many factors. The following factors might cause such a difference: the development and expansion of the Sylvan Learning Center franchise system; changes in the relationships among Sylvan Learning Center and
its franchisees; the Companys ability to effectively manage business growth; increased competition from other educational service providers; changes in laws and government policies and programs; changes in the acceptance of the Companys
services by institutional customers and consumers; changes in customer relationships; the seasonality of operating results; global economic conditions, including interest and currency rate fluctuations, and inflation rates. Additional information
regarding these and other risk factors and uncertainties are set forth from time to time in the Companys filings with the Securities and Exchange Commission, available for viewing on the Companys website www.educate-inc.com. These
forward-looking statements are based on estimates, projections, beliefs and assumptions of management and speak only as of the date made and are not guarantees of future performance.



Overview



Educate, Inc. (the Company) is the leading national provider of tutoring and other supplemental education services to pre-kindergarten through
twelfth grade, or pre-K-12, students. The Company operates through three business segments that served more than 250,000 students in 2003.



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



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



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



21



---

##### Table of Contents

Educate, Inc.



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



Seasonality and Other Quarterly Fluctuations



Like other companies that provide tutoring and other supplemental education services, we are subject to seasonality in our revenue streams that can affect our results of operations. This seasonality arises from a
number of factors, primarily driven by the timing of school semester cycles. Our quarterly results also have been affected by our license agreements with franchisees that require the payment of royalties to us based on a percentage of their cash
receipts, a significant portion of which consist of prepayments by customers for services to be provided by our franchises more than a month in the future. In our Institutional Services segment, we incur significant start-up costs in connection with
preparation of our No Child Left Behind (NCLB) programs.



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



Sale of Connections Academy



On September 20, 2004, we completed the sale of our Connections Academy
business to an ownership group including certain of our existing stockholders. Following this sale, we have no ongoing involvement with Connections academy other than a customary transition services agreement. Results of operations for all periods
presented exclude the results of the discontinued operations.



Results of
Operations



Comparison of results for the three months ended
September 30, 2004 to results for the three months ended September 30, 2003.



|                         |  |                                    |      |                                                                     |   |          |  |     |   
|------------------------ |  | ---------------------------------- | ---- | ------------------------------------------------------------------- | - | -------- |  | --- | --
|                         |  | Three MonthsEndedSeptember 30,2004 |      | Period fromJune 30, 2003(date of inception)throughSeptember 30,2003 |   | Variance | 
|                         |  | (Dollars in Millions)              |      |                                                                     |  
|Revenues                 |  |                                    |      |                                                                     |   |          |  |     |   
|Learning Center:         |  |                                    |      |                                                                     |   |          |  |     |   
|Franchise services       |  | $                                  | 10.4 |                                                                     | $ | 9.8      |  | 6   | % 
|Company-owned centers    |  |                                    | 31.4 |                                                                     |   | 28.9     |  | 9   | % 
|European                 |  |                                    | 6.1  |                                                                     |   | 4.7      |  | 29  | % 
|                         |  |                                    |      |                                                                     |   |          |  |     |   
|                         |  |                                    | 47.9 |                                                                     |   | 43.4     |  | 10  | % 
|Institutional Services:  |  |                                    |      |                                                                     |   |          |  |     |   
|School Services          |  |                                    | 9.8  |                                                                     |   | 9.2      |  | 7   | % 
|Special Needs            |  |                                    | 3.4  |                                                                     |   |         |  | N/A |   
|NCLB                     |  |                                    | 0.5  |                                                                     |   | 0.8      |  | (39 | %)
|                         |  |                                    |      |                                                                     |   |          |  |     |   
|                         |  |                                    | 13.8 |                                                                     |   | 10.0     |  | 38  | % 
|Online Learning Services |  |                                    | 0.7  |                                                                     |   | 0.5      |  | 52  | % 
|                         |  |                                    |      |                                                                     |   |          |  |     |   
|Total                    |  | $                                  | 62.4 |                                                                     | $ | 53.9     |  | 16  | % 
|                         |  |                                    |      |                                                                     |   |          |  |     |   



22



---

##### Table of Contents

Educate, Inc.



|                                             |  |                                    |    |  |                                                                        |   
|-------------------------------------------- |  | ---------------------------------- | -- |  | ---------------------------------------------------------------------- | --
|                                             |  | Three MonthsEndedSeptember 30,2004 |    |  | Period from June 30, 2003(date of inception) throughSeptember 30, 2003 |   
|Business Metrics                             |  |                                    |    |  |                                                                        |   
|Franchise centers operating information:     |  |                                    |    |  |                                                                        |   
|Same territory royalty growth (1)            |  | 1                                  | %  |  | 6                                                                      | % 
|Same center royalty growth (2)               |  | (1                                 | %) |  | 6                                                                      | % 
|Company-owned centers operating information: |  |                                    |    |  |                                                                        |   
|Same territory revenue growth (1) (3)        |  | 1                                  | %  |  | 7                                                                      | % 
|Same center revenue growth (2) (4)           |  | 0                                  | %  |  | 7                                                                      | % 
|Territory cash receipt growth (3)            |  | 4                                  | %  |  | (2                                                                     | %)
|Center cash receipt growth (4)               |  | 3                                  | %  |  | (3                                                                     | %)



|                                          |  |                        |  |                        |  |          |  
|----------------------------------------- |  | ---------------------- |  | ---------------------- |  | -------- | -
|                                          |  | As ofSeptember 30,2004 |  | As ofSeptember 30,2003 |  | Variance |  
|Number of Sylvan Learning Territories (5) |  |                        |  |                        |  |          |  
|Franchise                                 |  | 744                    |  | 729                    |  | 2        | %
|Company-owned                             |  | 96                     |  | 82                     |  | 17       | %
|                                          |  |                        |  |                        |  |          |  
|Total                                     |  | 840                    |  | 811                    |  | 4        | %
|                                          |  |                        |  |                        |  |          |  
|Number of Sylvan Learning Centers (6)     |  |                        |  |                        |  |          |  
|Franchise                                 |  | 896                    |  | 856                    |  | 5        | %
|Company-owned                             |  | 149                    |  | 132                    |  | 13       | %
|                                          |  |                        |  |                        |  |          |  
|Total                                     |  | 1,045                  |  | 988                    |  | 6        | %
|                                          |  |                        |  |                        |  |          |  

---

|(1) | Same Territory amounts, for both company-owned and franchised territories, include the results of territories for the identical months for each period presented in the
comparison, commencing with the 13thfull month the territory has been operating. A territory reflects the
geographically specified area where an operator controls rights to provide services under the Sylvan franchise agreement.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Same Center amounts, for both company-owned and franchised centers, include the results of centers for the identical months for each period presented in the comparison,
commencing with the 13th full month the center has been operating.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Company-owned territories are contractually obligated to pay an 8% royalty to one of our subsidiaries. This revenue is eliminated in consolidation. Territory cash receipt
growth of North American company-owned territories represents the change in the amount of cash receipts reported by company-owned same territories in one period as compared with the comparable period in the prior year. Management believes the
use of this non-GAAP metric enables a more meaningful comparison of same company-owned territory growth to same franchised territory royalty growth. The difference between same territory revenue growth and territory cash receipt growth is a change
in deferred revenues of 1% and (8%) and the impact of acquisitions of franchised Sylvan Learning Centers of 2% and (1%) for the three months ended September 30, 2004 and 2003, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Company-owned centers are contractually obligated to pay an 8% royalty to one of our subsidiaries. This revenue is eliminated in consolidation. Center cash receipt
growth of North American company-owned centers represents the change in the amount of cash receipts reported by company-owned same centers in one period as compared with the comparable period in the prior year. Management believes the use of
this non-GAAP metric enables a more meaningful comparison of same company-owned center growth to same franchised center royalty growth. The difference between same center revenue growth and center cash receipt growth is a change in deferred revenues
of 1% and (10%) and the impact of acquisitions of franchised Sylvan Learning Centers of 2% and 0% for the three months ended September 30, 2004 and 2003, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Number of Sylvan Learning territories at period end.
|--- | ----------------------------------------------------

|(6) | Number of Sylvan Learning Centers at period end.
|--- | ------------------------------------------------



23



---

##### Table of Contents

Educate, Inc.



Revenues. Our revenue increase was primarily driven by growth in Learning Center of $4.5 million due to the expansion
of company-owned centers ($2.5 million), franchised services revenue growth ($0.6 million), and an increase in European revenues ($1.4 million) as well as an increase in Institutional Services due primarily to the acquisition of Progressus Therapy
($3.4 million) in October 2003 and an increase in traditional summer school programs.



Learning CenterRevenues from company-owned centers increased primarily as a result of the acquisition of 14 territories from franchise owners, which contributed $2.5 million. Our company-owned same
territory revenue growth was 1% in the three-month period ended September 30, 2004. However, our company-owned same territories experienced territory cash receipt growth of 4% during the third quarter of 2004, a portion of which was due to the
launch of a new third-party financing program during June 2004, which made financing available to a broader range of potential customers. Franchise services revenues increased $0.6 million as a result of the addition of 15 franchised territories.
Franchise same territory royalty growth was below historical levels, because advertising expenditures were less efficient at reaching our target audience due to unexpectedly high media costs compared to prior periods results. European revenues,
reflecting both company-owned center and franchise results, increased due to company-owned center growth of $0.9 million and the effects of a $0.5 million benefit from a favorable foreign currency exchange environment. Revenues for the Learning
Center segment represented 77% of our total revenues for the three-month period ended September 30, 2004.



Institutional ServicesRevenues increased as a result of 7% growth in our school services business line, the traditional portion of our
Institutional Services segment business, due to an increase in summer programs and revenues from our special needs business of $3.4 million, which we acquired in October 2003. It should be noted that the third calendar quarter is typically the slow
period for the Institutional Services segment due to the summer breaks following the end of the school year. Revenues for the Institutional Services segment accounted for 22% of our total revenues for the three-month period ended September 30, 2004.



Online Learning ServicesRevenues primarily
increased due to higher retail sales. Revenues for the Online Learning Services segment represented 1% of our total revenues for the three-month period ended September 30, 2004.



|                                                          |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|--------------------------------------------------------- |  | ---------------------------------- | ---- | - | --------------------------------------------------------------------- | - | ---- | -------- |  | ---- | --
|                                                          |  | Three MonthsEndedSeptember 30,2004 |      |   | Period from June 30, 2003(date of inception) throughSeptember
30,2003 |   |      | Variance | 
|                                                          |  |                                    |      |   | (Pro Forma)                                                           |   |      |          | 
|                                                          |  | Dollars in millions                |     
|Segment Operating Costs                                   |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Learning Center                                           |  | $                                  | 33.4 |   |                                                                       | $ | 31.5 |          |  | 6    | % 
|Institutional Services                                    |  |                                    | 15.7 |   |                                                                       |   | 11.9 |          |  | 32   | % 
|Online Learning Services                                  |  |                                    | 1.8  |   |                                                                       |   | 1.6  |          |  | 12   | % 
|                                                          |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Total Segment Operating Costs                             |  | $                                  | 50.9 |   |                                                                       | $ | 44.9 |          |  | 13   | % 
|Segment Profit                                            |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Learning Center                                           |  | $                                  | 14.5 |   |                                                                       | $ | 11.9 |          |  | 22   | % 
|Institutional Services                                    |  |                                    | (1.9 | ) |                                                                       |   | (1.9 | )        |  | 0    | % 
|Online Learning Services                                  |  |                                    | (1.0 | ) |                                                                       |   | (1.1 | )        |  | 9    | % 
|                                                          |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Total Segment Profit                                      |  | $                                  | 11.5 |   |                                                                       | $ | 8.9  |          |  | 28   | % 
|Corporate Expenses                                        |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Corporate depreciation and amortization expenses          |  | $                                  | 0.4  |   |                                                                       | $ | 0.4  |          |  | 0    | % 
|General administrative expenses                           |  |                                    | 3.1  |   |                                                                       |   | 3.0  |          |  | 4    | % 
|Non-cash stock compensation expense                       |  |                                    | 0.3  |   |                                                                       |   |     |          |  |     |   
|Interest expense (net)                                    |  |                                    | 1.9  |   |                                                                       |   | 3.2  |          |  | (41  | )%
|Finance charges and other expenses related to refinancing |  |                                    | 0.3  |   |                                                                       |   |     |          |  |     |   
|Income tax expense                                        |  |                                    | 3.5  |   |                                                                       |   | 0.9  |          |  | (301 | )%
|                                                          |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Total Corporate Expenses                                  |  |                                    | 9.5  |   |                                                                       |   | 7.5  |          |  | (27  | )%
|                                                          |  |                                    |      |   |                                                                       |   |      |          |  |      |   
|Income from continuing operations                         |  | $                                  | 1.9  |   |                                                                       | $ | 1.4  |          |  | 36   | % 



24



---

##### Table of Contents

Educate, Inc.



|                         |  |                                    |    |  |                                                                       |   
|------------------------ |  | ---------------------------------- | -- |  | --------------------------------------------------------------------- | --
|                         |  | Three MonthsEndedSeptember 30,2004 |    |  | Period from June 30, 2003(date of inception) throughSeptember
30,2003 |   
|Segment Profit Margin    |  |                                    |    |  |                                                                       |   
|Learning Center          |  | 30                                 | %  |  | 28                                                                    | % 
|Institutional Services   |  | (14                                | )% |  | (19                                                                   | )%
|Online Learning Services |  | (144                               | )% |  | (231                                                                  | )%



Segment Operating
Costs. Segment operating costs increased primarily due to the acquisition of Progressus Therapy and the expansion of company-owned Learning Center territories.



Learning CenterSegment operating costs decreased to 70% of operating revenue in the third quarter of 2004
compared to 72% in the same period of 2003. The decrease in cost as a percent of revenue is primarily related to improved labor costs in our Company-owned territories and the aggressive management of fixed costs on an increasing revenue base.
European expenses related to Schülerhilfe increased by $0.8 million driven by higher costs to support revenue growth and an unfavorable impact of $0.4 million from foreign currency exchange rate movements.



Institutional ServicesCosts increased primarily due to the
acquisition of Progressus Therapy ($3.8 million). Segment operating costs decreased to 114% of segment revenue for the 2004 period, from 119% for the 2003 period. Costs as a percentage of revenues decreased primarily due to an increase in lower cost
summer programs in 2004 as compared to 2003.



Online
Learning ServicesSegment operating costs increased as a result of additional expenses incurred in servicing increased revenues in the 2004 period. Segment operating costs as a percentage of revenues improved due to the increased revenues
and an operating plan implemented in April 2003 aimed at improving the margins of our eSylvan business.



Segment Profit Margin. Learning Center segment profit margins increased to 30% in comparison to the prior year comparable period at 28% driven by
labor cost improvements. Institutional Services segment losses decreased to (14%) in the third quarter of 2004 from (19%) in the prior year comparable period as a result of the increase in lower cost summer programs. The reduction in the Online
Learning Services operating loss reflects the effects of our operating plan, which led to an improvement in loss margins from (231%) to (144%).



Corporate Expenses. Corporate expenses increased in the third quarter of 2004 primarily due to an increase in income tax expense of $2.6 million,
non-cash stock compensation expense of $0.3 million, and a write-off of debt financing costs of $0.3 million, offset by a decrease in interest expense in the 2004 period ($1.3 million) as a result of refinancing the senior term loan and repayment of
the subordinated note payable to Laureate. Income from continuing operations increased in the 2004 period due to the increases in revenues and operating margin. Our effective income tax rate was 64% for the three months ended September 30, 2004,
compared to 38% for the three months ended September 30, 2003 due to valuation differences between the book and tax amounts of non-cash stock compensation, which will result in an expected full year tax rate of 48%. During the third quarter of 2004,
our income tax expense of $3.5 million includes approximately $0.9 million of income tax expense recorded to adjust prior periods in 2004 for a change in the effective income tax rate expected in 2004 from 38% to 48% We expect the effective tax rate
to be approximately 38% in future years.



25



---

##### Table of Contents

Educate, Inc.



Comparison of results for the nine months ended September 30, 2004 to pro forma results for the nine months ended September 30,
2003.



|                         |  |                                     |       |                                     |   |          |  |     |  
|------------------------ |  | ----------------------------------- | ----- | ----------------------------------- | - | -------- |  | --- | -
|                         |  | Nine Months EndedSeptember 30, 2004 |       | Nine Months EndedSeptember 30, 2003 |   | Variance | 
|                         |  |                                     |       | (Pro Forma)                         |   |          | 
|                         |  | (Dollars in millions)               |      
|Revenues                 |  |                                     |       |                                     |   |          |  |     |  
|Learning Center:         |  |                                     |       |                                     |   |          |  |     |  
|Franchise services       |  | $                                   | 34.8  |                                     | $ | 31.6     |  | 10  | %
|Company-owned centers    |  |                                     | 84.6  |                                     |   | 78.7     |  | 8   | %
|European                 |  |                                     | 20.4  |                                     |   | 16.6     |  | 23  | %
|                         |  |                                     |       |                                     |   |          |  |     |  
|                         |  |                                     | 139.9 |                                     |   | 126.8    |  | 10  | %
|Institutional Services:  |  |                                     |       |                                     |   |          |  |     |  
|School Services          |  |                                     | 53.3  |                                     |   | 50.1     |  | 6   | %
|Special Needs            |  |                                     | 14.8  |                                     |   |         |  |    |  
|NCLB                     |  |                                     | 21.8  |                                     |   | 3.3      |  | 563 | %
|                         |  |                                     |       |                                     |   |          |  |     |  
|                         |  |                                     | 89.9  |                                     |   | 53.4     |  | 68  | %
|Online Learning Services |  |                                     | 2.1   |                                     |   | 1.4      |  | 42  | %
|                         |  |                                     |       |                                     |   |          |  |     |  
|Total                    |  | $                                   | 231.8 |                                     | $ | 181.7    |  | 28  | %
|                         |  |                                     |       |                                     |   |          |  |     |  

|                                             |  |                                     |   |  |                                      |  
|-------------------------------------------- |  | ----------------------------------- | - |  | ------------------------------------ | -
|                                             |  |                                    
|                                             |  | Nine Months EndedSeptember 30, 2004 |   |  | Nine Months Ended September 30, 2003 |  
|Business Metrics                             |  |                                     |   |  |                                      |  
|Franchise center operating information:      |  |                                     |   |  |                                      |  
|Same territory royalty growth (1)            |  | 5                                   | % |  | 8                                    | %
|Same center royalty growth (2)               |  | 3                                   | % |  | 7                                    | %
|Company-owned centers operating information: |  |                                     |   |  |                                      |  
|Same territory revenue growth (1) (3)        |  | 2                                   | % |  | 9                                    | %
|Same center revenue growth (2) (4)           |  | 1                                   | % |  | 8                                    | %
|Territory cash receipt growth (3)            |  | 5                                   | % |  | 5                                    | %
|Center cash receipt growth (4)               |  | 5                                   | % |  | 4                                    | %



|                                          |  |                                   |  |                                   |  |          |  
|----------------------------------------- |  | --------------------------------- |  | --------------------------------- |  | -------- | -
|                                          |  | Nine MonthsEndedSeptember 30,2004 |  | Nine MonthsEndedSeptember 30,2003 |  | Variance |  
|Number of Sylvan Learning Territories (5) |  |                                   |  |                                   |  |          |  
|Franchise                                 |  | 744                               |  | 729                               |  | 2        | %
|Company-owned                             |  | 96                                |  | 82                                |  | 17       | %
|                                          |  |                                   |  |                                   |  |          |  
|Total                                     |  | 840                               |  | 811                               |  | 4        | %
|Number of Sylvan Learning Centers (6)     |  |                                   |  |                                   |  |          |  
|Franchise                                 |  | 896                               |  | 856                               |  | 5        | %
|Company-owned                             |  | 149                               |  | 132                               |  | 13       | %
|                                          |  |                                   |  |                                   |  |          |  
|Total                                     |  | 1,045                             |  | 988                               |  | 6        | %
|                                          |  |                                   |  |                                   |  |          |  

---

|(1) | Same Territory amounts, for both company-owned and franchised territories, include the results of territories for the identical months for each period presented in the
comparison, commencing with the 13thfull month the territory has been operating A territory reflects the
geographically specified area where an operator controls rights to provide services under the Sylvan franchise agreement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Same Center amounts, for both company-owned and franchised centers, include the results of centers for the identical months for each period presented in the comparison,
commencing with the 13th full month the center has been operating.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

##### Table of Contents

Educate, Inc.



|(3) | Company-owned territories are contractually obligated to pay an 8% royalty to one of our subsidiaries. This revenue is eliminated in consolidation. Territory cash receipt
growth of North American company-owned territories represents the change in the amount of cash receipts reported by company-owned same territories in one period as compared with the comparable period in the prior year. Management believes the
use of this non-GAAP metric enables a more meaningful comparison of same company-owned territory growth to same franchised territory royalty growth. The difference between same territory revenue growth and territory cash receipt growth is a change
in deferred revenues of 2% and (4%) and the impact of acquisitions of franchised Sylvan Learning Centers of 1% and 0% for the nine month ended September 30, 2004 and 2003, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Company-owned centers are contractually obligated to pay an 8% royalty to one of our subsidiaries. This revenue is eliminated in consolidation. Center cash receipt
growth of North American company-owned centers represents the change in the amount of cash receipts reported by company-owned same centers in one period as compared with the comparable period in the prior year. Management believes the use of
this non-GAAP metric enables a more meaningful comparison of same company-owned center growth to same franchised center royalty growth. The difference between same center revenue growth and center cash receipt growth is a change in deferred revenues
of 2% and (5%) and the impact of acquisitions of franchised Sylvan Learning Centers of 2% and 1% for the nine month ended September 30, 2004 and 2003, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Number of Sylvan Learning Territories at period end.
|--- | ----------------------------------------------------

|(6) | Number of Sylvan Learning Centers at period end.
|--- | ------------------------------------------------



Revenues. Our revenue increase was primarily driven by significant growth of the NCLB program ($18.5 million), the acquisition of Progressus
Therapy ($14.8 million); expansion of company-owned centers ($5.9 million), and franchised center royalty growth ($3.2 million).



Learning CenterRevenues from company-owned centers increased primarily as a result of the acquisition of 14 company-owned territories from
franchisees, which contributed $5.9 million. Our company-owned same territory revenue growth increased 2% in the nine-month period ended September 30, 2004 compared to the same period of 2003. However, we experienced same territory cash receipt
growth of 5% during the nine-month period ended September 30, 2004, a portion of which was due to the launch of a new third-party financing program during June 2004, which made financing available to a broader range of potential customers. Franchise
services revenues increased $3.2 million as a result of the addition of 15 franchised territories and 5% same territory royalty growth.



Franchise same territory royalty growth was below historical levels, because our advertising expenditures were less efficient at reaching our target
audience due to unexpectedly high media rates. European revenues, reflecting both company-owned center and franchise results, increased $3.8 million due to company-owned center growth of $2.0 million and the effects of a $1.8 million benefit from a
favorable foreign currency exchange environment. Revenues for the Learning Center segment represented 60% of our total revenues for the nine-month period ended September 30, 2004.



Institutional ServicesRevenues increased as a result of significant growth in our NCLB supplemental service
program ($18.5 million), which began during the 2002-2003 school year; revenues from our special needs business ($14.8 million) which we acquired in October 2003; and 6% growth in our school services business line, the traditional portion of our
Institutional Services segment business. Revenues for the Institutional Services segment accounted for 39% of our total revenues for the nine-month period ended September 30, 2004.



Online Learning ServicesRevenues increased due to higher enrollments in our retail business and the
introduction of our institutional service offering. Revenues for the Online Learning Services segment represented less than 1% of our total revenues for the nine-month period ended September 30, 2004.



27



---

##### Table of Contents

Educate, Inc.



|                                                 |  |                                     |       |    |                                     |   |       |          |  |     |   
|------------------------------------------------ |  | ----------------------------------- | ----- | -- | ----------------------------------- | - | ----- | -------- |  | --- | --
|                                                 |  | Nine Months EndedSeptember 30, 2004 |       |    | Nine Months EndedSeptember 30, 2003 |   |       | Variance | 
|Segment Operating Costs                          |  |                                     |       |    |                                     |   |       |          |  |     |   
|Learning Center                                  |  | $                                   | 98.7  |    |                                     | $ | 90.8  |          |  | 9   | % 
|Institutional Services                           |  |                                     | 81.5  |    |                                     |   | 49.0  |          |  | 66  | % 
|Online Learning Services                         |  |                                     | 5.4   |    |                                     |   | 6.4   |          |  | (16 | )%
|                                                 |  |                                     |       |    |                                     |   |       |          |  |     |   
|Total Segment Operating Costs                    |  | $                                   | 185.6 |    |                                     | $ | 146.2 |          |  | 27  | % 
|Segment Profit                                   |  |                                     |       |    |                                     |   |       |          |  |     |   
|Learning Center                                  |  | $                                   | 41.1  |    |                                     | $ | 36.1  |          |  | 14  | % 
|Institutional Services                           |  |                                     | 8.4   |    |                                     |   | 4.4   |          |  | 91  | % 
|Online Learning Services                         |  |                                     | (3.4  | )  |                                     |   | (5.0  | )        |  | (34 | )%
|                                                 |  |                                     |       |    |                                     |   |       |          |  |     |   
|Total Segment Profit                             |  | $                                   | 46.2  |    |                                     | $ | 35.4  |          |  | 30  | % 
|Corporate Expenses                               |  |                                     |       |    |                                     |   |       |          |  |     |   
|Corporate depreciation and amortization expenses |  | $                                   | 1.2   |    |                                     | $ | 1.3   |          |  | (8  | )%
|General and administrative expenses              |  |                                     | 9.5   |    |                                     |   | 9.5   |          |  | 0   | % 
|Non-cash stock compensation                      |  |                                     | 8.7   |    |                                     |   |      |          |  |    |   
|Interest expense (net)                           |  |                                     | 7.6   |    |                                     |   | 9.6   |          |  | (21 | )%
|Finance charges and other expenses               |  |                                     | 5.1   |    |                                     |   |      |          |  |    |   
|Income tax expense                               |  |                                     | 6.8   |    |                                     |   | 6.0   |          |  | 12  | % 
|                                                 |  |                                     |       |    |                                     |   |       |          |  |     |   
|Total Corporate Expense                          |  |                                     | 38.9  |    |                                     |   | 26.4  |          |  | 47  | % 
|                                                 |  |                                     |       |    |                                     |   |       |          |  |     |   
|Income from continuing operations                |  | $                                   | 7.3   |    |                                     | $ | 9.0   |          |  | (19 | )%
|                                                 |  |                                     |       |    |                                     |   |       |          |  |     |   
|Segment Profit Margin                            |  |                                     |       |    |                                     |   |       |          |  |     |   
|Learning Center                                  |  |                                     | 29    | %  |                                     |   | 28    | %        |  |     |   
|Institutional Services                           |  |                                     | 9     | %  |                                     |   | 8     | %        |  |     |   
|Online Learning Services                         |  |                                     | (164  | )% |                                     |   | (345  | )%       |  |     |   



Segment Operating
Costs. Segment operating costs increased primarily due to the delivery of NCLB services, the acquisition of Progressus Therapy and the expansion of company-owned Learning Center territories.



Learning CenterSegment operating costs decreased to 71% of
operating revenue for the nine-month period ended September 30, 2004 compared to 72% in the same period of 2003. The decrease in costs as a percent of revenue is primarily related to improved labor costs in our company-owned territories.
Company-owned territory expenses increased $3.1 million due primarily to instructional costs associated with 14 additional company-owned territories. European expenses related to Schülerhilfe increased by $3.2 million driven by $1.7 million in
higher costs to support revenue growth and an unfavorable impact of $1.5 million from foreign currency exchange rate movements.



Institutional ServicesCosts increased primarily due to the expansion of our new NCLB businesses ($14.0 million) and the acquisition of
Progressus Therapy ($14.9 million). Segment operating costs slightly decreased to 91% of segment revenue for the 2004 period, from 92% for the 2003 period. Costs as a percentage of revenues declined primarily as a result of improved NCLB margins in
2004 versus 2003.



Online Learning ServicesThe
decline in segment operating costs was a result of an operating plan to improve performance of the segment implemented in April 2003. Pursuant to the plan, we temporarily enrolled fewer students in our online business programs, which enabled us to
reduce eSylvans full time work force by 33%. We also redeployed capital to develop new software applications and to improve certain operational processes. These measures were aimed at improving the margins of our online business. A charge of
$0.4 million for severance costs was recorded in the first nine months of 2003 in connection with the plan.



Segment Profit Margin. Learning Center segment profit margins increased 1% in comparison to the prior year, improving from 28% to 29%.
Institutional Services segment profit margins slightly increased to 9% in the 2004 period from 8% in the prior year comparable period as a result of the substantial increase in NCLB revenue. The reduction in the Online Learning Services operating
loss reflects the effect of our operating plan, which led to an improvement in loss margins from (345%) to (164%) in that segment.



28



---

##### Table of Contents

Educate, Inc.



Corporate Expenses. Corporate expenses increased in 2004 primarily due to non-cash stock compensation expense of $8.7
million related to restricted common stock and options granted to employees and directors to purchase common stock at prices less than the estimated fair value of our common stock. Interest expense in the 2004 period declined $2.0 million, primarily
as a result of refinancing the senior term loan and repayment of the subordinated note payable to Laureate. Upon replacement of the senior term loan, $5.1 million of previously capitalized debt issuance costs and other financing costs related to a
terminated financing transaction were expensed. Income from continuing operations increased in the 2004 period due to increased segment profits offset by increases in corporate expenses. Our effective income tax rate was 48% for the nine-month 2004
period compared to 40% for the nine-month 2003 period due to permanent differences between income tax and financial reporting amounts of non-cash stock compensation. We expect the effective tax rate to be approximately 38% in future years.



Liquidity and Capital Resources



|                                               |  |                                     |       |   |                                                                         |   |        |  
|---------------------------------------------- |  | ----------------------------------- | ----- | - | ----------------------------------------------------------------------- | - | ------ | -
|                                               |  | Nine Months EndedSeptember 30, 2004 |       |   | Period from June 30, 2003 (date of inception) throughSeptember 30, 2003 |  
|                                               |  | (in Millions)                       |      
|Beginning cash balance                         |  | $                                   | 20.3  |   |                                                                         | $ |       |  
|Operating activities  continuing operations   |  |                                     | 33.6  |   |                                                                         |   | 15.7   |  
|Operating activities  discontinued operations |  |                                     | (1.9  | ) |                                                                         |   | (2.2   | )
|Investing activities                           |  |                                     | (11.2 | ) |                                                                         |   | (112.0 | )
|Financing activities                           |  |                                     | (6.8  | ) |                                                                         |   | 134.1  |  
|Effect of exchange rates                       |  |                                     | (0.4  | ) |                                                                         |   | 0.1    |  
|                                               |  |                                     |       |   |                                                                         |   |        |  
|Ending cash balance                            |  | $                                   | 33.6  |   |                                                                         | $ | 35.7   |  
|                                               |  |                                     |       |   |                                                                         |   |        |  



Historically, we have
generated significant cash flows from our operations which have allowed us to meet our working capital needs and fund the cash we require to make investments in property and equipment, open new company-owned centers, and acquire franchised learning
centers and other businesses. More recently, the cash flows we have generated from operations and our recent common stock offering have also been used to service debt we incurred in June 2003 and refinanced in April 2004.



Our working capital requirements are minimized because in our largest
segment, the Learning Center segment, our company-owned learning centers receive advance payments for services and our franchisees are required to pay us royalties based on cash receipts on a monthly basis. Our working capital needs are greater in
our Institutional Services segment because our customers are principally public school districts that pay us in arrears, often 60 days or longer after we perform our services. As our revenues in the Institutional Services segment increase as a
result of the expected expansion of our NCLB business, our working capital requirements will also increase principally because of increases in accounts receivable.



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



In connection with our inception on June 30, 2003, we used $110.8 million of
cash to acquire the pre-K-12 business from Laureate. We financed the cash component of the purchase price from borrowings on our $110.0 million credit facility and $30.0 million of capital from our investors. During the nine-month period ended
September 30, 2004, we invested an additional $4.6 million in acquired businesses, primarily center acquisitions, and $7.5 million in property and equipment to meet the needs of our expanding operations.



29



---

##### Table of Contents

Educate, Inc.



On April 27, 2004, we refinanced the borrowings under our credit facility and the subordinated note we issued to Laureate in
connection with the acquisition of the pre-K-12 business from the proceeds of a new seven-year, $170 million term loan. Borrowings under the term loan and a $30.0 million revolving credit facility bear interest at a rate of LIBOR plus 2.5%, subject
to rate reductions tied to reduced leverage ratios. As of September 30, 2004, we had no borrowings under the revolving credit facility. In June 2004, we declared and paid a dividend to our common stockholders in the amount of $9.0 million.



On September 23, 2004, we sold 5 million shares of common
stock in an initial public offering at $11.00 share. Proceeds received, net of cash paid costs of issuance, were $50.1 million. Immediately upon receipt of these proceeds, we repaid outstanding debt in the amount of $50.0 million under our current
credit facility.



We believe that cash flow from operations,
available cash and existing credit facilities will be sufficient to meet our operating requirements, including expansion of our existing business, acquisition of centers, funding of eSylvan investments and operating costs for at least the next year.
Our future capital requirements will depend on many factors, including our rate of revenue growth, center acquisitions and new company-owned center development, the expansion of sales and marketing activities, the timing of introductions of new
services and enhancements to existing programs. We expect that we will, from time to time, continue to consider opportunities in the educational services industry for potential acquisitions of companies that complement our overall business strategy.



Contingent Matters



The following tables reflect our contractual obligations and other
commercial commitments as of September 30, 2004:



|                                           |  |                        |         |                   |   |           |  |           |        |               |   |        |  |   |        
|------------------------------------------ |  | ---------------------- | ------- | ----------------- | - | --------- |  | --------- | ------ | ------------- | - | ------ |  | - | -------
|                                           |  | Payments Due by Period
|                                           |  | Total                  |         | Remainder of 2004 |   | 2005-2006 |  | 2007-2008 |        | 2009 andafter
|                                           |  | (In Thousands)        
|Contractual Obligations                    |  |                        |         |                   |   |           |  |           |        |               |   |        |  |   |        
|Long-Term Debt                             |  | $                      | 122,356 |                   | $ | 661       |  | $         | 4,782  |               | $ | 4,618  |  | $ | 112,295
|Leased Center, Office Space, and Equipment |  |                        | 36,954  |                   |   | 3,750     |  |           | 21,948 |               |   | 6,815  |  |   | 4,441  
|                                           |  |                        |         |                   |   |           |  |           |        |               |   |        |  |   |        
|Total Contractual Cash Obligations         |  | $                      | 159,310 |                   | $ | 4,411     |  | $         | 26,730 |               | $ | 11,433 |  | $ | 116,736
|                                           |  |                        |         |                   |   |           |  |           |        |               |   |        |  |   |        



|                             |  |                                            |       |                  |   |           |  |           |  |               |     |  |   |    
|---------------------------- |  | ------------------------------------------ | ----- | ---------------- | - | --------- |  | --------- |  | ------------- | --- |  | - | ---
|                             |  | Amount of Commitment Expiration Per Period
|                             |  | TotalAmountsCommitted                      |       | Remainderof 2004 |   | 2005-2006 |  | 2007-2008 |  | 2009 andafter
|                             |  | (In Thousands)                            
|Contractual Obligations      |  |                                            |       |                  |   |           |  |           |  |               |     |  |   |    
|Guarantees                   |  | $                                          | 235   |                  | $ | 235       |  |          |  |               |    |  |   |   
|Standby Letters of Credit    |  |                                            | 830   |                  |   |          |  |          |  |               | 270 |  |   | 560
|                             |  |                                            |       |                  |   |           |  |           |  |               |     |  |   |    
|Total Commercial Commitments |  | $                                          | 1,065 |                  | $ | 235       |  |          |  | $             | 270 |  | $ | 560
|                             |  |                                            |       |                  |   |           |  |           |  |               |     |  |   |    



We have guaranteed
certain bank loans of franchisees related to financing the purchase of educational programs and other purchased instructional material. Of the $1.0 million of available credit under this program, $0.2 million was outstanding at September 30, 2004.
These guarantees are secured by the assets of the business of the individual franchisee utilizing this financing arrangement.



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



30



---

##### Table of Contents

Educate, Inc.



International Exposure



Our Learning Center segment has operations outside the United States, primarily in Germany. These international operations subject us to political
uncertainties, currency devaluations and national regulations affecting the provision of educational services. Accordingly, our revenues and income in any period may be impacted by international developments outside our control.



Critical Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results
of Operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and
judgments, including those related to revenue, intangible assets and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



We identified our most critical accounting policies to be
those related to revenue recognition, the allowance for doubtful accounts receivable, amortization of intangibles, and impairment tests associated with indefinite lived intangible assets. This discussion and analysis should be read in conjunction
with our consolidated financial statements and related notes included in our final prospectus dated September 22, 2003 and filed with the SEC on September 23, 2004.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK



For quantitative and qualitative disclosures about market risk, see Quantitative and Qualitative Disclosures About Market Risk, in our final
prospectus dated September 22, 2004 and filed with the SEC on September 23, 2004. Our exposures to market risk have not changed materially since June 30, 2004.



ITEM 4. CONTROLS AND PROCEDURES



The Companys management, including our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14d of the Securities Exchange
Act of 1934, as amended) as of September 30, 2004. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this Quarterly Report on Form 10-Q has been appropriately recorded,
processed, summarized and reported. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.



The Companys management, including the principal
executive and principal financial officers, has evaluated any changes in the internal controls over financial reporting that occurred during the quarter ended September 30, 2004, and has concluded that there was no change that occurred during the
quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



31



---

##### Table of Contents

Educate, Inc.



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



None.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



Reverse Stock Split



In September 2004, we completed a 1.00 for 1.25 reverse stock split of our common stock.



Issuances of Securities



In the three months ended September 30, 2004, we issued options to purchase an aggregate of 248,800 shares of common stock to our employees and directors at an average exercise price of approximately $10.43 per share. All of the
above-described issuances were exempt from registration (i) pursuant to Section 4(2) of the Securities Act or Regulation D promulgated thereunder, as transactions not involving a public offering or (ii) Rule 701 promulgated under the Securities Act.
With respect to each transaction listed above, no general solicitation was made by either us or any person acting on our behalf, the securities sold are subject to transfer restrictions and the certificates for the shares contained an appropriate
legend stating such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. No underwriters were involved in connection with the sales of securities
referred to above.



Report of Offering of Securities and Use of Proceeds
Therefrom



The date of the initial public offering of
our common stock was September 23, 2004. The managing underwriters were Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Banc of America Securities LLC, Legg Mason Wood Walker,
Incorporated and ThinkEquity Partners LLC. The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Form S-1 Registration Statement (SEC File No. 333-115496) that was declared effective by
the Securities and Exchange Commission on September 22, 2004. The offering was closed on September 28, 2004. We sold 5,000,000 shares of common stock and certain selling stockholders sold 10,000,000 shares of our common stock. All of the shares
registered under the registration statement were sold at a price to the public of $11.00 per share. As part of the initial public offering, certain selling stockholders granted the underwriters an over-allotment option to purchase up to an
additional 2,250,000 shares of our common stock. The underwriters exercised their over-allotment option in full. The offering did not terminate until after the sale of all of the securities registered on the Registration Statement.



The aggregate gross proceeds from the shares of common stock sold by us were
$55.0 million. The aggregate net proceeds to us from the offering were approximately $47.8 million after deducting $3.9 million in underwriting discounts and commissions paid to the underwriters by us and an estimated $3.3 million in other expenses
incurred in connection with the offering. We used all of our net proceeds from the offering to repay a portion of the indebtedness under our operating companys secured credit facility. JPMorgan Chase Bank, an affiliate of J.P. Morgan
Securities Inc., is a lender and administrative agent for the other lenders under the secured credit facility, Merrill Lynch Capital, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated is a lender and documentation agent for the
other lenders under the secured credit facility and Bank of America N.A., an affiliate of Banc of America Securities LLC, is a lender under the secured credit facility.



The aggregate gross proceeds from the shares of common stock sold by the selling stockholders were approximately $134.8
million (including approximately $24.8 million from the exercise of the over-allotment option described above). The aggregate net proceeds to the selling stockholders from the offering (including the exercise of the over-allotment option) were
approximately $125.4 million after deducting $9.4 million in underwriting discounts and commissions paid to the underwriters by the selling stockholders. We did not receive any proceeds from the sale of shares by the selling stockholders.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



32



---

##### Table of Contents

Educate, Inc.



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



On September 20, 2004, our stockholders approved (i) all actions necessary to complete a 1-for-1.25 reverse stock split, (ii) our Amended and Restated
Articles of Incorporation, (iii) our Amended and Restated By-Laws, (iv) our 2004 Omnibus Stock Incentive Plan, and (v) the terms of certain indemnification agreements between the Company and our directors and officers. Stockholders holding
34,287,197 shares out of a total of 37,574,474 outstanding shares of common stock (on a post-reverse stock split basis) approved these actions by written consent.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS



|            |  |                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------
|IndexNumber |  |                                                                                                      
|31.01       |  | Certification of R. Christopher Hoehn-Saric pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.02       |  | Certification of Kevin Shaffer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002             
|            | 
|32.01       |  | Certification of R. Christopher Hoehn-Saric pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.02       |  | Certification of Kevin Shaffer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002             



33



---

##### Table of Contents

Educate, Inc.



SIGNATURE



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.



Educate, Inc./s/ Kevin E. ShafferKevin E. Shaffer, Chief Financial Officer




34