##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2005



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



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EDUCATE, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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  x.    No ̈.



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



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈.    No  x.



The registrant had 42,720,017 shares of Common Stock outstanding as of November 7, 2005.



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##### Table of Contents

EDUCATE, INC.



INDEX



| |  |                                 |  |           |  |                                                                                                           |  |         
| |  | ------------------------------- |  | --------- |  | --------------------------------------------------------------------------------------------------------- |  | --------
| |  |                                 |  |           |  |                                                                                                           |  | Page No.
| |  | PART I. - FINANCIAL INFORMATION |  |          
| |  |                                 |  |          
| |  |                                 |  | Item 1.   |  | Financial Statements                                                                                      |  |         
| |  |                                 |  |          
| |  |                                 |  |           |  | Consolidated Balance Sheets  September 30, 2005 (Unaudited) and December 31, 2004                        |  | 1       
| |  |                                 |  |          
| |  |                                 |  |           |  | Consolidated Statements of Income (Unaudited)  For the three months ended September 30, 2005 and 2004    |  | 3       
| |  |                                 |  |          
| |  |                                 |  |           |  | Consolidated Statements of Income (Unaudited)  For the nine months ended September 30, 2005 and 2004     |  | 4       
| |  |                                 |  |          
| |  |                                 |  |           |  | Consolidated Statements of Cash Flows (Unaudited)  For the nine months ended September 30, 2005 and 2004 |  | 5       
| |  |                                 |  |          
| |  |                                 |  |           |  | Notes to Consolidated Financial Statements (Unaudited)                                                    |  | 6       
| |  |                                 |  |          
| |  |                                 |  | Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 18      
| |  |                                 |  |          
| |  |                                 |  | Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                |  | 28      
| |  |                                 |  |          
| |  |                                 |  | Item 4.   |  | Controls and Procedures                                                                                   |  | 29      
| |  |                                
| |  | PART II. -
OTHER INFORMATION    |  |          
| |  |                                 |  |          
| |  |                                 |  | Item 1.   |  | Legal Proceedings                                                                                         |  | 30      
| |  |                                 |  |          
| |  |                                 |  | Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                               |  | 30      
| |  |                                 |  |          
| |  |                                 |  | Item 3.   |  | Defaults Upon Senior Securities                                                                           |  | 30      
| |  |                                 |  |          
| |  |                                 |  | Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                       |  | 30      
| |  |                                 |  |          
| |  |                                 |  | Item 5.   |  | Other Information                                                                                         |  | 30      
| |  |                                 |  |          
| |  |                                 |  | Item 6.   |  | Exhibits                                                                                                  |  | 30      
| |  |                                 | 
| |  |                                 |  | SIGNATURE |  | 31                                                                                                       



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##### Table of Contents

Educate, Inc.



Consolidated
Balance Sheets



(Dollar amounts in thousands)



|                                          |  |                   |         |   |                  |   |         |  
|----------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                          |  | September 30,2005 |         |   | December 31,2004 |  
|                                          |  | (unaudited)       |         |   |                  |  
|Assets                                    |  |                   |         |   |                  |   |         |  
|Current assets:                           |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                 |  | $                 | 12,702  |   |                  | $ | 14,592  |  
|                                          |  |                  
|Receivables:                              |  |                   |         |   |                  |   |         |  
|Accounts receivable                       |  |                   | 35,690  |   |                  |   | 43,541  |  
|Notes receivable                          |  |                   | 123     |   |                  |   | 140     |  
|                                          |  |                   |         |   |                  |   |         |  
|                                          |  |                   | 35,813  |   |                  |   | 43,681  |  
|Allowance for doubtful accounts           |  |                   | (4,973  | ) |                  |   | (3,952  | )
|                                          |  |                   |         |   |                  |   |         |  
|                                          |  |                   | 30,840  |   |                  |   | 39,729  |  
|                                          |  |                  
|Inventory                                 |  |                   | 5,783   |   |                  |   | 2,891   |  
|Prepaid expenses and other current assets |  |                   | 7,028   |   |                  |   | 2,728   |  
|Deferred income taxes                     |  |                   | 501     |   |                  |   | 3,234   |  
|                                          |  |                   |         |   |                  |   |         |  
|Total current assets                      |  |                   | 56,854  |   |                  |   | 63,174  |  
|                                          |  |                  
|Property and equipment:                   |  |                   |         |   |                  |   |         |  
|Furniture and fixtures                    |  |                   | 5,187   |   |                  |   | 4,392   |  
|Education materials                       |  |                   | 7,371   |   |                  |   | 4,225   |  
|Computer equipment and software           |  |                   | 11,359  |   |                  |   | 8,282   |  
|Leasehold improvements                    |  |                   | 11,867  |   |                  |   | 8,516   |  
|                                          |  |                   |         |   |                  |   |         |  
|                                          |  |                   | 35,784  |   |                  |   | 25,415  |  
|Accumulated depreciation and amortization |  |                   | (15,610 | ) |                  |   | (10,366 | )
|                                          |  |                   |         |   |                  |   |         |  
|                                          |  |                   | 20,174  |   |                  |   | 15,049  |  
|                                          |  |                  
|Intangible assets:                        |  |                   |         |   |                  |   |         |  
|Goodwill                                  |  |                   | 104,666 |   |                  |   | 69,110  |  
|Tradenames                                |  |                   | 139,974 |   |                  |   | 132,425 |  
|Franchise license rights                  |  |                   | 85,544  |   |                  |   | 86,000  |  
|Other intangible assets                   |  |                   | 8,691   |   |                  |   | 4,898   |  
|                                          |  |                   |         |   |                  |   |         |  
|                                          |  |                   | 338,875 |   |                  |   | 292,433 |  
|Accumulated amortization                  |  |                   | (1,416  | ) |                  |   | (678    | )
|                                          |  |                   |         |   |                  |   |         |  
|                                          |  |                   | 337,459 |   |                  |   | 291,755 |  
|Other assets                              |  |                   | 14,711  |   |                  |   | 11,404  |  
|                                          |  |                   |         |   |                  |   |         |  
|Total assets                              |  | $                 | 429,198 |   |                  | $ | 381,382 |  
|                                          |  |                   |         |   |                  |   |         |  



See notes to consolidated financial
statements (unaudited).



1



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##### Table of Contents

Educate, Inc.



Consolidated Balance Sheets (continued)



(Dollar amounts in thousands)



|                                                                                                                                                                                   |  |                   |         |                  |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                   |  | September 30,2005 |         | December 31,2004
|                                                                                                                                                                                   |  | (unaudited)       |         |                 
|Liabilities and stockholders equity                                                                                                                                               |  |                   |         |                  |   |        
|Current liabilities:                                                                                                                                                               |  |                   |         |                  |   |        
|Accounts payable and accrued expenses                                                                                                                                              |  | $                 | 20,720  |                  | $ | 16,193 
|Accrued compensation and related benefits                                                                                                                                          |  |                   | 10,573  |                  |   | 13,330 
|Income taxes payable                                                                                                                                                               |  |                   |        |                  |   | 822    
|Current portion of long-term debt                                                                                                                                                  |  |                   | 2,546   |                  |   | 2,102  
|Deferred revenue                                                                                                                                                                   |  |                   | 24,343  |                  |   | 19,925 
|Other current liabilities                                                                                                                                                          |  |                   | 246     |                  |   |       
|                                                                                                                                                                                   |  |                   |         |                  |   |        
|Total current liabilities                                                                                                                                                          |  |                   | 58,428  |                  |   | 52,372 
|                                                                                                                                                                                   |  |                  
|Long-term debt, less current portion                                                                                                                                               |  |                   | 140,895 |                  |   | 120,411
|Other long-term liabilities                                                                                                                                                        |  |                   | 4,542   |                  |   | 2,495  
|Deferred income taxes                                                                                                                                                              |  |                   | 9,357   |                  |   | 8,403  
|                                                                                                                                                                                   |  |                   |         |                  |   |        
|Total liabilities                                                                                                                                                                  |  |                   | 213,222 |                  |   | 183,681
|Commitments and contingencies                                                                                                                                                      |  |                   |        |                  |   |       
|                                                                                                                                                                                   |  |                  
|Stockholders equity:                                                                                                                                                              |  |                   |         |                  |   |        
|Common stock, par value $0.01, 120,000,000 shares authorized, 42,707,136 and 42,585,019 shares issued and outstanding as of September 30,
2005 and December 31, 2004, respectively |  |                   | 427     |                  |   | 426    
|Additional paid-in capital                                                                                                                                                         |  |                   | 192,318 |                  |   | 191,002
|Retained earnings                                                                                                                                                                  |  |                   | 22,945  |                  |   | 2,807  
|Accumulated other comprehensive income                                                                                                                                             |  |                   | 286     |                  |   | 3,466  
|                                                                                                                                                                                   |  |                   |         |                  |   |        
|Total stockholders equity                                                                                                                                                         |  |                   | 215,976 |                  |   | 197,701
|                                                                                                                                                                                   |  |                   |         |                  |   |        
|Total liabilities and stockholders equity                                                                                                                                         |  | $                 | 429,198 |                  | $ | 381,382
|                                                                                                                                                                                   |  |                   |         |                  |   |        



See notes to consolidated financial
statements (unaudited).



2



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##### Table of Contents

Educate, Inc.



Consolidated
Statements of Income



(Dollar amounts in thousands,
except per share data)

(unaudited)



|                                                                                      |  |                                  |        |   |      |   |        |  
|------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                      |  | Three months ended September 30, |       
|                                                                                      |  | 2005                             |        |   | 2004 |  
|Revenues                                                                              |  |                                  |        |   |      |   |        |  
|Learning Center:                                                                      |  |                                  |        |   |      |   |        |  
|Franchise services                                                                    |  | $                                | 11,905 |   |      | $ | 11,646 |  
|Company-owned centers                                                                 |  |                                  | 54,470 |   |      |   | 36,965 |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Total Learning Center                                                                 |  |                                  | 66,375 |   |      |   | 48,611 |  
|                                                                                      |  |                                 
|Catapult Learning                                                                     |  |                                  | 12,530 |   |      |   | 13,750 |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Total revenues                                                                        |  |                                  | 78,905 |   |      |   | 62,361 |  
|                                                                                      |  |                                 
|Costs and expenses                                                                    |  |                                  |        |   |      |   |        |  
|Instructional and franchise operations costs                                          |  |                                  | 58,710 |   |      |   | 43,761 |  
|Marketing and advertising                                                             |  |                                  | 7,940  |   |      |   | 5,542  |  
|Depreciation and amortization                                                         |  |                                  | 2,185  |   |      |   | 2,025  |  
|General and administrative expenses                                                   |  |                                  | 3,796  |   |      |   | 3,133  |  
|Non-cash stock compensation expense (* see detail below)                              |  |                                  | 51     |   |      |   | 303    |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Total costs and expenses                                                              |  |                                  | 72,682 |   |      |   | 54,764 |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Operating income                                                                      |  |                                  | 6,223  |   |      |   | 7,597  |  
|                                                                                      |  |                                 
|Other income (expense)                                                                |  |                                  |        |   |      |   |        |  
|Interest income                                                                       |  |                                  | 105    |   |      |   | 90     |  
|Interest expense                                                                      |  |                                  | (2,159 | ) |      |   | (2,205 | )
|Other financing costs                                                                 |  |                                  |       |   |      |   | (275   | )
|Foreign exchange gains and other                                                      |  |                                  | 133    |   |      |   | 226    |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Income from continuing operations before income taxes                                 |  |                                  | 4,302  |   |      |   | 5,433  |  
|                                                                                      |  |                                 
|Income tax expense                                                                    |  |                                  | (1,635 | ) |      |   | (3,496 | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Income from continuing operations                                                     |  |                                  | 2,667  |   |      |   | 1,937  |  
|Loss from discontinued operations, net of income tax benefit of $602 in 2004          |  |                                  |       |   |      |   | (1,117 | )
|Gain on disposal of discontinued operations, net of income tax expense of $51 in 2004 |  |                                  |       |   |      |   | 83     |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Net income                                                                            |  | $                                | 2,667  |   |      | $ | 903    |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Earnings (loss) per common share - basic                                              |  |                                  |        |   |      |   |        |  
|Income from continuing operations                                                     |  | $                                | 0.06   |   |      | $ | 0.05   |  
|Loss from discontinued operations                                                     |  | $                                |       |   |      | $ | (0.03  | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Net income                                                                            |  | $                                | 0.06   |   |      | $ | 0.02   |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Earnings (loss) per common share - diluted                                            |  |                                  |        |   |      |   |        |  
|Income from continuing operations                                                     |  | $                                | 0.06   |   |      | $ | 0.05   |  
|Loss from discontinued operations                                                     |  | $                                |       |   |      | $ | (0.03  | )
|                                                                                      |  |                                  |        |   |      |   |        |  
|Net income                                                                            |  | $                                | 0.06   |   |      | $ | 0.02   |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|*       Composition of non-cash stock compensation:                                   |  |                                  |        |   |      |   |        |  
|Instructional and franchise operations costs                                          |  | $                                | (3     | ) |      | $ | 94     |  
|General and administrative expenses                                                   |  | $                                | 54     |   |      | $ | 209    |  
|                                                                                      |  |                                  |        |   |      |   |        |  
|Total                                                                                 |  | $                                | 51     |   |      | $ | 303    |  
|                                                                                      |  |                                  |        |   |      |   |        |  



See notes to consolidated financial
statements (unaudited).



3



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##### Table of Contents

Educate, Inc.



Consolidated
Statements of Income



(Dollar amounts in thousands,
except per share data)

(unaudited)



|                                                                                      |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Nine months ended September 30, |        
|                                                                                      |  | 2005                            |         |   | 2004 |  
|Revenues                                                                              |  |                                 |         |   |      |   |         |  
|Learning Center:                                                                      |  |                                 |         |   |      |   |         |  
|Franchise services                                                                    |  | $                               | 41,471  |   |      | $ | 38,324  |  
|Company-owned centers                                                                 |  |                                 | 148,373 |   |      |   | 103,588 |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Total Learning Center                                                                 |  |                                 | 189,844 |   |      |   | 141,912 |  
|                                                                                      |  |                                
|Catapult Learning                                                                     |  |                                 | 90,368  |   |      |   | 89,895  |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Total revenues                                                                        |  |                                 | 280,212 |   |      |   | 231,807 |  
|                                                                                      |  |                                
|Costs and expenses                                                                    |  |                                 |         |   |      |   |         |  
|Instructional and franchise operations costs                                          |  |                                 | 199,105 |   |      |   | 161,995 |  
|Marketing and advertising                                                             |  |                                 | 24,682  |   |      |   | 19,148  |  
|Depreciation and amortization                                                         |  |                                 | 6,221   |   |      |   | 5,669   |  
|General and administrative expenses                                                   |  |                                 | 10,413  |   |      |   | 9,516   |  
|Non-cash stock compensation expense (* see detail below)                              |  |                                 | 348     |   |      |   | 8,704   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Total costs and expenses                                                              |  |                                 | 240,769 |   |      |   | 205,032 |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Operating income                                                                      |  |                                 | 39,443  |   |      |   | 26,775  |  
|                                                                                      |  |                                
|Other income (expense)                                                                |  |                                 |         |   |      |   |         |  
|Interest income                                                                       |  |                                 | 252     |   |      |   | 226     |  
|Interest expense                                                                      |  |                                 | (5,907  | ) |      |   | (8,250  | )
|Other financing costs                                                                 |  |                                 | (1,506  | ) |      |   | (5,117  | )
|Foreign exchange gains and other                                                      |  |                                 | 199     |   |      |   | 389     |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Income from continuing operations before income taxes                                 |  |                                 | 32,481  |   |      |   | 14,023  |  
|                                                                                      |  |                                
|Income tax expense                                                                    |  |                                 | (12,343 | ) |      |   | (6,760  | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Income from continuing operations                                                     |  |                                 | 20,138  |   |      |   | 7,263   |  
|Loss from discontinued operations, net of income tax benefit of $1,529 in 2004        |  |                                 |        |   |      |   | (2,838  | )
|Gain on disposal of discontinued operations, net of income tax expense of $51 in 2004 |  |                                 |        |   |      |   | 83      |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net income                                                                            |  | $                               | 20,138  |   |      | $ | 4,508   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Dividends per common share                                                            |  | $                               |        |   |      | $ | 0.24    |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Earnings (loss) per common share - basic                                              |  |                                 |         |   |      |   |         |  
|Income from continuing operations                                                     |  | $                               | 0.47    |   |      | $ | 0.19    |  
|Loss from discontinued operations                                                     |  | $                               |        |   |      | $ | (0.07   | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net income                                                                            |  | $                               | 0.47    |   |      | $ | 0.12    |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Earnings (loss) per common share - diluted                                            |  |                                 |         |   |      |   |         |  
|Income from continuing operations                                                     |  | $                               | 0.46    |   |      | $ | 0.19    |  
|Loss from discontinued operations                                                     |  | $                               |        |   |      | $ | (0.07   | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net income                                                                            |  | $                               | 0.46    |   |      | $ | 0.12    |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|*       Composition of non-cash stock compensation:                                   |  |                                 |         |   |      |   |         |  
|Instructional and franchise operations costs                                          |  | $                               | 185     |   |      | $ | 694     |  
|General and administrative expenses                                                   |  | $                               | 163     |   |      | $ | 8,010   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Total                                                                                 |  | $                               | 348     |   |      | $ | 8,704   |  
|                                                                                      |  |                                 |         |   |      |   |         |  



See notes to consolidated financial
statements (unaudited).



4



---

##### Table of Contents

Educate, Inc.



Consolidated
Statements of Cash Flows



(Dollar amounts in
thousands) (unaudited)



|                                                                                                                         |  |                                 |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                         |  | Nine months ended September 30, |         
|                                                                                                                         |  | 2005                            |          |   | 2004 |  
|Operating activities                                                                                                     |  |                                 |          |   |      |   |          |  
|Income from continuing operations                                                                                        |  | $                               | 20,138   |   |      | $ | 7,263    |  
|Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:                |  |                                 |          |   |      |   |          |  
|Depreciation                                                                                                             |  |                                 | 5,427    |   |      |   | 5,373    |  
|Amortization                                                                                                             |  |                                 | 794      |   |      |   | 296      |  
|Bad debt expense                                                                                                         |  |                                 | 688      |   |      |   | 849      |  
|Deferred income taxes                                                                                                    |  |                                 | 6,353    |   |      |   | 677      |  
|Amortization of software developed for sale                                                                              |  |                                 | 547      |   |      |   |         |  
|Non-cash stock compensation                                                                                              |  |                                 | 348      |   |      |   | 8,704    |  
|Other financing costs                                                                                                    |  |                                 | 1,506    |   |      |   | 4,842    |  
|Gain on investments                                                                                                      |  |                                 |         |   |      |   | (219     | )
|Foreign currency exchange gain                                                                                           |  |                                 | (251     | ) |      |   | (10      | )
|Other non-cash items                                                                                                     |  |                                 | (5       | ) |      |   | 398      |  
|Changes in operating assets and liabilities:                                                                             |  |                                 |          |   |      |   |          |  
|Receivables                                                                                                              |  |                                 | 10,479   |   |      |   | 12,142   |  
|Prepaid expenses and other current assets                                                                                |  |                                 | (2,325   | ) |      |   | (1,196   | )
|Inventory                                                                                                                |  |                                 | (1,526   | ) |      |   | (588     | )
|Other assets                                                                                                             |  |                                 | (1,074   | ) |      |   | (180     | )
|Accounts payable, accrued expenses, and other current liabilities                                                        |  |                                 | (1,206   | ) |      |   | (6,552   | )
|Income taxes                                                                                                             |  |                                 | (1,388   | ) |      |   | 3,998    |  
|Deferred revenue                                                                                                         |  |                                 | (4,656   | ) |      |   | (2,069   | )
|Accrued compensation and related benefits                                                                                |  |                                 | (2,175   | ) |      |   | (333     | )
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash provided by continuing operations                                                                               |  |                                 | 31,674   |   |      |   | 33,395   |  
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Loss from discontinued operations                                                                                        |  |                                 |         |   |      |   | (2,755   | )
|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      |  
|Depreciation and other non-cash items                                                                                    |  |                                 |         |   |      |   | 301      |  
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash used in discontinued operations                                                                                 |  |                                 |         |   |      |   | (1,895   | )
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                                                                |  |                                 | 31,674   |   |      |   | 31,500   |  
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Investing activities                                                                                                     |  |                                 |          |   |      |   |          |  
|Cash paid for acquired businesses, net of cash acquired (including acquisition costs of $1,417 in 2005 and $246 in 2004) |  |                                 | (34,973  | ) |      |   | (4,577   | )
|Proceeds from sale of discontinued operations                                                                            |  |                                 |         |   |      |   | 2,166    |  
|Cash paid for internally developed software                                                                              |  |                                 | (3,556   | ) |      |   | (2,492   | )
|Purchases of property and equipment                                                                                      |  |                                 | (10,570  | ) |      |   | (5,057   | )
|Change in other assets                                                                                                   |  |                                 | (1,978   | ) |      |   | (1,071   | )
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                                                                    |  |                                 | (51,077  | ) |      |   | (11,031  | )
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Financing activities                                                                                                     |  |                                 |          |   |      |   |          |  
|Proceeds from exercise of stock options                                                                                  |  |                                 | 992      |   |      |   | 638      |  
|Proceeds from issuance of common stock                                                                                   |  |                                 |         |   |      |   | 50,051   |  
|Borrowings on revolving credit facility                                                                                  |  |                                 | 13,000   |   |      |   |         |  
|Payments on revolving credit facility                                                                                    |  |                                 | (13,000  | ) |      |   |         |  
|Cash received upon issuance of debt                                                                                      |  |                                 | 140,000  |   |      |   | 170,000  |  
|Payments on debt                                                                                                         |  |                                 | (123,031 | ) |      |   | (216,009 | )
|Dividends paid                                                                                                           |  |                                 |         |   |      |   | (9,000   | )
|Deferred financing costs                                                                                                 |  |                                 | (427     | ) |      |   | (2,499   | )
|Change in other long-term liabilities                                                                                    |  |                                 | 594      |   |      |   |         |  
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                                                                      |  |                                 | 18,128   |   |      |   | (6,819   | )
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Effect of exchange rate changes on cash                                                                                  |  |                                 | (615     | ) |      |   | (280     | )
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Net change in cash and cash equivalents                                                                                  |  |                                 | (1,890   | ) |      |   | 13,370   |  
|Cash and cash equivalents at beginning of period                                                                         |  |                                 | 14,592   |   |      |   | 20,260   |  
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                               |  | $                               | 12,702   |   |      | $ | 33,630   |  
|                                                                                                                         |  |                                 |          |   |      |   |          |  
|Included in balance sheet caption:                                                                                       |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                |  | $                               | 12,702   |   |      | $ | 33,696   |  
|Assets of discontinued operations held for sale                                                                          |  | $                               |         |   |      | $ | (66      | )
|Supplemental cash flow information:                                                                                      |  |                                 |          |   |      |   |          |  
|Interest paid                                                                                                            |  | $                               | 6,399    |   |      | $ | 11,961   |  
|Income taxes paid                                                                                                        |  | $                               | 5,736    |   |      | $ |         |  



See notes to consolidated financial
statements (unaudited).



5



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited)



(Dollars 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,
other supplemental education services, and educational products and services to pre-kindergarten through twelfth grade, or pre-K-12, students. The Company is organized on the basis of educational services provided, and segments are business units
that offer distinct services. Beginning in 2005, the Company began to manage the operations of its previous Online Learning Services segment within its Learning Center segment, and accordingly now has two operating segments. All segment information
has been restated to conform to the new presentation. The segments are managed separately as they have different customer bases and delivery channels. Reportable segments are as follows:



| |  |  | The Learning Center segment develops and delivers trusted, personalized tutoring programs through a network of 1,111 franchised and company-owned learning centers in 886
geographical territories in North America operated under the Sylvan brand name, and 993 European franchised and company-owned learning centers operated under the Schülerhilfe brand name. The Learning Center segment offers online instruction in
participating franchised and company-owned territories through Sylvan Online. The Learning Center segment also develops and sells educational products and services under the recently-acquired Hooked on Phonics brand name. Sylvan and Hooked on
Phonics are two of the most highly recognized brand names in the supplemental education services industry.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Catapult Learning segment, formerly referred to as Institutional Services, 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Basis of Presentation



The unaudited interim financial information as of September 30, 2005, for the three-month and nine-month periods then ended, and for the comparable periods of the
prior year, 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 Annual Report on Form 10-K for the year ended December 31, 2004.



Due principally to the timing of school semesters and holiday schedules, the Company is
subject to seasonality of 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 Catapult Learning 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 which occurs primarily in the fourth calendar quarter to evaluate the specific needs of individual students prior to enrolling students into the Companys
supplemental education programs. In addition, a disproportionate amount of costs associated with the Companys Catapult Learning 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.



Certain amounts previously reported for 2004 have been reclassified to conform to the 2005 presentation.



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



Summary of Significant Accounting Policies



Stock  Based Compensation



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



The Company has granted stock options and restricted common stock to employees and directors, which are discussed more fully in Note 10.



Pro forma net income and earnings per share data have been determined as if the Company had
accounted for its stock-based awards using the prescribed fair value based method. For all grants prior to May 14, 2004, the date the Company filed a registration statement with the Securities and Exchange Commission (SEC) 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 common stock has been publicly traded only since September 2004, the expected stock price volatility over the expected life of granted options has been based on published volatility measures of companies in the
Companys industry. These estimates of volatility may change in future periods, and the effects could be material.



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



|                                |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | --------- | - |  | --------- | -
|                                |  | Three months ended September 30, |   |  | Nine months ended September 30, |  
|                                |  | 2005                             |   |  | 2004                            |   |  | 2005      |   |  | 2004      |  
|Risk-free interest rate (range) |  | 4.18                             | % |  | 3.13                            | % |  | 3.81-4.18 | % |  | 2.81-3.55 | %
|Expected dividend yield         |  | 0.00                             | % |  | 0.00                            | % |  | 0.00      | % |  | 0.00      | %
|Expected life                   |  | 4 years                          |   |  | 4 years                         |   |  | 4 years   |   |  | 4 years   |  
|Stock price volatility          |  | 44                               | % |  | 46                              | % |  | 45        | % |  | 46        | %



The weighted average estimated fair
value of stock-based awards was $5.60 and $5.36 for the three and nine months ended September 30, 2005, respectively, and $4.60 and $7.41 for the three and nine months ended September 30, 2004, respectively.



7



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



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 months ended September 30, |       |   | Nine months ended September 30, |  
|                                                                                                |  | 2005                             |       |   | 2004                            |   |      | 2005 |  |   | 2004   |  
|Net income as reported                                                                          |  | $                                | 2,667 |   |                                 | $ | 903  |      |  | $ | 20,138 |   |  | $ | 4,508  |  
|Stock-based employee compensation expense included in net income as reported, net of tax        |  |                                  | 32    |   |                                 |   | 240  |      |  |   | 216    |   |  |   | 5,450  |  
|Stock-based employee compensation expense using prescribed fair value based methods, net of tax |  |                                  | (194  | ) |                                 |   | (252 | )    |  |   | (548   | ) |  |   | (5,626 | )
|                                                                                                |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                            |  | $                                | 2,505 |   |                                 | $ | 891  |      |  | $ | 19,806 |   |  | $ | 4,332  |  
|                                                                                                |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|Earnings per common sharebasic                                                                 |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|As reported                                                                                     |  | $                                | 0.06  |   |                                 | $ | 0.02 |      |  | $ | 0.47   |   |  | $ | 0.12   |  
|Pro forma                                                                                       |  | $                                | 0.06  |   |                                 | $ | 0.02 |      |  | $ | 0.46   |   |  | $ | 0.12   |  
|                                                                                                |  |                                  |       |  
|Earnings per common sharediluted                                                               |  |                                  |       |   |                                 |   |      |      |  |   |        |   |  |   |        |  
|As reported                                                                                     |  | $                                | 0.06  |   |                                 | $ | 0.02 |      |  | $ | 0.46   |   |  | $ | 0.12   |  
|Pro forma                                                                                       |  | $                                | 0.06  |   |                                 | $ | 0.02 |      |  | $ | 0.45   |   |  | $ | 0.11   |  



New Accounting Pronouncement



In December 2004, the FASB
issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which is a revision of Statement 123. Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) was originally required to be adopted no later than July 1, 2005. On April 14, 2005, the SEC announced that
non-small business registrants would not be required to adopt Statement 123(R) until the first fiscal year beginning after June 15, 2005, which effectively extended the adoption deadline for the Company to January 1, 2006. The Company
expects to adopt the standard on January 1, 2006. Statement 123(R) permits public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of proforma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company will adopt the provisions of Statement 123(R) on January 1, 2006, using the
modified prospective method. Unvested stock-based awards issued prior to May 14, 2004 and disclosed in the financial statements using the minimum value method (rather than the estimated fair value using the Black-Scholes option-pricing model)
will be accounted for at the date of adoption using the intrinsic value method originally applied to those awards. Awards issued after May 14, 2004 and through December 31, 2005 that have not vested will be accounted for at the date of
adoption using the same estimate of the grant-date fair value disclosed in the historical financial statements.



As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method and, as such, recognizes no
compensation cost when employee stock options are granted with exercise prices equal to the market price of the shares on the date of grant. Accordingly, the adoption of Statement 123(R)s fair value method may have a significant impact on the
Companys results of operations, although it will have no impact on our financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend significantly on levels of share-based payments
granted in the future.



8



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



Cash retained as a result of excess tax benefits relating to share-based payments will be presented in the statement
of cash flows as financing cash inflows. Previously, the cash retained from excess tax benefits was presented in operating cash flows along with other tax cash flows.



2. Acquisitions



On February 8, 2005, the Company acquired all the common stock of Gateway Learning Corporation (HOP), the owner of the branded Hooked on
Phonics early reading, math and study skills programs. The results of operations of HOP are included in the Companys consolidated statements of income beginning February 1, 2005.



The initial purchase price totaled approximately $11,210 including acquisition costs of
$1,193. The Company also extinguished $2,982 of acquired debt at closing. Contingent consideration may be payable to the seller based upon future direct response television advertising spending related to the HOP business during the eighteen-month
period beginning in August 2005 and ending in February 2007. No amounts are payable nor are amounts expected to be paid under the contingent consideration provisions of the purchase agreement.



The final purchase price allocation is pending determination of the valuation of the
intangible assets acquired. The purchase price was preliminarily allocated to acquired assets totaling $19,502, including identifiable amortizable and indefinite-lived intangible assets of $784 and $8,629 respectively, and liabilities of $8,292.



During the nine month period ended September 30, 2005, the Company
purchased 52 Sylvan Learning Center franchised territories comprising 68 centers. The combined purchase price of these territories included cash paid of $25,513, acquisition costs of $240 and the assumption of liabilities of $13,455, which consisted
primarily of obligations to provide services to customers.



The following
unaudited consolidated pro forma results of operations of the Company for the three and nine months ended September 30, 2005 and 2004 give effect to the acquisitions of the 52 Sylvan Learning Center territories and HOP as if the acquisitions
had occurred on January 1 of the respective year:



|                                                      |  |                                  |        |                                 |   |        |  |      |         |  |   |        
|----------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                                                      |  | Three months ended September 30, |        | Nine months ended September 30,
|                                                      |  | 2005                             |        | 2004                            |   | 2005   |  | 2004
|Revenues                                              |  | $                                | 80,471 |                                 | $ | 73,346 |  | $    | 296,942 |  | $ | 265,205
|Income from continuing operations before income taxes |  |                                  | 4,349  |                                 |   | 5,808  |  |      | 33,012  |  |   | 15,171 
|Net income                                            |  |                                  | 2,696  |                                 |   | 1,136  |  |      | 20,467  |  |   | 5,219  
|                                                      |  |                                  |        |                                
|Diluted earnings per share                            |  | $                                | 0.06   |                                 | $ | 0.03   |  | $    | 0.46    |  | $ | 0.14   



3. Goodwill



Changes in the carrying amount of goodwill during the period from December 31, 2004
through September 30, 2005 are summarized as follows:



|                                                 |  |                |        |   |                  |   |       |  |   |         |  
|------------------------------------------------ |  | -------------- | ------ | - | ---------------- | - | ----- |  | - | ------- | -
|                                                 |  | LearningCenter |        |   | CatapultLearning |   | Total | 
|Goodwill at December 31, 2004                    |  | $              | 59,559 |   |                  | $ | 9,551 |  | $ | 69,110  |  
|Acquisition of franchisee-owned learning centers |  |                | 37,194 |   |                  |   |      |  |   | 37,194  |  
|Foreign currency translation adjustment          |  |                | (1,638 | ) |                  |   |      |  |   | (1,638  | )
|                                                 |  |                |        |   |                  |   |       |  |   |         |  
|Goodwill at September 30, 2005                   |  | $              | 95,115 |   |                  | $ | 9,551 |  | $ | 104,666 |  
|                                                 |  |                |        |   |                  |   |       |  |   |         |  



9



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



4. Intangible Assets Other Than Goodwill



A summary of other intangible assets at September 30, 2005 and December 31, 2004 is as follows:



|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|--------------------------------------------------------------- |  | ------------------- |  | ------------------- | ------- | ----------------------- | - | ----------------- |  | - | -------
|                                                                |  | September 30, 2005 
|                                                                |  | Useful LifeIn Years |  | GrossCarryingAmount |         | AccumulatedAmortization |   | NetCarryingAmount
|Intangible assets subject to amortization:                      |  |                     |  |                     |         |                         |   |                   |  |   |        
|Acquired backlog (Learning Center Segment)                      |  | 0.5                 |  | $                   | 115     |                         | $ | 115               |  | $ |       
|Contract rights (Catapult Learning Segment)                     |  | 5                   |  |                     | 1,084   |                         |   | 485               |  |   | 599    
|Schülerhilfe franchise license rights (Learning Center Segment) |  | 25                  |  |                     | 3,544   |                         |   | 417               |  |   | 3,127  
|Customer list (Learning Center Segment)                         |  | 1                   |  |                     | 130     |                         |   | 90                |  |   | 40     
|Internally developed software (Learning Center Segment)         |  | 5-7                 |  |                     | 7,362   |                         |   | 309               |  |   | 7,053  
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets subject to amortization                 |  |                     |  |                     | 12,235  |                         |   | 1,416             |  |   | 10,819 
|                                                                |  |                     |  |                    
|Indefinite-lived intangible assets not subject to amortization: |  |                     |  |                     |         |                         |   |                   |  |   |        
|Tradenames                                                      |  | N/A                 |  |                     | 139,974 |                         |   |                  |  |   | 139,974
|Learning Center franchise license rights                        |  | N/A                 |  |                     | 82,000  |                         |   |                  |  |   | 82,000 
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total indefinite-lived intangible assets                        |  |                     |  |                     | 221,974 |                         |   |                  |  |   | 221,974
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets excluding goodwill                      |  |                     |  | $                   | 234,209 |                         | $ | 1,416             |  | $ | 232,793
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|                                                                | 
|                                                                |  | December 31, 2004  
|                                                                |  | Useful LifeIn Years |  | GrossCarryingAmount |         | AccumulatedAmortization |   | NetCarryingAmount
|Intangible assets subject to amortization:                      |  |                     |  |                     |         |                         |   |                   |  |   |        
|Acquired backlog (Learning Center Segment)                      |  | 0.5                 |  | $                   | 115     |                         | $ | 115               |  | $ |       
|Contract rights (Catapult Learning Segment)                     |  | 5                   |  |                     | 1,084   |                         |   | 323               |  |   | 761    
|Schülerhilfe franchise license rights (Learning Center Segment) |  | 25                  |  |                     | 4,000   |                         |   | 240               |  |   | 3,760  
|Internally developed software (Learning Center Segment)         |  | 5-7                 |  |                     | 3,699   |                         |   |                  |  |   | 3,699  
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets subject to amortization                 |  |                     |  |                     | 8,898   |                         |   | 678               |  |   | 8,220  
|                                                                |  |                     |  |                    
|Indefinite-lived intangible assets not subject to amortization: |  |                     |  |                     |         |                         |   |                   |  |   |        
|Tradenames                                                      |  | N/A                 |  |                     | 132,425 |                         |   |                  |  |   | 132,425
|Learning Center franchise license rights                        |  | N/A                 |  |                     | 82,000  |                         |   |                  |  |   | 82,000 
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total indefinite-lived intangible assets                        |  |                     |  |                     | 214,425 |                         |   |                  |  |   | 214,425
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets excluding goodwill                      |  |                     |  | $                   | 223,323 |                         | $ | 678               |  | $ | 222,645
|                                                                |  |                     |  |                     |         |                         |   |                   |  |   |        



Estimated future amortization expense
of intangible assets subject to amortization at September 30, 2005 is as follows:



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31, |  |   |       
|2005                     |  | $ | 869   
|2006                     |  |   | 2,197 
|2007                     |  |   | 1,909 
|2008                     |  |   | 1,671 
|2009                     |  |   | 1,481 
|Thereafter               |  |   | 2,692 
|                         |  |   |       
|Total                    |  | $ | 10,819
|                         |  |   |       



10



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



5. Long-Term Debt



Long-term debt consists of the following:



|                                                                                                                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                                                                      |  | September 30,2005 |         |   | December 31,2004 |  
|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 4.475% per annum at December 31, 2004) |  | $                 |        |   |                  | $ | 118,851 |  
|Senior term loan payable to a bank (2005 Term Loan) in quarterly installments through March 2012. The loan bears interest at
the banks prime rate or the Eurodollar rate, plus specified margins, as elected by the Company (aggregating to 5.49% per annum at September 30, 2005) |  |                   | 139,300 |   |                  |   |        |  
|Note payable, due in semi-annual installments through June 30, 2009. The note does not bear interest, and is recorded net of a discount
of $281 at September 30, 2005 and $348 at December 31, 2004                                                                                   |  |                   | 1,656   |   |                  |   | 1,831   |  
|Various notes payable bearing interest at fixed rates ranging from 5.00% to 8.00% per annum                                                                                                                                                                                           |  |                   | 2,485   |   |                  |   | 1,831   |  
|                                                                                                                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                                                                                                                      |  |                   | 143,441 |   |                  |   | 122,513 |  
|Less: current portion of long-term debt                                                                                                                                                                                                                                               |  |                   | (2,546  | ) |                  |   | (2,102  | )
|                                                                                                                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Total long-term debt                                                                                                                                                                                                                                                                  |  | $                 | 140,895 |   |                  | $ | 120,411 |  
|                                                                                                                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  



In order to manage interest rate
exposure and to comply with certain covenants of the Companys credit agreement, the Company has entered into three interest rate swap agreements. A notional amount of $40,000 in variable rate debt has been swapped to a counter party in
exchange for a fixed interest rate commitment of 2.58% per annum. A second agreement with a notional amount of $10,000 in variable rate debt has been swapped to a counter party in exchange for a fixed interest rate commitment of 3.44% per
annum. These agreements will terminate on July 1, 2006. A third agreement effective from July 1, 2006 through May 1, 2007 with a notional amount of $50,000 in variable rate debt has been swapped to a counter party in exchange for a
fixed interest rate commitment of 4.03% per annum. Interest paid under these agreements is recorded as interest expense in the period in which it is incurred.



On April 28, 2005, one of the Companys consolidated subsidiaries entered into an Amended and Restated Credit Agreement (the
2005 Term Loan) with a bank syndicate, replacing the existing 2004 Term Loan facility. The 2005 Term Loan increased the term loan facility to $140 million, lowered the interest rate spread over a variable rate, extended the maturities,
and provided for increased flexibility in certain other terms and conditions of the term loan facility. No amendments were made to the agreement concerning the revolving credit facility.



At the Companys election, the modified term loan will bear interest at the base rate or Eurodollar rate plus a margin, currently at
200 basis points. Pursuant to the 2005 Term Loan, quarterly principal payments based upon a 100-year amortization schedule are due until the seventh year, when the remaining balance is due. The obligations under the 2005 Term Loan are guaranteed by
the Company and certain direct and indirect subsidiaries of the Company. These obligations are secured by a senior interest in substantially all of the assets of certain of the consolidated subsidiaries of the Company.



The 2005 Term Loan includes customary covenants for transactions of this type, including
covenants limiting liens on assets of certain of the Companys subsidiaries, certain asset sales, payment of dividends, incurrence of additional indebtedness, and mergers or fundamental business changes.



The 2005 Term Loan constitutes a substantial modification of the terms of the prior agreement
in accordance with generally accepted accounting principles. Accordingly, the Company wrote-off unamortized deferred financing costs of approximately $1.1 million related to the prior term loan facility and expensed an additional $0.4 million
related to the modification during the three-month period ended June 30, 2005.



Of the $30,000 revolving credit facility, $28,845 was available to the Company due to outstanding standby letters of credit totaling $1,155 as of September 30, 2005.



6. Income Taxes



The Companys income tax provisions for all periods consist of federal, state, and foreign income taxes. The tax provisions for the three- and nine-month periods
ended September 30, 2005 are based on the effective tax rate estimated to be applicable for the full year. Currently, the effective tax rate for the Company for the year ending December 31, 2005 is expected to be 38%. Due to potential
changes in the mix of earnings between tax jurisdictions, the Companys consolidated effective tax rate may fluctuate during



11



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



2005. During the quarter ended September 30, 2004 the Companys effective tax rate was increased from 38%
for the first two quarters of the year to 64% in order to arrive at the full year tax rate of 48% for 2004. The increase in the full year effective tax rate in 2004 was primarily due to the recording of stock compensation expense in 2004 that
resulted 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 $0.02 per diluted common share.



7. Stockholders Equity



Changes
in the Companys stockholders equity during the period December 31, 2004 through September 30, 2005 are summarized as follows:



|                                                                                                        |  |             |     |                          |   |                  |  |                                     |        |  |                          |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ----------- | --- | ------------------------ | - | ---------------- |  | ----------------------------------- | ------ |  | ------------------------ | ------ | - |  | - | ------- | -
|                                                                                                        |  | CommonStock |     | AdditionalPaid-inCapital |   | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome |        |  | TotalStockholdersEquity |       
|Balance at December 31, 2004                                                                            |  | $           | 426 |                          | $ | 191,002          |  | $                                   | 2,807  |  | $                        | 3,466  |   |  | $ | 197,701 |  
|Options exercised for purchase of 122,117 shares of common stock (including income tax benefit of $493) |  |             | 1   |                          |   | 968              |  |                                     |       |  |                          |       |   |  |   | 969     |  
|Non-cash stock compensation expense                                                                     |  |             |    |                          |   | 348              |  |                                     |       |  |                          |       |   |  |   | 348     |  
|                                                                                                        |  |             |     |                          |  
|Comprehensive income:                                                                                   |  |             |     |                          |   |                  |  |                                     |        |  |                          |        |   |  |   |         |  
|Net income for the nine months ended September 30, 2005                                                 |  |             |    |                          |   |                 |  |                                     | 20,138 |  |                          |       |   |  |   | 20,138  |  
|Other comprehensive income (loss):                                                                      |  |             |     |                          |   |                  |  |                                     |        |  |                          |        |   |  |   |         |  
|Change in fair value of derivative financial instrument                                                 |  |             |    |                          |   |                 |  |                                     |       |  |                          | 386    |   |  |   | 386     |  
|Foreign currency translation adjustment                                                                 |  |             |    |                          |   |                 |  |                                     |       |  |                          | (3,566 | ) |  |   | (3,566  | )
|                                                                                                        |  |             |     |                          |   |                  |  |                                     |        |  |                          |        |   |  |   |         |  
|Balance at September 30, 2005                                                                           |  | $           | 427 |                          | $ | 192,318          |  | $                                   | 22,945 |  | $                        | 286    |   |  | $ | 215,976 |  
|                                                                                                        |  |             |     |                          |   |                  |  |                                     |        |  |                          |        |   |  |   |         |  



8. Comprehensive Income



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



|                                                                                                                                                                                                                                          |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | -----
|                                                                                                                                                                                                                                          |  | Three months ended September 30, |       |   | Nine months ended September 30,
|                                                                                                                                                                                                                                          |  | 2005                             |       |   | 2004                            |   |       | 2005 |  |   | 2004  
|Net income                                                                                                                                                                                                                                |  | $                                | 2,667 |   |                                 | $ | 903   |      |  | $ | 20,138 |   |  | $ | 4,508
|Foreign currency translation adjustment, net of tax (benefit) of $(123) and $(364) for the three and nine months ended September 30,
2005, respectively                                                                                   |  |                                  | (772  | ) |                                 |   | 487   |      |  |   | (3,566 | ) |  |   | 142  
|Change in fair value of derivative financial instruments, net of tax of $128 and $237 for the three and nine months ended September 30,
2005, respectively, and tax (benefit) of $(78) and $91 for the same periods in 2004, respectively |  |                                  | 208   |   |                                 |   | (125  | )    |  |   | 386    |   |  |   | 149  
|                                                                                                                                                                                                                                          |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |      
|Comprehensive income                                                                                                                                                                                                                      |  | $                                | 2,103 |   |                                 | $ | 1,265 |      |  | $ | 16,958 |   |  | $ | 4,799
|                                                                                                                                                                                                                                          |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |      



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Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



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.



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



|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|----------------------------------- |  | -------------------------------- | ------ | ---- | ------------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                    |  | Three months ended September 30, |        |      | Nine months ended September 30, |       
|                                    |  | 2005                             |        | 2004 |                                 |        | 2005 |  | 2004 |       
|Numerator                           |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Income from continuing operations   |  | $                                | 2,667  |      | $                               | 1,937  |      |  | $    | 20,138 |  | $ | 7,263  |  
|Loss from discontinued operations   |  |                                  |       |      |                                 | (1,034 | )    |  |      |       |  |   | (2,755 | )
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Net income                          |  | $                                | 2,667  |      | $                               | 903    |      |  | $    | 20,138 |  | $ | 4,508  |  
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Denominator (shares in thousands)   |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Basic:                              |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Weighted-average shares outstanding |  |                                  | 42,672 |      |                                 | 37,974 |      |  |      | 42,619 |  |   | 37,341 |  
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Diluted:                            |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Weighted-average shares outstanding |  |                                  | 42,672 |      |                                 | 37,974 |      |  |      | 42,619 |  |   | 37,341 |  
|Dilutive effect of stock options    |  |                                  | 1,494  |      |                                 | 1,334  |      |  |      | 1,448  |  |   | 1,095  |  
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Total                               |  |                                  | 44,166 |      |                                 | 39,308 |      |  |      | 44,067 |  |   | 38,436 |  
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Earnings per common sharebasic     |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Income from continuing operations   |  | $                                | 0.06   |      | $                               | 0.05   |      |  | $    | 0.47   |  | $ | 0.19   |  
|Loss from discontinued operations   |  |                                  |       |      |                                 | (0.03  | )    |  |      |       |  |   | (0.07  | )
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Net income                          |  | $                                | 0.06   |      | $                               | 0.02   |      |  | $    | 0.47   |  | $ | 0.12   |  
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Earnings per common sharediluted   |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Income from continuing operations   |  | $                                | 0.06   |      | $                               | 0.05   |      |  | $    | 0.46   |  | $ | 0.19   |  
|Loss from discontinued operations   |  |                                  |       |      |                                 | (0.03  | )    |  |      |       |  |   | (0.07  | )
|                                    |  |                                  |        |      |                                 |        |      |  |      |        |  |   |        |  
|Net income                          |  | $                                | 0.06   |      | $                               | 0.02   |      |  | $    | 0.46   |  | $ | 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 4,360,000 shares of common stock to selected employees and directors of the Company. Options to purchase 3,922,800 shares of common stock were granted under this plan. Of this amount, 104,000 shares
immediately vested with the remainder vesting ratably over three or four years. Options under this plan expire 10 years after the grant date. Options to purchase 374,000 shares of common stock were granted with an exercise price less than the
estimated fair value of the Companys common stock at the grant date. The Company recorded $348 of compensation expense during the nine months ended September 30, 2005 for these options vesting during the period.



During 2004, the Company adopted a stock option plan that provides for the granting to
selected employees and directors of the Company of options to purchase up to 700,000 shares of common stock plus an annual increase to be added automatically on the first day of our fiscal year equal to the lesser of (i) 400,000 shares or
(ii) one percent of the number of outstanding shares on the last day of the immediately preceding fiscal year. At December 31, 2004, options to purchase 194,000 shares of common stock had been granted under this plan with a weighted
average exercise price of $11.76 per share. Of this amount, 16,000 shares immediately vested with the remainder vesting ratably over four years. Options under this plan expire 10 years after the grant date.



On January 1, 2005, the first annual automatic increase resulted in an additional
400,000 shares of common stock available for issuance under the 2004 stock option plan. During the period from January 1, 2005 through September 30, 2005, the Company issued options to purchase 185,200 shares of common stock to employees
of the Company with a weighted average exercise price of $13.44 per share. Options will vest ratably over a four-year period.



13



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



At September 30, 2005, the Company had outstanding options to purchase 3,651,435 shares of common stock at a
weighted average exercise price of $4.85 per share.



11. Employee Benefit
Plan



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



The Company may at its discretion make matching contributions,
which are allocated to eligible participants. The Company made a discretionary contribution to this plan of $741 during the nine-month period ended September 30, 2005.



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.
Beginning in 2005, the Company began to manage the operations of its previous Online Learning Services segment within its Learning Center segment, and accordingly now has two operating segments. All segment information has been restated to conform
to the new presentation. 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 and online instruction through a network of franchised and company-owned learning centers
located primarily in North America and Europe. The Learning Center segment also develops and sells educational products and services under the recently-acquired Hooked on Phonics brand name.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Catapult Learning segment, formerly Institutional Services, provides tutoring, online instruction, other supplemental education services and special-needs services to public and
private schools.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company evaluates performance and allocates
resources based on operating income. Any significant intercompany sales or transfers are eliminated.



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



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



|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|---------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------ | ----- |  | - | ------- | -
|Three months ended September 30,
2005                      |  | LearningCenter |         |   | CatapultLearning |   |        | Total | 
|Revenues                                                   |  | $              | 66,375  |   |                  | $ | 12,530 |       |  | $ | 78,905  |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit (loss) before depreciation and amortization |  |                | 16,283  |   |                  |   | (4,027 | )     |  |   | 12,256  |  
|Depreciation and amortization                              |  |                | (1,207  | ) |                  |   | (573   | )     |  |   | (1,780  | )
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit (loss)                                      |  | $              | 15,076  |   |                  | $ | (4,600 | )     |  | $ | 10,476  |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment assets                                             |  | $              | 371,123 |   |                  | $ | 40,636 |       |  | $ | 411,759 |  
|Total expenditures for additions to long-lived assets      |  |                | 4,062   |   |                  |   | 912    |       |  |   | 4,974   |  
|                                                           |  |                |        
|Three months ended September 30,
2004                      |  | LearningCenter |         |   | CatapultLearning |   |        | Total | 
|Revenues                                                   |  | $              | 48,611  |   |                  | $ | 13,750 |       |  | $ | 62,361  |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit (loss) before depreciation and amortization |  |                | 14,448  |   |                  |   | (1,389 | )     |  |   | 13,059  |  
|Depreciation and amortization                              |  |                | (1,000  | ) |                  |   | (599   | )     |  |   | (1,599  | )
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit                                             |  | $              | 13,448  |   |                  | $ | (1,988 | )     |  | $ | 11,460  |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment assets                                             |  | $              | 298,977 |   |                  | $ | 34,769 |       |  | $ | 333,746 |  
|Total expenditures for additions to long-lived assets      |  |                | 3,218   |   |                  |   | 1,148  |       |  |   | 4,366   |  
|                                                           |  |                |        
|Nine months ended September 30,
2005                       |  | LearningCenter |         |   | CatapultLearning |   |        | Total | 
|Revenues                                                   |  | $              | 189,844 |   |                  | $ | 90,368 |       |  | $ | 280,212 |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit before depreciation and amortization        |  |                | 48,870  |   |                  |   | 7,555  |       |  |   | 56,425  |  
|Depreciation and amortization                              |  |                | (3,471  | ) |                  |   | (1,534 | )     |  |   | (5,005  | )
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit                                             |  | $              | 45,399  |   |                  | $ | 6,021  |       |  | $ | 51,420  |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment assets                                             |  | $              | 371,123 |   |                  | $ | 40,636 |       |  | $ | 411,759 |  
|Total expenditures for additions to long-lived assets      |  |                | 14,404  |   |                  |   | 3,109  |       |  |   | 17,513  |  
|                                                           |  |                |        
|Nine months ended September 30,
2004                       |  | LearningCenter |         |   | CatapultLearning |   |        | Total | 
|Revenues                                                   |  | $              | 141,912 |   |                  | $ | 89,895 |       |  | $ | 231,807 |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit before depreciation and amortization        |  |                | 40,586  |   |                  |   | 10,079 |       |  |   | 50,665  |  
|Depreciation and amortization                              |  |                | (2,825  | ) |                  |   | (1,635 | )     |  |   | (4,460  | )
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment profit                                             |  | $              | 37,761  |   |                  | $ | 8,444  |       |  | $ | 46,205  |  
|                                                           |  |                |         |   |                  |   |        |       |  |   |         |  
|Segment assets                                             |  | $              | 298,977 |   |                  | $ | 34,769 |       |  | $ | 333,746 |  
|Total expenditures for additions to long-lived assets      |  |                | 10,047  |   |                  |   | 2,748  |       |  |   | 12,795  |  



15



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



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



|                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                      |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Segment profit                                        |  | $                               | 10,476 |   |                                | $ | 11,460 |      |  | $ | 51,420  |   |  | $ | 46,205  |  
|Corporate depreciation and amortization               |  |                                 | (405   | ) |                                |   | (427   | )    |  |   | (1,216  | ) |  |   | (1,210  | )
|General and administrative costs                      |  |                                 | (3,796 | ) |                                |   | (3,133 | )    |  |   | (10,413 | ) |  |   | (9,516  | )
|Non-cash stock compensation expense                   |  |                                 | (51    | ) |                                |   | (303   | )    |  |   | (348    | ) |  |   | (8,704  | )
|Other expense                                         |  |                                 | (1,922 | ) |                                |   | (2,164 | )    |  |   | (6,962  | ) |  |   | (12,752 | )
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes |  | $                               | 4,302  |   |                                | $ | 5,433  |      |  | $ | 32,481  |   |  | $ | 14,023  |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



Revenues by geographic area are as follows:



|                   |  |                                 |        |                                |   |        |  |      |         |  |   |        
|------------------ |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                   |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                   |  | 2005                            |        | 2004                           |   | 2005   |  | 2004
|United States      |  | $                               | 70,999 |                                | $ | 55,835 |  | $    | 254,069 |  | $ | 210,182
|Other              |  |                                 | 7,906  |                                |   | 6,526  |  |      | 26,143  |  |   | 21,625 
|                   |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Consolidated total |  | $                               | 78,905 |                                | $ | 62,361 |  | $    | 280,212 |  | $ | 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. Subsequent Events



On October 27, 2005, the Company announced its intention to sell its Education Station business, which delivers site-based No Child
Left Behind services to public schools. The sale of Education Station is expected to realize value from the Companys development efforts while also allowing management to focus attention on the opportunities available in the Learning Center
and remaining Catapult Learning businesses. Existing Education Station contracts will be served and the Company anticipates the completion of the sale within the next year. The Company is currently identifying interested buyers, and does not expect
to incur a loss upon the sale of Education Station.



In accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, we anticipate reporting the operations of Educations Station as discontinued operations for all periods beginning in
the fourth quarter of 2005. In addition, the net asset group of Education Station will be classified as assets held for sale beginning in the fourth quarter.



Education Station is a component unit within the Catapult Learning operating segment. The major classes of assets and liabilities of Education Station at
September 30, 2005 are as follows:



|                            |  |   |      
|--------------------------- |  | - | -----
|Current assets              |  | $ | 6,005
|Property and equipment, net |  |   | 3,439
|Other long-term assets      |  |   | 92   
|Current liabilities         |  |   | 2,778



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##### Table of Contents

Educate, Inc.



Notes to Consolidated Financial Statements (Unaudited, continued)



(Dollars in thousands, except per share data)



The following unaudited consolidated pro forma results of operations of the Company for the three and nine months
ended September 30, 2005 and 2004 give effect to the disposal of Education Station as if it had occurred on January 1 of the respective year:



|                                                      |  |                                  |        |                                 |   |        |  |      |         |  |   |        
|----------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                                                      |  | Three months ended September 30, |        | Nine months ended September 30,
|                                                      |  | 2005                             |        | 2004                            |   | 2005   |  | 2004
|Revenues                                              |  | $                                | 78,540 |                                 | $ | 61,953 |  | $    | 253,770 |  | $ | 210,347
|Income from continuing operations before income taxes |  |                                  | 7,594  |                                 |   | 7,438  |  |      | 36,474  |  |   | 17,011 
|Net income                                            |  |                                  | 4,708  |                                 |   | 2,146  |  |      | 22,614  |  |   | 6,360  
|                                                      |  |                                  |        |                                
|Diluted earnings per share                            |  | $                                | 0.11   |                                 | $ | 0.05   |  | $    | 0.51    |  | $ | 0.17   



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ITEM 2. 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 related
notes to those statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes to those statements in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004.



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 or the negative of such words or 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
are some of the factors that 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; changes in the Companys ability to effectively integrate recently acquired companies; 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. We do not
undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under
applicable securities law.



Overview



We are a leading provider of tutoring and other supplemental education services to
pre-kindergarten through twelfth grade, or pre-K-12, students. We operate through two business segments that served more than 320,000 students in 2004.



Our Learning Center segment develops and delivers trusted diagnostic, prescriptive tutoring programs primarily through a network of franchised and company-owned learning
centers located primarily in North America operating under the Sylvan brand name. The Learning Center segment also develops and sells educational programs and services under the recently-acquired Hooked on Phonics brand name. Sylvan and Hooked on
Phonics are two of the most highly recognized brand names in the supplemental education services industry.



Our Catapult Learning segment, formerly referred to as Institutional Services, 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.



We have experienced significant growth over the last five years. Parents have become more proactive in seeking education services that supplement their childrens education and are increasingly willing to pay for
these services largely due to the increase in economic value of a college degree relative to a high school diploma. Combined with our strategies of acquiring and integrating franchised centers into our operations and expanding our product and
service offerings, the economic factors have resulted in significant growth in our Learning Center segment.



As disclosed in the Notes to the Consolidated Financial Statements (unaudited) in this Quarterly Report on Form 10-Q, in the fourth quarter of calendar 2005, we announced our intention to sell our Education Station
business unit. Education Station provides site-based supplemental services to students under the No Child Left Behind Act. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we anticipate reporting the operations of



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Education Station as discontinued operations for all periods presented beginning in the fourth quarter of 2005. In addition, the net asset
group of Education Station will be classified as assets held for sale beginning in the fourth quarter. Note 13 in this Quarterly Report on Form 10-Q provides additional information on the planned sale.



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Educate, Inc.



Seasonality and Other Quarterly Fluctuations



The following table sets forth selected information related to seasonality and other quarterly
fluctuations:



|                                  |  |              |      |               |   |              |  |              |      |               |   |              |  |                |      |  |   |      |  |   |     
|--------------------------------- |  | ------------ | ---- | ------------- | - | ------------ |  | ------------ | ---- | ------------- | - | ------------ |  | -------------- | ---- |  | - | ---- |  | - | ----
|                                  |  | 2005         |      | 2004         
|(Dollars in millions)             |  | FirstQuarter |      | SecondQuarter |   | ThirdQuarter |  | FirstQuarter |      | SecondQuarter |   | ThirdQuarter |  | Fourth Quarter
|Revenues:                         |  |              |      |               |   |              |  |              |      |               |   |              |  |                |      |  |   |      |  |   |     
|Learning Center                   |  | $            | 56.8 |               | $ | 66.7         |  | $            | 66.4 |               | $ | 43.4         |  | $              | 49.9 |  | $ | 48.6 |  | $ | 39.3
|Catapult Learning                 |  |              | 41.5 |               |   | 36.4         |  |              | 12.5 |               |   | 38.8         |  |                | 37.4 |  |   | 13.8 |  |   | 29.1
|                                  |  |              |      |               |   |              |  |              |      |               |   |              |  |                |      |  |   |      |  |   |     
|Total revenues                    |  | $            | 98.3 |               | $ | 103.1        |  | $            | 78.9 |               | $ | 82.2         |  | $              | 87.3 |  | $ | 62.4 |  | $ | 68.4
|Percentage of annual revenues     |  |              | N/A  |               |   | N/A          |  |              | N/A  |               |   | 27%          |  |                | 29%  |  |   | 21%  |  |   | 23% 
|Operating income                  |  | $            | 13.8 |               | $ | 19.5         |  | $            | 6.2  |               | $ | 11.0         |  | $              | 8.1  |  | $ | 7.6  |  | $ | 4.6 
|Income from continuing operations |  | $            | 7.5  |               | $ | 16.1         |  | $            | 4.3  |               | $ | 4.9          |  | $              | 0.5  |  | $ | 1.9  |  | $ | 1.9 



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 franchisees more than a month in the future.



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



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



Third Quarter. The third quarter marks the peak delivery of services in our
Learning Center segment. We recognize revenue as we deliver these services in our company-owned territories. However, with respect to our franchised territories, our royalties decline as the cash receipts our franchisees receive from their customers
decline from peak second quarter levels. Due to summer vacation, we provide limited services in our Catapult Learning segment during this period, which results in the lowest segment revenue for the year. However, we gain significant visibility for
the upcoming year because the majority of our institutional contracts are renewed during the third quarter.



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



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



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



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Educate, Inc.



Results of Operations



Comparison of results for the three months ended September 30, 2005 and 2004.



|                                                   |  |                                  |       |      |   |                      |  |      
|-------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | -------------------- |  | -----
|                                                   |  | Three months ended September 30, |       |     
|                                                   |  | 2005                             |       | 2004 |   | % Increase(Decrease)
|                                                   |  | (Dollars in millions)            |       |     
|Revenues                                           |  |                                  |       |      |   |                      |  |      
|Learning Center:                                   |  |                                  |       |      |   |                      |  |      
|Franchise services-North American                  |  | $                                | 10.5  |      | $ | 10.5                 |  |     
|Company-owned centers-North American               |  |                                  | 49.0  |      |   | 32.0                 |  | 53%  
|European                                           |  |                                  | 6.9   |      |   | 6.1                  |  | 13%  
|                                                   |  |                                  |       |      |   |                      |  |      
|                                                   |  |                                  | 66.4  |      |   | 48.6                 |  | 37%  
|Catapult Learning:                                 |  |                                  |       |      |   |                      |  |      
|School services and special needs                  |  |                                  | 12.0  |      |   | 13.3                 |  | (10)%
|NCLB                                               |  |                                  | 0.5   |      |   | 0.5                  |  |     
|                                                   |  |                                  |       |      |   |                      |  |      
|                                                   |  |                                  | 12.5  |      |   | 13.8                 |  | (9)% 
|                                                   |  |                                  |       |      |   |                      |  |      
|Total                                              |  | $                                | 78.9  |      | $ | 62.4                 |  | 26%  
|                                                   |  |                                  |       |      |   |                      |  |      
|Business Metrics                                   |  |                                  |       |      |   |                      |  |      
|Sylvan Learning same territory revenue growth: (1) |  |                                  | 1%    |      |   | 2%                   |  |      
|                                                   |  |                                  |      
|Number of Sylvan Learning Territories (2):         |  |                                  |       |      |   |                      |  |      
|Franchisee-owned                                   |  |                                  | 723   |      |   | 744                  |  | (3)% 
|Company-owned                                      |  |                                  | 163   |      |   | 96                   |  | 70%  
|                                                   |  |                                  |       |      |   |                      |  |      
|Total                                              |  |                                  | 886   |      |   | 840                  |  | 5%   
|                                                   |  |                                  |       |      |   |                      |  |      
|Number of Sylvan Learning Centers (3):             |  |                                  |       |      |   |                      |  |      
|Franchisee-owned                                   |  |                                  | 877   |      |   | 896                  |  | (2)% 
|Company-owned                                      |  |                                  | 234   |      |   | 149                  |  | 57%  
|                                                   |  |                                  |       |      |   |                      |  |      
|Total                                              |  |                                  | 1,111 |      |   | 1,045                |  | 6%   
|                                                   |  |                                  |       |      |   |                      |  |      

---

|(1) | Same Territory amounts include the results of territories for the identical months for each period presented in the comparison, commencing with the 13thfull month each territory has been operating. Same territory growth is presented as the aggregate Educate revenue growth for
franchise royalties and company-owned territory revenues during the period. A territory reflects the geographically specified area where an operator has the right to provide products and services under a Sylvan franchise agreement. Same territory
amounts include revenue from additional centers opened in existing territories.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Number of Sylvan Learning territories at period end.
|--- | ----------------------------------------------------

|(3) | Number of Sylvan Learning centers at period end.
|--- | ------------------------------------------------



Revenues. The increase in revenue during the quarter ended September 30, 2005 of $16.5 million compared to the same period of the prior year was due to
growth in the Learning Center segment of $17.8 million, partially offset by a decline of $1.3 million in the Catapult Learning segment. The acquisitions of Sylvan Learning Centers from franchisees as well as the acquisition of the Hooked on Phonics
line of educational programs and growth in revenue of existing company-owned centers accounted for $17.0 million of the increase in the Learning Center segment. European revenues increased $0.8 million. Franchise services revenues remained stable at
$10.5 million. In the Catapult Learning segment, NCLB services revenues remained stable at $0.5 million and the school services and special needs businesses revenues decreased $1.3 million compared to the same period of 2004.



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Learning CenterRevenues from company-owned territories increased approximately $17.0 million primarily as a result of the
acquisition of 67 franchised territories since September 30, 2004 and the inclusion of revenues from Hooked on Phonics programs and services, which we acquired during the first quarter of 2005. Additionally, our combined same territory revenue
growth was 1% during the quarter ended September 30, 2005.



Despite the
decrease in the number of franchisee-owned territories, which is a result of our acquisitions since September 30, 2004 exceeding new franchise territory openings, franchise services revenues remained stable at $10.5 million, primarily as a
result of same territory royalty growth and increased educational program sales to franchisees during the quarter.



European revenues, which include both company-owned and franchise territory results, increased $0.8 million primarily due to increased enrollment. Foreign currency
exchange rate movements had minimal impact on revenues.



Revenues for the
Learning Center segment represented 84% of our total revenues for the quarter ended September 30, 2005.



Catapult LearningOur school services and special needs revenues decreased $1.3 million in this seasonally slow period due primarily to certain one-time summer school programs that were served in the prior
year. NCLB revenues remained stable at $0.5 million in both the current and prior year quarters as NCLB services begin for the new school year in September. Revenues for the Catapult Learning segment accounted for 16% of our total revenues for the
quarter ended September 30, 2005.



|                                                 |  |                                  |       |      |   |                      |  |       
|------------------------------------------------ |  | -------------------------------- | ----- | ---- | - | -------------------- |  | ------
|                                                 |  | Three months ended September 30, |       |     
|                                                 |  | 2005                             |       | 2004 |   | % Increase(Decrease)
|                                                 |  | (Dollars in millions)            |       |     
|Segment Operating Costs                          |  |                                  |       |      |   |                      |  |       
|Learning Center                                  |  | $                                | 51.3  |      | $ | 35.1                 |  | 46%   
|Catapult Learning                                |  |                                  | 17.1  |      |   | 15.8                 |  | 8%    
|                                                 |  |                                  |       |      |   |                      |  |       
|Total Segment Operating Costs                    |  | $                                | 68.4  |      | $ | 50.9                 |  | 34%   
|                                                 |  |                                  |      
|Segment Profit (Loss)                            |  |                                  |       |      |   |                      |  |       
|Learning Center                                  |  | $                                | 15.1  |      | $ | 13.5                 |  | 12%   
|Catapult Learning                                |  |                                  | (4.6) |      |   | (2.0)                |  | (130)%
|                                                 |  |                                  |       |      |   |                      |  |       
|Total Segment Profit                             |  | $                                | 10.5  |      | $ | 11.5                 |  | (9)%  
|                                                 |  |                                  |      
|Corporate Expenses                               |  |                                  |       |      |   |                      |  |       
|Corporate depreciation and amortization expenses |  | $                                | 0.4   |      | $ | 0.4                  |  |      
|General and administrative expenses              |  |                                  | 3.8   |      |   | 3.2                  |  | 19%   
|Non-cash stock compensation expense              |  |                                  | 0.1   |      |   | 0.3                  |  | (67)% 
|Interest expense, net                            |  |                                  | 2.0   |      |   | 2.1                  |  | (5)%  
|Other financing costs                            |  |                                  |      |      |   | 0.3                  |  | (100)%
|Foreign exchange (gains) and other               |  |                                  | (0.1) |      |   | (0.2)                |  | (50)% 
|Income tax expense                               |  |                                  | 1.6   |      |   | 3.5                  |  | (54)% 
|                                                 |  |                                  |       |      |   |                      |  |       
|Total Corporate Expenses                         |  |                                  | 7.8   |      |   | 9.6                  |  | (19)% 
|                                                 |  |                                  |       |      |   |                      |  |       
|Income from continuing operations                |  | $                                | 2.7   |      | $ | 1.9                  |  | 42%   
|                                                 |  |                                  |       |      |   |                      |  |       
|Business Metrics                                 |  |                                  |       |      |   |                      |  |       
|Segment Operating Margin (1)                     |  |                                  |       |      |   |                      |  |       
|Learning Center                                  |  |                                  | 23%   |      |   | 28%                  |  |       
|Catapult Learning                                |  |                                  | (37)% |      |   | (14)%                |  |       

---

|(1) | Segment operating margin is calculated by dividing segment profit/(loss) by segment revenue.
|--- | --------------------------------------------------------------------------------------------



Segment Operating Costs. Segment operating costs increased primarily due to the expansion of company-owned Learning Center
territories and the acquisition of the Hooked on Phonics line of educational programs.



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Learning CenterSegment operating costs increased to 77% of operating revenue for the quarter ended September 30, 2005
compared to 72% in the same period of 2004. Segment operating costs increased by $16.2 million in the third quarter of 2005 compared to the third quarter of 2004 primarily as a result of the additional costs associated with operating and integrating
the 67 company-owned territories acquired since September 30, 2004. These costs consist primarily of instructional and advertising costs. Segment costs also increased due to the acquisition of the Hooked on Phonics line of educational programs
and the launch of online tutorial services to customers through the Learning Center network. During the current period we also increased our investment in the development of new programs to meet market needs for convenient educational services and
programs. European expenses related to Schülerhilfe increased by $0.5 million primarily due to higher costs to support revenue growth. Foreign currency exchange rate movements had minimal impact on expenses compared to the same period in the
prior year.



Catapult LearningCosts increased by $1.3 million, or
8% in the current quarter compared to the third quarter of 2004 primarily due to spending targeted toward increasing student enrollment in Catapult Online, which delivers NCLB instruction to a students home via a live, online environment, as
well as costs associated with enrolling students in our site-based NCLB business, Education Station.



Segment Operating Margin. Learning Center segment operating margins decreased in the quarter ended September 30, 2005 to 23% compared to 28% for the prior year. The decreased margin is primarily related to
additional costs associated with operating and integrating additional company-owned territories acquired and the related shift in revenue mix from franchise revenues to company-owned territory revenues. This occurs because the operating income from
an acquired territory is comparable to the royalty income earned from a franchisee in the year of acquisition although the revenue recorded increases substantially. The margin decline is also due to the increased investment in program development
costs intended to increase future revenues. Catapult Learning segment operating margins were (37)% for the quarter ended September 30, 2005, down 23% from the prior year at (14)%. This margin decline is due to the incurrence of an increased
amount of start-up costs associated with the upcoming school years expanded Catapult Online and site-based NCLB offerings as well as the loss of certain summer school programs served in the prior year. Margins were also negatively impacted by
Hurricane Katrina through the closing of numerous schools in New Orleans and Alabama where Catapult had been scheduled to provide services.



Corporate Expenses. Corporate general and administrative and depreciation and amortization expenses were $4.2 million for the quarter ended September 30, 2005
and $3.6 million during the same period of 2004, but declined slightly as a percentage of revenue from 5.8% in the third quarter of 2004 to 5.3% in the third quarter of 2005. The increase in the amount of these expenses is in response to needs to
support the expanding business and to operate as a public company. Non-cash stock compensation expense decreased by $0.2 million during the third quarter of 2005 compared to the third quarter of 2004. In 2004 we issued restricted common stock and
granted vested options to employees and directors to purchase common stock at prices less than the estimated fair value of our common stock. Net interest expense decreased by $0.1 million primarily as a result of the repayment in September 2004 of a
portion of our term loan facility with the proceeds from our initial public offering, offset partially by an increase in short-term interest rates under the facility. Other financing costs decreased $0.3 million due to a nonrecurring terminated
financing transaction in 2004. Our income tax expense decreased to $1.6 million for the quarter ended September 30, 2005 from $3.5 million for the quarter ended September 30, 2004 due to differences in the effective tax rates between the
two periods. Our effective tax rate was 38% for the quarter ended September 30, 2005. During the quarter ended September 30, 2004 our effective tax rate was increased from 38% in the first two quarters of the year to 64% in order to arrive
at the full year tax rate of 48% for 2004. The increase in the full year effective tax rate in 2004 was primarily due to the recording of stock compensation expense in 2004 that resulted in a permanently lower income tax deduction compared to the
related compensation expense recorded for financial statement purposes.



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Comparison of results for the nine months ended September 30, 2005 and 2004.



|                                                   |  |                                 |       |      |   |                      |  |     
|-------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -------------------- |  | ----
|                                                   |  | Nine months ended September 30, |       |     
|                                                   |  | 2005                            |       | 2004 |   | % Increase(Decrease)
|                                                   |  | (Dollars in millions)           |       |     
|Revenues                                           |  |                                 |       |      |   |                      |  |     
|Learning Center:                                   |  |                                 |       |      |   |                      |  |     
|Franchise services-North American                  |  | $                               | 37.3  |      | $ | 34.9                 |  | 7%  
|Company-owned centers-North American               |  |                                 | 129.3 |      |   | 86.6                 |  | 49% 
|European                                           |  |                                 | 23.2  |      |   | 20.4                 |  | 14% 
|                                                   |  |                                 |       |      |   |                      |  |     
|                                                   |  |                                 | 189.8 |      |   | 141.9                |  | 34% 
|Catapult Learning:                                 |  |                                 |       |      |   |                      |  |     
|School services and special needs                  |  |                                 | 62.3  |      |   | 68.1                 |  | (9)%
|NCLB                                               |  |                                 | 28.1  |      |   | 21.8                 |  | 29% 
|                                                   |  |                                 |       |      |   |                      |  |     
|                                                   |  |                                 | 90.4  |      |   | 89.9                 |  | 1%  
|                                                   |  |                                 |       |      |   |                      |  |     
|Total                                              |  | $                               | 280.2 |      | $ | 231.8                |  | 21% 
|                                                   |  |                                 |       |      |   |                      |  |     
|Business Metrics                                   |  |                                 |       |      |   |                      |  |     
|Sylvan Learning same territory revenue growth: (1) |  |                                 | 3%    |      |   | 3%                   |  |     
|                                                   |  |                                 |      
|Number of Sylvan Learning Territories (2):         |  |                                 |       |      |   |                      |  |     
|Franchisee-owned                                   |  |                                 | 723   |      |   | 744                  |  | (3)%
|Company-owned                                      |  |                                 | 163   |      |   | 96                   |  | 70% 
|                                                   |  |                                 |       |      |   |                      |  |     
|Total                                              |  |                                 | 886   |      |   | 840                  |  | 5%  
|                                                   |  |                                 |       |      |   |                      |  |     
|Number of Sylvan Learning Centers (3):             |  |                                 |       |      |   |                      |  |     
|Franchisee-owned                                   |  |                                 | 877   |      |   | 896                  |  | (2)%
|Company-owned                                      |  |                                 | 234   |      |   | 149                  |  | 57% 
|                                                   |  |                                 |       |      |   |                      |  |     
|Total                                              |  |                                 | 1,111 |      |   | 1,045                |  | 6%  
|                                                   |  |                                 |       |      |   |                      |  |     

---

|(1) | Same Territory amounts include the results of territories for the identical months for each period presented in the comparison, commencing with the 13thfull month each territory has been operating. Same territory growth is presented as the aggregate Educate revenue growth for
franchise royalties and company-owned territory revenues during the period. A territory reflects the geographically specified area where an operator has the right to provide products and services under a Sylvan franchise agreement. Same territory
amounts include revenue from additional centers opened in existing territories.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Number of Sylvan Learning territories at period end.
|--- | ----------------------------------------------------

|(3) | Number of Sylvan Learning centers at period end.
|--- | ------------------------------------------------



Revenues. The increase in revenue during the nine months ended September 30, 2005 of $48.4 million compared to the same period of the prior year was due
to growth in the Learning Center segment of $47.9 million and growth in the Catapult Learning segment of $0.5 million. The acquisitions of Sylvan Learning Centers from franchisees as well as the acquisition of the Hooked on Phonics line of
educational programs and growth in revenue of existing company-owned centers accounted for $42.7 million of the increase in the Learning Center segment. European revenues increased $2.8 million and franchise services revenues grew by $2.4 million
compared to the same period of 2004. In the Catapult Learning segment, NCLB services revenues increased 29%, or $6.3 million, partially offset by decreases in revenues of the school services and special needs businesses of $5.8 million compared to
the same period of 2004.



Learning CenterRevenues from
company-owned territories increased approximately $42.7 million primarily as a result of the acquisition of 67 franchised territories since September 30, 2004 and the inclusion of revenues from Hooked on Phonics programs and services, which we
acquired during the first quarter of 2005. In addition, our combined same territory revenue growth increased 3% in the nine months ended September 30, 2005 compared to the same period of 2004.



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Educate, Inc.



Despite the decrease in the number of franchisee-owned territories, which is a result of our acquisitions since September 30, 2004
exceeding new franchise territory openings, franchise services revenues increased $2.4 million primarily as a result of same territory royalty growth and increased educational program sales to franchisees during the most recent nine-month period.



European revenues, which include both company-owned territory and franchise
results, increased $2.8 million, of which $2.1 million was due to increased enrollment and $0.7 million was a benefit from a favorable foreign currency exchange environment relative to the prior year.



Revenues for the Learning Center segment represented 68% of our total revenues for the nine
months ended September 30, 2005.



Catapult LearningNCLB
revenues increased $6.3 million primarily as a result of an increase in the number of contracts and students served in our NCLB supplemental service program compared to the prior year. Our school services and special needs revenues decreased $5.8
million due to the expiration and planned non-renewal of several non-strategic contracts, reduced staffing availability of speech therapists in the current school year, and due to the non-funding of certain one-time summer school programs that were
served in the prior year. Revenues for the Catapult Learning segment accounted for 32% of our total revenues for the nine months ended September 30, 2005.



|                                                 |  |                                 |       |      |   |                      |  |      
|------------------------------------------------ |  | ------------------------------- | ----- | ---- | - | -------------------- |  | -----
|                                                 |  | Nine months ended September 30, |       |     
|                                                 |  | 2005                            |       | 2004 |   | % Increase(Decrease)
|                                                 |  | (Dollars in millions)           |       |     
|Segment Operating Costs                          |  |                                 |       |      |   |                      |  |      
|Learning Center                                  |  | $                               | 144.4 |      | $ | 104.1                |  | 39%  
|Catapult Learning                                |  |                                 | 84.4  |      |   | 81.5                 |  | 4%   
|                                                 |  |                                 |       |      |   |                      |  |      
|Total Segment Operating Costs                    |  | $                               | 228.8 |      | $ | 185.6                |  | 23%  
|                                                 |  |                                 |      
|Segment Profit                                   |  |                                 |       |      |   |                      |  |      
|Learning Center                                  |  | $                               | 45.4  |      | $ | 37.8                 |  | 20%  
|Catapult Learning                                |  |                                 | 6.0   |      |   | 8.4                  |  | (29)%
|                                                 |  |                                 |       |      |   |                      |  |      
|Total Segment Profit                             |  | $                               | 51.4  |      | $ | 46.2                 |  | 11%  
|                                                 |  |                                 |      
|Corporate Expenses                               |  |                                 |       |      |   |                      |  |      
|Corporate depreciation and amortization expenses |  | $                               | 1.2   |      | $ | 1.2                  |  |     
|General and administrative expenses              |  |                                 | 10.4  |      |   | 9.5                  |  | 9%   
|Non-cash stock compensation expense              |  |                                 | 0.3   |      |   | 8.7                  |  | (97)%
|Interest expense, net                            |  |                                 | 5.7   |      |   | 8.0                  |  | (29)%
|Other financing costs                            |  |                                 | 1.5   |      |   | 5.1                  |  | (71)%
|Foreign exchange (gains) and other               |  |                                 | (0.1) |      |   | (0.4)                |  | (75)%
|Income tax expense                               |  |                                 | 12.3  |      |   | 6.8                  |  | 81%  
|                                                 |  |                                 |       |      |   |                      |  |      
|Total Corporate Expenses                         |  |                                 | 31.3  |      |   | 38.9                 |  | (20)%
|                                                 |  |                                 |       |      |   |                      |  |      
|Income from continuing operations                |  | $                               | 20.1  |      | $ | 7.3                  |  | 175% 
|                                                 |  |                                 |       |      |   |                      |  |      
|Business Metrics                                 |  |                                 |       |      |   |                      |  |      
|Segment Profit Margin (1)                        |  |                                 |       |      |   |                      |  |      
|Learning Center                                  |  |                                 | 24%   |      |   | 27%                  |  |      
|Catapult Learning                                |  |                                 | 7%    |      |   | 9%                   |  |      

---

|(1) | Segment profit margin is calculated by dividing segment profit by segment revenue.
|--- | ----------------------------------------------------------------------------------



Segment Operating Costs. Segment operating costs increased primarily due to the expansion of company-owned Learning Center
territories and the acquisition of the Hooked on Phonics line of educational programs.



Learning CenterSegment operating costs increased to 76% of segment revenue for the nine months ended September 30, 2005 compared to 73% in the same period of 2004. Segment operating costs increased by $40.3 million in the
nine-month period ended September 30, 2005 compared to the same period in 2004 primarily as a result of the additional costs associated with operating and integrating the 67 company-owned territories acquired since September 30, 2004.
These costs consist primarily of instructional and advertising costs. Segment costs also increased due to the acquisition of the Hooked on Phonics line of educational programs and the launch of online tutorial services to customers through the
Learning Center network. Current period segment costs also increased due



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Educate, Inc.



to an increased investment in the development of new programs to meet market needs for convenient educational services and programs.
European expenses related to Schülerhilfe increased by $2.1 million, related to $1.6 million in higher costs to support revenue growth and an unfavorable impact of $0.5 million from foreign currency exchange rate movements.



Catapult LearningCosts increased by $2.9 million, or 4% in the nine-month period
ended September 30, 2005 compared to the same period in 2004 primarily due to spending targeted toward increasing student enrollment in Catapult Online, which delivers NCLB instruction to a students home via a live, online environment, as
well as costs associated with enrolling students in our site-based NCLB business, Education Station.



Segment Profit Margin. Learning Center segment profit margins decreased in the nine months ended September 30, 2005 to 24% compared to the prior year period at 27%. The decreased margin is primarily
related to additional costs associated with operating and integrating additional company-owned territories acquired and the related shift in revenue mix from franchise revenues to company-owned territory revenues. This occurs because the operating
income from an acquired territory is comparable to the royalty income earned from a franchisee in the year of acquisition although the revenue recorded increases substantially. The margin decline is also due to the increased investment in program
development costs intended to increase future revenues. Catapult Learning segment profit margins were 7% for the nine months ended September 30, 2005 compared to 9% in the same period of 2004. This margin decline is due to the incurrence of an
increased amount of start-up costs associated with the upcoming school years expanded Catapult Online and site-based NCLB offerings as well as the loss of certain summer school programs served in the prior year. Margins were also negatively
impacted by Hurricane Katrina through the closing of numerous schools in New Orleans and Alabama where Catapult had been scheduled to provide services.



Corporate Expenses. Corporate general and administrative and depreciation and amortization expenses were $11.6 million for the nine-month period ended
September 30, 2005 and $10.7 million during the same period of 2004, but declined as a percentage of revenue from 4.6% in the first nine months of 2004 to 4.1% in the same period of 2005. The increase in the amount of these expenses is in
response to needs to support the expanding business and to operate as a public company. Non-cash stock compensation expense decreased by $8.4 million during the nine-month period ended September 30, 2005 compared to the same period of 2004,
when we issued restricted common stock and granted vested options to employees and directors to purchase common stock at prices less than the estimated fair value of our common stock, which resulted in a significant one-time stock compensation
charge and smaller expense recorded over the vesting period for the remaining award. Net interest expense decreased by $2.3 million primarily as a result of the repayment in September 2004 of a portion of our term loan facility with the proceeds
from our initial public offering, offset partially by an increase in short-term interest rates under the facility. Other financing costs were $1.5 million in the nine-month period ended September 30, 2005 compared to $5.1 million in the same
period of 2004. Both periods included the write-off of deferred financing costs. The 2005 period included $1.5 million of expense related to the substantial modification of our term debt facility. The 2004 period included a $4.8 million write-off
related to the substantial modification of our prior term debt facility and other financing costs related to a terminated financing transaction in 2004. Our income tax expense increased to $12.3 million for the nine months ended September 30,
2005 from $6.8 million for the nine months ended September 30, 2004. This was due to an increase in segment profits combined with a decrease in interest and other financing costs, partially offset by a decrease in the effective tax rate
compared to 2004. Our effective tax rate was 38% for the nine months ended September 30, 2005. During the nine months ended September 30, 2004 our effective tax rate was 48%. The increase in the full year effective tax rate in 2004 was
primarily due to the recording of stock compensation expense in 2004 that resulted in a permanently lower income tax deduction compared to the related compensation expense recorded for financial statement purposes.



Liquidity and Capital Resources



The following table summarizes major changes in our cash
position during the nine-month periods ending:



|                                               |  |                       |       |   |                   |   |       |  
|---------------------------------------------- |  | --------------------- | ----- | - | ----------------- | - | ----- | -
|                                               |  | September 30,2005     |       |   | September 30,2004 |  
|                                               |  | (Dollars in Millions) |      
|Beginning cash balance                         |  | $                     | 14.6  |   |                   | $ | 20.3  |  
|Operating activities  continuing operations   |  |                       | 31.7  |   |                   |   | 33.4  |  
|Operating activities  discontinued operations |  |                       |      |   |                   |   | (1.9  | )
|Investing activities                           |  |                       | (51.1 | ) |                   |   | (11.1 | )
|Financing activities                           |  |                       | 18.1  |   |                   |   | (6.8  | )
|Effect of exchange rates                       |  |                       | (0.6  | ) |                   |   | (0.3  | )
|                                               |  |                       |       |   |                   |   |       |  
|Ending cash balance                            |  | $                     | 12.7  |   |                   | $ | 33.6  |  
|                                               |  |                       |       |   |                   |   |       |  



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Educate, Inc.



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 Learning Center territories, and acquire franchised territories and other businesses.



Our working capital requirements are favorably impacted by the fact that in our largest segment, the Learning Center segment, our operations
generate positive working capital even during growth periods. In our Learning Center business, customers must pay in advance of services, which contributes to our cash position. Company-owned territories benefit from customer prepayment and, in
connection with franchised territories, we receive royalty payments from franchisees based upon net cash collected in the prior month. Our working capital needs are greater in our Catapult Learning segment because our customers are primarily public
school districts that pay us in arrears, often 60 days or longer after we perform our services.



For the nine-month periods ended September 30, 2005 and September 30, 2004, our cash flows from continuing operations were $31.7 million and $33.4 million, respectively. The decrease of $1.7 million was
attributed primarily to cash used to fund working capital changes, offset by an increase in income from continuing operations before non-cash charges of $7.4 million for the nine months ended September 30, 2005 compared to the same period in
2004. The reported income from continuing operations for the nine months ended September 30, 2005 included significant non-cash elements such as deferred income taxes of $6.4 million resulting from tax benefits related to tax basis goodwill
amortization, as well as depreciation and amortization of $6.2 million. The cash used to fund working capital changes of $8.2 million relative to the same period of 2004 consisted of increased investments in accounts receivable and other current
assets of $3.7 million combined with reduced funding from current liabilities of $4.5 million.



Our investing activities have historically consisted of investments in property and equipment and acquisitions of franchised territories and other businesses. 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.



During the nine-month period ended September 30, 2005, we used $9.2 million of cash to acquire Hooked on Phonics net of cash acquired. We invested an additional
$25.7 million in Learning Center acquisitions and $14.1 million in property and equipment and internally developed software.



As described more fully in the unaudited Notes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, on April 28, 2005, we amended
our term loan facility, increasing the term loans outstanding from $118.6 million at March 31, 2005 to $140.0 million. The revolving credit borrowings of $13.0 million were immediately repaid, and the remaining $8.4 million was available for
use in operations, acquisitions or other investments. As a result of the repayment of the borrowings under the revolving credit facility and outstanding standby letters of credit, we had $28.8 million of available credit through that facility as of
September 30, 2005.



We believe that cash flows 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 program and software development and operating costs for the next year. Our
future capital requirements will depend on many factors, including our rate of revenue growth, territory 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



We have guaranteed certain bank loans of franchisees related to financing the purchase of
educational programs and other purchased instructional material. Of the $0.6 million of available credit under this program, $0.1 million was outstanding at September 30, 2005. These guarantees are secured by the assets of the business of the
individual franchisee utilizing this financing arrangement.



The Company
maintains a number of standby letters of credit totaling $1.2 million as of September 30, 2005 to guarantee its insurance program and the potential payment under a franchisee acquisition through 2008.



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.



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Educate, Inc.



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.



Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2004.



New Accounting Pronouncements



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (Statement 123(R)), which is a revision of Statement 123. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
income statement based on their estimated fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) was originally required to be adopted no later than July 1, 2005. On April 14, 2005 the SEC announced that non-small business registrants would not be required to adopt Statement 123(R)
until the first fiscal year beginning after June 15, 2005 which effectively extended the adoption deadline for the Company to January 1, 2006. The Company expects to adopt the standard on January 1, 2006. Statement 123(R) permits
public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of proforma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company will adopt the provisions of Statement 123(R) on January 1, 2006,
using the modified prospective method. Unvested stock-based awards issued prior to May 14, 2004 and disclosed in the financial statements using the minimum value method (rather than the estimated fair value using the Black-Scholes
option-pricing model) will be accounted for at the date of adoption using the intrinsic value method originally applied to those awards. Awards issued after May 14, 2004 and through December 31, 2005 that have not vested will be accounted
for at the date of adoption using the same estimate of the grant-date fair value disclosed in the historical financial statements. See also Note 1, Stock-Based Compensation.



As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method and, as
such, recognizes no compensation cost when employee stock options are granted with exercise prices equal to the market price of the shares on the date of grant. Accordingly, the adoption of Statement 123(R)s fair value method may have a
significant impact on the Companys results of operations, although it will have no impact on our financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend significantly on levels of
share-based payments granted in the future.



Cash retained as a result of
excess tax benefits relating to share-based payments will be presented in the statement of cash flows as financing cash inflows. Previously, the cash retained from excess tax benefits was presented in operating cash flows along with other tax cash
flows.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to certain market risks, which exist as part of our ongoing business operations. We use derivative financial instruments, where appropriate, to manage these risks. As a matter of policy, we do not
engage in trading or speculative transactions. Refer to Note 1 within Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004 for further information on accounting policies related to
derivative financial instruments.



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Educate, Inc.



Foreign Currency Risk



In the third quarter of 2005, approximately 10% of our revenues were derived from customers outside the United States. Most of this business is transacted through
international subsidiaries, generally in the local currency that is considered the functional currency of that foreign subsidiary. Expenses are also incurred in the foreign currencies to match revenues earned and minimize the exchange rate exposure
of our operating margins. A hypothetical 10% adverse change in average annual foreign currency movements would have decreased both net income and cash flows for the nine months ended September 30, 2005 by $0.3 million. We are also exposed to
fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. We generally view our equity investment in foreign subsidiaries as long-term. The effects of a change in foreign
currency exchange rates on our net investment in foreign subsidiaries are reflected in other comprehensive income (loss). A hypothetical 10% average change in depreciation in functional currencies relative to the U.S. dollar would have resulted in a
decrease in our net investment in foreign subsidiaries of approximately $2.0 million at September 30, 2005.



Interest Rate Risk



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



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



Note 5 of the Notes to Consolidated Financial Statements (Unaudited) of Educate, Inc. in this
Quarterly Report on Form 10-Q provides information on our significant indebtedness and our interest rate swap agreements. The total notional amount of interest rate swaps at September 30, 2005 was $50.0 million, representing a settlement asset
of $0.9 million. Assuming average variable rate debt levels, a one percentage point increase in interest rates would have increased interest expense by approximately $0.5 million in the nine months ended September 30, 2005.



All the potential impacts noted above are based on sensitivity analysis performed on our
financial position at September 30, 2005. Actual results may differ materially.



ITEM 4. CONTROLS AND PROCEDURES



The
Companys management, with the participation of our principal executive and principal financial officers, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of September 30, 2005. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in reports that the Company
files or submits under the Exchange Act has been appropriately recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the
Companys management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on such 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 as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act that occurred during the quarter ended September 30, 2005, and has concluded that there was no change that occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably
likely to materially affect, the Companys internal controls over financial reporting.



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Educate, Inc.



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



The
Company is involved in various lawsuits in the ordinary course of business, usually related to employment matters or commercial disputes. The Company maintains liability insurance to cover claims over a deductible amount. In the opinion of
management, amounts accrued for exposure relating to legal proceedings are adequate and, accordingly, the ultimate resolution of these matters is not expected to have a material adverse effect on the Companys consolidated financial statements.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None



ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None



ITEM 5. OTHER INFORMATION - None



ITEM 6. EXHIBITS



|            |  |                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|IndexNumber |  |                                                                                                                                                                
|3.1         |  | Amended and Restated Certificate of Incorporation of Educate, Inc., a Delaware corporation (1)                                                                 
|            | 
|3.2         |  | Amended and Restated By-laws of Educate, inc., a Delaware corporation (2)                                                                                      
|            | 
|4.1         |  | Form of Registration Rights Agreement, by and among Educate, Inc., and certain of its stockholders (2)                                                         
|            | 
|31(i).1     |  | Certification of R. Christopher Hoehn-Saric pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                          
|            | 
|31(i).2     |  | Certification of Kevin Shaffer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                       
|            | 
|32.1        |  | Certification of R. Christopher Hoehn-Saric pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                          
|            | 
|32.2        |  | Certification of Kevin Shaffer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                       
|            | 
|(1)         |  | Incorporated by reference to the Registrants Registration Statement on Form 8-A filed on September 22, 2004.                                                  
|            | 
|(2)         |  | Incorporated by reference to the Registrants Registration Statement on Form S-1 originally filed on May 14, 2004 and declared effective on September 22, 2004.



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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, hereunto duly authorized.



| |  |                         |  |                        
| |  | ----------------------- |  | -----------------------
| |  |                         |  | Educate, Inc.          
| |  |                        
| |  | Date: November 14, 2005 |  | /s/ Kevin E. Shaffer   
| |  |                         |  | Kevin E. Shaffer       
| |  |                         |  | Chief Financial Officer



31