---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1



|x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006 or
|- | -----------------------------------------------------------------------------------------------------------------------------------



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

Commission File Number 000-50952

EDUCATE, INC.

(Exact name of registrant as specified in its charter)



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



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

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

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



|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|Common stock, par value $0.01 per share |  | NASDAQ Global Select Market              

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ̈No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

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

The aggregate market value of the common stock held by non-affiliates computed using the closing stock price on the NASDAQ Global Select Market as of June 30, 2006
was $131,021,245. For purposes of this calculation, the registrant considers directors, executive officers and holders of more than 5% of the outstanding common stock to be affiliates. The registrant had 43,163,307 shares of common stock outstanding
as of March 5, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

None



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Explanatory Note:

This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of Educate, Inc. (the
Company) for the fiscal year ended December 31, 2006 is being filed for the purpose of providing the information required by Part III of the Annual Report on Form 10-K, which the Company is no longer incorporating by reference to its
proxy statement. Part III is hereby amended and restated in its entirety. In addition, this Amendment No. 1 on Form 10-K/A is being filed to supplement the current disclosure in Note 16 of Item 8 of Part II with the tabular presentation of the
adjustment to the financial statement line items in the quarters ended June 30, 2006 and September 30, 2006 as a result of the error discussed in Note 16.

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), new certifications of our principal executive officer and principal financial officer are being filed as exhibits to this
Amendment No. 1 on Form 10-K/A. In addition, a revised consent of Ernst & Young LLP, Independent Registered Public Accounting Firm is filed herewith as part of Item 15 of Part IV. No other information contained in the original filing is amended
hereby. This amendment does not modify or update disclosures in the original filing. Furthermore, except for the matters described above, this amendment does not change any previously reported financial results, nor does it reflect events occurring
after the date of the original filing.



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PART II



|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

INDEX TO THE FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|EDUCATE, INC.                                                                                        |  |     
|Report of Independent Registered Public Accounting Firm  Consolidated Financial Statements          |  | 2   
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                         |  | 3   
|Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004           |  | 5   
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2005 and 2004 |  | 6   
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004           |  | 7   
|Notes to Consolidated Financial Statements                                                           |  | 9   



1



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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Educate, Inc.

We have audited the accompanying consolidated balance sheets
of Educate, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Educate, Inc. at December 31, 2006 and 2005, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that Educate, Inc. will continue as a going concern. As more fully described in Note 6, at December 31, 2006 the Company did not comply with
covenants of loan agreements with a syndicate of banks. Although the Company obtained a waiver of these defaults as of December 31, 2006, it is likely that the Company will need to obtain additional waivers of these covenants in 2007 to avoid
triggering the debts demand repayment provisions. Accordingly, at December 31, 2006 the Company classified $175.8 million of long-term debt in default as a current liability, thereby resulting in a working capital deficit of $170.0
million. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters also are described in Note 17. The 2006 financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

As discussed more fully in Note 9 to the consolidated financial statements, on January 1, 2006 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment,and changed its method of accounting for share-based payments using the modified prospective transition method.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Educate, Inc.s internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion on
managements assessment, and an adverse opinion on the effectiveness of internal control over financial reporting.

/s/ Ernst & Young LLP

Baltimore, Maryland

March 15, 2007



2



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Educate, Inc.

Consolidated Balance Sheets

(Dollar amounts in thousands)



|                                                           |  |                  |         |   |                  |   |         |  
|---------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                           |  | December 31,2006 |         |   | December 31,2005 |  
|Assets                                                     |  |                  |         |   |                  |   |         |  
|Current assets:                                            |  |                  |         |   |                  |   |         |  
|Cash and cash equivalents                                  |  | $                | 535     |   |                  | $ | 2,414   |  
|Receivables:                                               |  |                  |         |   |                  |   |         |  
|Accounts receivable                                        |  |                  | 53,891  |   |                  |   | 51,883  |  
|Notes receivable                                           |  |                  | 183     |   |                  |   | 140     |  
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  |                  | 54,074  |   |                  |   | 52,023  |  
|Allowances                                                 |  |                  | (4,949  | ) |                  |   | (4,764  | )
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  |                  | 49,125  |   |                  |   | 47,259  |  
|Finished goods inventory                                   |  |                  | 14,885  |   |                  |   | 11,685  |  
|Prepaid expenses                                           |  |                  | 3,313   |   |                  |   | 3,246   |  
|Other current assets                                       |  |                  | 818     |   |                  |   | 1,958   |  
|Other receivables                                          |  |                  | 3,224   |   |                  |   | 5,667   |  
|Deferred income taxes                                      |  |                  | 2,169   |   |                  |   | 24      |  
|Assets of discontinued operations held for sale            |  |                  |        |   |                  |   | 1,683   |  
|                                                           |  |                  |         |   |                  |   |         |  
|Total current assets                                       |  |                  | 74,069  |   |                  |   | 73,936  |  
|Property and equipment:                                    |  |                  |         |   |                  |   |         |  
|Furniture and fixtures                                     |  |                  | 6,398   |   |                  |   | 5,190   |  
|Education materials                                        |  |                  | 4,918   |   |                  |   | 3,950   |  
|Computer equipment and software                            |  |                  | 14,751  |   |                  |   | 10,770  |  
|Leasehold improvements                                     |  |                  | 19,481  |   |                  |   | 14,013  |  
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  |                  | 45,548  |   |                  |   | 33,923  |  
|Accumulated depreciation and amortization                  |  |                  | (22,677 | ) |                  |   | (14,854 | )
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  |                  | 22,871  |   |                  |   | 19,069  |  
|Intangible assets:                                         |  |                  |         |   |                  |   |         |  
|Goodwill                                                   |  |                  | 93,148  |   |                  |   | 92,077  |  
|Tradenames                                                 |  |                  | 148,489 |   |                  |   | 147,894 |  
|Franchise license rights                                   |  |                  | 91,914  |   |                  |   | 90,590  |  
|Other intangible assets                                    |  |                  | 23,951  |   |                  |   | 11,295  |  
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  |                  | 357,502 |   |                  |   | 341,856 |  
|Accumulated amortization                                   |  |                  | (6,254  | ) |                  |   | (2,957  | )
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  |                  | 351,248 |   |                  |   | 338,899 |  
|Noncurrent assets of discontinued operations held for sale |  |                  |        |   |                  |   | 9,755   |  
|Other assets                                               |  |                  | 16,589  |   |                  |   | 10,229  |  
|                                                           |  |                  |         |   |                  |   |         |  
|Total assets                                               |  | $                | 464,777 |   |                  | $ | 451,888 |  
|                                                           |  |                  |         |   |                  |   |         |  

See notes to consolidated financial statements.



3



---

Educate, Inc.



Consolidated Balance Sheets (continued)

(Dollar amounts in thousands, except per share data)



|                                                                                                                                                                                  |  |                  |         |                  |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                  |  | December 31,2006 |         | December 31,2005
|Liabilities and stockholders equity                                                                                                                                              |  |                  |         |                  |   |        
|Current liabilities:                                                                                                                                                              |  |                  |         |                  |   |        
|Accounts payable and accrued expenses                                                                                                                                             |  | $                | 31,914  |                  | $ | 25,312 
|Accrued compensation and related benefits                                                                                                                                         |  |                  | 10,967  |                  |   | 13,203 
|Income taxes payable                                                                                                                                                              |  |                  | 1,063   |                  |   | 724    
|Current portion of long-term debt                                                                                                                                                 |  |                  | 176,597 |                  |   | 2,734  
|Deferred revenue                                                                                                                                                                  |  |                  | 23,271  |                  |   | 23,340 
|Other current liabilities                                                                                                                                                         |  |                  | 260     |                  |   | 231    
|                                                                                                                                                                                  |  |                  |         |                  |   |        
|Total current liabilities                                                                                                                                                         |  |                  | 244,072 |                  |   | 65,544 
|Long-term debt, less current portion                                                                                                                                              |  |                  | 1,760   |                  |   | 160,114
|Other long-term liabilities                                                                                                                                                       |  |                  | 5,900   |                  |   | 4,703  
|Deferred income taxes                                                                                                                                                             |  |                  | 8,064   |                  |   | 9,819  
|                                                                                                                                                                                  |  |                  |         |                  |   |        
|Total liabilities                                                                                                                                                                 |  |                  | 259,796 |                  |   | 240,180
|Commitments and contingencies                                                                                                                                                     |  |                  |        |                  |   |       
|Stockholders equity:                                                                                                                                                             |  |                  |         |                  |   |        
|Common stock, par value $0.01, 120,000,000 shares authorized, 43,154,123 and 42,731,868 shares issued and outstanding as of December 31,
2006 and December 31, 2005, respectively |  |                  | 432     |                  |   | 427    
|Additional paid-in capital                                                                                                                                                        |  |                  | 195,639 |                  |   | 192,608
|Retained earnings                                                                                                                                                                 |  |                  | 6,323   |                  |   | 18,212 
|Accumulated other comprehensive income                                                                                                                                            |  |                  | 2,587   |                  |   | 461    
|                                                                                                                                                                                  |  |                  |         |                  |   |        
|Total stockholders equity                                                                                                                                                        |  |                  | 204,981 |                  |   | 211,708
|                                                                                                                                                                                  |  |                  |         |                  |   |        
|Total liabilities and stockholders equity                                                                                                                                        |  | $                | 464,777 |                  | $ | 451,888
|                                                                                                                                                                                  |  |                  |         |                  |   |        

See notes to consolidated financial statements.



4



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Educate, Inc.

Consolidated Statements of Operations

(Dollar amounts in thousands, except per share data)



|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                          |  | Year ended December 31, |        
|                                                                                                                          |  | 2006                    |         |   | 2005 |   |         | 2004 | 
|Revenues                                                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Service revenues                                                                                                          |  | $                       | 329,996 |   |      | $ | 296,629 |      |  | $ | 265,095 |  
|Net product sales                                                                                                         |  |                         | 24,672  |   |      |   | 33,785  |      |  |   | 8,029   |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                                                                            |  |                         | 354,668 |   |      |   | 330,414 |      |  |   | 273,124 |  
|Costs and expenses                                                                                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Instructional and franchise operations costs (1) (2)                                                                      |  |                         | 266,142 |   |      |   | 217,107 |      |  |   | 179,934 |  
|Marketing and advertising                                                                                                 |  |                         | 35,584  |   |      |   | 30,074  |      |  |   | 22,950  |  
|Cost of goods sold (2)                                                                                                    |  |                         | 20,500  |   |      |   | 16,080  |      |  |   | 4,652   |  
|Depreciation and amortization (2)                                                                                         |  |                         | 8,447   |   |      |   | 6,787   |      |  |   | 6,300   |  
|General and administrative expenses (1)                                                                                   |  |                         | 18,052  |   |      |   | 14,721  |      |  |   | 21,092  |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Total costs and expenses                                                                                                  |  |                         | 348,725 |   |      |   | 284,769 |      |  |   | 234,928 |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating income                                                                                                          |  |                         | 5,943   |   |      |   | 45,645  |      |  |   | 38,196  |  
|Other income (expense)                                                                                                    |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest income                                                                                                           |  |                         | 411     |   |      |   | 411     |      |  |   | 380     |  
|Interest expense                                                                                                          |  |                         | (12,759 | ) |      |   | (7,932  | )    |  |   | (9,778  | )
|Other financing costs                                                                                                     |  |                         | (1,149  | ) |      |   | (1,506  | )    |  |   | (5,420  | )
|Foreign exchange gains (losses) and other                                                                                 |  |                         | (486    | ) |      |   | 142     |      |  |   | 1,159   |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before income taxes                                                              |  |                         | (8,040  | ) |      |   | 36,760  |      |  |   | 24,537  |  
|Income tax expense                                                                                                        |  |                         | (644    | ) |      |   | (14,749 | )    |  |   | (11,090 | )
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                                                  |  |                         | (8,684  | ) |      |   | 22,011  |      |  |   | 13,447  |  
|Loss from discontinued operations, net of income tax benefit of $973 in 2006, $4,404 in 2005 and $4,068 in 2004           |  |                         | (1,957  | ) |      |   | (6,606  | )    |  |   | (7,118  | )
|Gain (loss) on disposal of discontinued operations, net of income tax benefit (expense) of $620 in 2006 and ($51) in 2004 |  |                         | (1,248  | ) |      |   |        |      |  |   | 83      |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                                         |  | $                       | (11,889 | ) |      | $ | 15,405  |      |  | $ | 6,412   |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Dividends per common share                                                                                                |  | $                       |        |   |      | $ |        |      |  | $ | 0.24    |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Earnings (loss) per common share - basic                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                                                  |  | $                       | (0.20   | ) |      | $ | 0.52    |      |  | $ | 0.35    |  
|Loss from discontinued operations, net of tax                                                                             |  |                         | (0.08   | ) |      |   | (0.16   | )    |  |   | (0.18   | )
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                                         |  | $                       | (0.28   | ) |      | $ | 0.36    |      |  | $ | 0.17    |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Earnings (loss) per common share  diluted                                                                                |  |                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                                                  |  | $                       | (0.20   | ) |      | $ | 0.50    |      |  | $ | 0.34    |  
|Loss from discontinued operations, net of tax                                                                             |  |                         | (0.08   | ) |      |   | (0.15   | )    |  |   | (0.18   | )
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                                         |  | $                       | (0.28   | ) |      | $ | 0.35    |      |  | $ | 0.16    |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|(1) Line item includes non-cash stock compensation as follows:                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Instructional and franchise operations costs                                                                              |  | $                       | 553     |   |      | $ | 246     |      |  | $ | 788     |  
|General and administrative expenses                                                                                       |  |                         | 409     |   |      |   | 217     |      |  |   | 8,059   |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Total                                                                                                                     |  | $                       | 962     |   |      | $ | 463     |      |  | $ | 8,847   |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|(2) Amount of depreciation and amortization directly attributed to generation of revenue excluded from:                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Instructional and franchise operations costs                                                                              |  | $                       | 6,701   |   |      | $ | 5,123   |      |  | $ | 4,531   |  
|Cost of goods sold                                                                                                        |  |                         | 129     |   |      |   | 26      |      |  |   | 95      |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Total                                                                                                                     |  | $                       | 6,830   |   |      | $ | 5,149   |      |  | $ | 4,626   |  
|                                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  

See notes to consolidated financial statements.



5



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Educate, Inc.

Consolidated Statement of Stockholders Equity

(Dollar amounts in thousands)



|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | ------------------------ | - | ------- | ---------------- |  | - | ----------------------------------- | - |  | ------------------------ | ------ | - |  | - | ------- | -
|                                                                                                              |  | CommonStock |     | AdditionalPaid-inCapital |   |         | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TotalStockholdersEquity |       
|Balance at January 1, 2004                                                                                    |  | $           | 368 |                          | $ | 137,336 |                  |  | $ | 1,701                               |   |  | $                        | 2,502  |   |  | $ | 141,907 |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Options exercised for purchase of 182,583 shares of common stock, including excess income tax benefit of $126 |  |             | 2   |                          |   | 802     |                  |  |   |                                    |   |  |                          |       |   |  |   | 804     |  
|Issuance of 604,000 shares of restricted stock to employees for cash and services                             |  |             | 6   |                          |   | 7,598   |                  |  |   |                                    |   |  |                          |       |   |  |   | 7,604   |  
|Issuance of 5,000,000 shares of common stock (less direct costs of issuance of $7,317)                        |  |             | 50  |                          |   | 47,633  |                  |  |   |                                    |   |  |                          |       |   |  |   | 47,683  |  
|Issuance of options to purchase common stock to employees and directors                                       |  |             |    |                          |   | 1,327   |                  |  |   |                                    |   |  |                          |       |   |  |   | 1,327   |  
|Cash dividends to stockholders                                                                                |  |             |    |                          |   | (3,694  | )                |  |   | (5,306                              | ) |  |                          |       |   |  |   | (9,000  | )
|Comprehensive income:                                                                                         |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Net income for 2004                                                                                           |  |             |    |                          |   |        |                  |  |   | 6,412                               |   |  |                          |       |   |  |   | 6,412   |  
|Other comprehensive income:                                                                                   |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Change in fair value of derivative financial instrument                                                       |  |             |    |                          |   |        |                  |  |   |                                    |   |  |                          | 303    |   |  |   | 303     |  
|Foreign currency translation adjustment                                                                       |  |             |    |                          |   |        |                  |  |   |                                    |   |  |                          | 661    |   |  |   | 661     |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Total comprehensive income                                                                                    |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   | 7,376   |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Balance at December 31, 2004                                                                                  |  |             | 426 |                          |   | 191,002 |                  |  |   | 2,807                               |   |  |                          | 3,466  |   |  |   | 197,701 |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Options exercised for purchase of 146,967 shares of common stock, including excess income tax benefit of $577 |  |             | 1   |                          |   | 1,143   |                  |  |   |                                    |   |  |                          |       |   |  |   | 1,144   |  
|Non-cash stock compensation expense                                                                           |  |             |    |                          |   | 463     |                  |  |   |                                    |   |  |                          |       |   |  |   | 463     |  
|Comprehensive income:                                                                                         |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Net income for 2005                                                                                           |  |             |    |                          |   |        |                  |  |   | 15,405                              |   |  |                          |       |   |  |   | 15,405  |  
|Other comprehensive income (loss):                                                                            |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Change in fair value of derivative financial instrument                                                       |  |             |    |                          |   |        |                  |  |   |                                    |   |  |                          | 411    |   |  |   | 411     |  
|Foreign currency translation adjustment                                                                       |  |             |    |                          |   |        |                  |  |   |                                    |   |  |                          | (3,416 | ) |  |   | (3,416  | )
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Total comprehensive income (loss)                                                                             |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   | 12,400  |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Balance at December 31, 2005                                                                                  |  |             | 427 |                          |   | 192,608 |                  |  |   | 18,212                              |   |  |                          | 461    |   |  |   | 211,708 |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Options exercised for purchase of 319,606 shares of common stock                                              |  |             | 4   |                          |   | 1,183   |                  |  |   |                                    |   |  |                          |       |   |  |   | 1,187   |  
|Issuance of 102,649 shares of common stock for 401(k) match                                                   |  |             | 1   |                          |   | 845     |                  |  |   |                                    |   |  |                          |       |   |  |   | 846     |  
|Non-cash stock compensation expense                                                                           |  |             |    |                          |   | 1,003   |                  |  |   |                                    |   |  |                          |       |   |  |   | 1,003   |  
|Comprehensive income:                                                                                         |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Net loss for 2006                                                                                             |  |             |    |                          |   |        |                  |  |   | (11,889                             | ) |  |                          |       |   |  |   | (11,889 | )
|Other comprehensive income (loss):                                                                            |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Change in fair value of derivative financial instrument                                                       |  |             |    |                          |   |        |                  |  |   |                                    |   |  |                          | (360   | ) |  |   | (360    | )
|Foreign currency translation adjustment                                                                       |  |             |    |                          |   |        |                  |  |   |                                    |   |  |                          | 2,486  |   |  |   | 2,486   |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Total comprehensive income (loss)                                                                             |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   | (9,763  | )
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  
|Balance at December 31, 2006                                                                                  |  | $           | 432 |                          | $ | 195,639 |                  |  | $ | 6,323                               |   |  | $                        | 2,587  |   |  | $ | 204,981 |  
|                                                                                                              |  |             |     |                          |   |         |                  |  |   |                                     |   |  |                          |        |   |  |   |         |  

See notes to consolidated financial statements.



6



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Educate, Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)



|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                                                                              |  | Year ended December 31, |        
|                                                                                                                                              |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Operating activities                                                                                                                          |  |                         |         |   |      |   |        |      |  |   |         |  
|Net income (loss)                                                                                                                             |  | $                       | (11,889 | ) |      | $ | 15,405 |      |  | $ | 6,412   |  
|Loss from discontinued operations                                                                                                             |  |                         | 1,957   |   |      |   | 6,606  |      |  |   | 7,118   |  
|(Gain) loss on disposal of discontinued operations                                                                                            |  |                         | 1,248   |   |      |   |       |      |  |   | (83     | )
|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Income (loss) from continuing operations                                                                                                      |  |                         | (8,684  | ) |      |   | 22,011 |      |  |   | 13,447  |  
|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operations:                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Depreciation                                                                                                                                  |  |                         | 7,739   |   |      |   | 6,068  |      |  |   | 5,851   |  
|Amortization                                                                                                                                  |  |                         | 708     |   |      |   | 719    |      |  |   | 449     |  
|Bad debt expense                                                                                                                              |  |                         | 2,138   |   |      |   | 612    |      |  |   | 622     |  
|Deferred income taxes                                                                                                                         |  |                         | (2,363  | ) |      |   | 7,276  |      |  |   | 4,858   |  
|Amortization of copyrights and software and media intangible assets                                                                           |  |                         | 3,267   |   |      |   | 1,616  |      |  |   |        |  
|Non-cash stock compensation                                                                                                                   |  |                         | 962     |   |      |   | 463    |      |  |   | 8,847   |  
|Other financing costs                                                                                                                         |  |                         | 1,149   |   |      |   | 1,506  |      |  |   | 5,747   |  
|Other non-cash items                                                                                                                          |  |                         | 1,501   |   |      |   | 210    |      |  |   | (664    | )
|Changes in operating assets and liabilities:                                                                                                  |  |                         |         |   |      |   |        |      |  |   |         |  
|Receivables                                                                                                                                   |  |                         | (3,803  | ) |      |   | (7,858 | )    |  |   | 2,075   |  
|Prepaid expenses and other current assets                                                                                                     |  |                         | 1,080   |   |      |   | (482   | )    |  |   | (1,168  | )
|Inventory                                                                                                                                     |  |                         | (2,808  | ) |      |   | (7,522 | )    |  |   | (2,082  | )
|Other assets                                                                                                                                  |  |                         | (1,113  | ) |      |   | (382   | )    |  |   | 1,971   |  
|Accounts payable, accrued expenses, and other current liabilities                                                                             |  |                         | 5,098   |   |      |   | 3,645  |      |  |   | (9,103  | )
|Income taxes payable                                                                                                                          |  |                         | 4,360   |   |      |   | (3,744 | )    |  |   | 233     |  
|Deferred revenue                                                                                                                              |  |                         | 1       |   |      |   | (6,718 | )    |  |   | 2,070   |  
|Accrued compensation and related benefits                                                                                                     |  |                         | (2,270  | ) |      |   | (970   | )    |  |   | 1,431   |  
|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Net cash provided by continuing operations                                                                                                    |  |                         | 6,962   |   |      |   | 16,450 |      |  |   | 34,584  |  
|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Adjustments for discontinued operations to reconcile net cash provided by continuing operations to net cash provided by operating
activities: |  |                         |         |   |      |   |        |      |  |   |         |  
|Loss from discontinued operations, including loss on disposal                                                                                 |  |                         | (3,205  | ) |      |   | (6,606 | )    |  |   | (7,035  | )
|(Gain) loss on disposal of discontinued operations                                                                                            |  |                         | 1,248   |   |      |   |       |      |  |   | (83     | )
|Changes in operating assets and liabilities                                                                                                   |  |                         | 6,142   |   |      |   | (853   | )    |  |   | (5,632  | )
|Depreciation and other non-cash items                                                                                                         |  |                         | 41      |   |      |   | 1,732  |      |  |   | 1,763   |  
|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Net cash provided by (used in) discontinued operations                                                                                        |  |                         | 4,226   |   |      |   | (5,727 | )    |  |   | (10,987 | )
|                                                                                                                                              |  |                         |         |   |      |   |        |      |  |   |         |  
|Net cash provided by operating activities                                                                                                     |  |                         | 11,188  |   |      |   | 10,723 |      |  |   | 23,597  |  

(continued on the following page)

See notes to consolidated financial statements.



7



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Educate, Inc.



Consolidated Statements of Cash Flows (continued)

(Dollar amounts in thousands)



|                                                                                                                                        |  |                         |         |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                                                        |  | Year ended December 31, |        
|                                                                                                                                        |  | 2006                    |         |   | 2005 |   |          | 2004 | 
|Investing activities                                                                                                                    |  |                         |         |   |      |   |          |      |  |   |          |  
|Cash paid for acquired businesses, net of cash acquired (including acquisition costs of $795 in 2006, $1,521 in 2005, and $361 in
2004) |  | $                       | (6,212  | ) |      | $ | (37,885  | )    |  | $ | (8,830   | )
|Proceeds from sale of discontinued operations                                                                                           |  |                         | 1,698   |   |      |   |         |      |  |   | 2,166    |  
|Cash paid for internally developed software and media                                                                                   |  |                         | (8,624  | ) |      |   | (5,030   | )    |  |   | (3,699   | )
|Purchases of property and equipment                                                                                                     |  |                         | (11,784 | ) |      |   | (12,441  | )    |  |   | (5,079   | )
|Net investing activities of discontinued operations                                                                                     |  |                         | (1,479  | ) |      |   | (2,527   | )    |  |   | (2,804   | )
|Change in other assets                                                                                                                  |  |                         | (3,793  | ) |      |   | (2,629   | )    |  |   | (988     | )
|                                                                                                                                        |  |                         |         |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                                                                   |  |                         | (30,194 | ) |      |   | (60,512  | )    |  |   | (19,234  | )
|Financing activities                                                                                                                    |  |                         |         |   |      |   |          |      |  |   |          |  
|Proceeds from exercises of stock options                                                                                                |  |                         | 1,249   |   |      |   | 567      |      |  |   | 552      |  
|Proceeds from issuance of common stock (less cash paid for direct costs of issuance of $7,317)                                          |  |                         |        |   |      |   |         |      |  |   | 47,689   |  
|Borrowings on revolving credit facility                                                                                                 |  |                         | 30,000  |   |      |   | 33,000   |      |  |   |         |  
|Payments on revolving credit facility                                                                                                   |  |                         | (33,000 | ) |      |   | (13,000  | )    |  |   |         |  
|Cash received upon issuance of debt                                                                                                     |  |                         | 21,050  |   |      |   | 140,000  |      |  |   | 170,000  |  
|Payments on debt                                                                                                                        |  |                         | (2,861  | ) |      |   | (123,629 | )    |  |   | (216,558 | )
|Dividends paid                                                                                                                          |  |                         |        |   |      |   |         |      |  |   | (9,000   | )
|Deferred financing costs                                                                                                                |  |                         | (1,005  | ) |      |   | (427     | )    |  |   | (3,574   | )
|Change in other long-term liabilities                                                                                                   |  |                         | 1,188   |   |      |   | 1,092    |      |  |   | 820      |  
|                                                                                                                                        |  |                         |         |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                                                                     |  |                         | 16,621  |   |      |   | 37,603   |      |  |   | (10,071  | )
|Effect of exchange rate changes on cash                                                                                                 |  |                         | 506     |   |      |   | 8        |      |  |   | 40       |  
|                                                                                                                                        |  |                         |         |   |      |   |          |      |  |   |          |  
|Net change in cash and cash equivalents                                                                                                 |  |                         | (1,879  | ) |      |   | (12,178  | )    |  |   | (5,668   | )
|Cash and cash equivalents at beginning of year                                                                                          |  |                         | 2,414   |   |      |   | 14,592   |      |  |   | 20,260   |  
|                                                                                                                                        |  |                         |         |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                                                                                |  | $                       | 535     |   |      | $ | 2,414    |      |  | $ | 14,592   |  
|                                                                                                                                        |  |                         |         |   |      |   |          |      |  |   |          |  
|Supplemental cash flow information:                                                                                                     |  |                         |         |   |      |   |          |      |  |   |          |  
|Interest paid                                                                                                                           |  | $                       | 14,663  |   |      | $ | 7,834    |      |  | $ | 13,372   |  
|Income taxes paid (excluding tax refunds of $4,579 in 2006)                                                                             |  | $                       | 1,286   |   |      | $ | 6,480    |      |  | $ | 343      |  

See notes to consolidated financial statements.



8



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Educate, Inc.

Notes to Consolidated Financial Statements

(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, Educate or we) is a leading pre-K-12 education company delivering supplemental education services and products to students and their
families. For over 25 years, we have provided trusted, personalized instruction to millions of students improving their academic achievement and helping them experience the joy of learning.

We provide supplemental, remedial and enrichment instruction through Sylvan Learning - North Americas largest network of tutoring centers. We are also the leading
provider of educational services to public and non-public schools through our school partnership business, Catapult Learning. We also deliver educational products, including the highly regarded Hooked on Phonics early reading, math and study skills
programs through our Educate Products business. See Note 15 for further discussion of the Companys business segments.

Basis of Presentation

The accompanying consolidated financial statements represent the consolidated financial position, results of operations and cash flows of the
Company prepared in accordance with accounting principles generally accepted in the United States. The Companys management has made estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ
from those estimates. All significant intercompany transactions and balances have been eliminated in consolidation.

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 Franchise Services and Company-Owned Centers segments generally experience
lower revenues in the fourth quarter. 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. As a result of these factors, quarter-to-quarter comparisons of results of operation may not be indicative of future results of operations.

On August 23, 2006, the Company completed the sale of its Education Station business. Also, on September 20, 2004, Educate, Inc. sold its subsidiary
Connections Academy, Inc., an operator of K-8 virtual public and charter schools. The accompanying consolidated financial statements present the results of operations of Education Station and Connections Academy as discontinued operations. See also
Note 2.

The Company consolidates investments where it has a controlling financial interest. The usual condition for a controlling financial interest is
ownership of a majority of the voting interest and, therefore, as a general rule ownership, directly or indirectly, of over fifty percent of the outstanding voting shares is a condition for consolidation. For investments in variable interest
entities, as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, the Company consolidates when it is determined to be the primary beneficiary of the
variable interest entity. The Company is not the primary beneficiary of any variable interest entity.

Summary of Significant Accounting Policies

Cash Equivalents

The Company considers
all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Allowances for Accounts Receivable

The Company reports accounts and notes receivable at net realizable value. The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments. The Company calculates the allowance based on a specific analysis of past due balances and also considers historical trends of write-offs. Past due status is based



9



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on how recently payments have been received by customers. Actual collection experience has not differed significantly from the Companys estimates, due
primarily to credit and collections practices and the financial strength of its customers. Balances are written off when management determines that collection is unlikely. Accounts and notes receivable balances due from franchisees are secured by
the assets of the franchisees business. Other accounts receivable balances, primarily due from governmental agencies, product distributors and retailer, are not collateralized.

Sales of educational products to retailers and product distributors generally allow the customer to return the product for a full refund or credit. The Company provides an allowance against accounts receivable to
estimate the value of products that will be returned and to state accounts receivable at net realizable value. The allowance is calculated based upon historical return experience giving specific consideration to customer type.

Inventory

Inventory, consisting primarily of educational and
instructional products for sale to retailers and consumers, and educational programs and materials for sale to franchisees, is stated at the lower of cost (average cost) or market value.

Cost of Goods Sold

Cost of goods sold includes the materials and production cost of inventory sold during the
period as well as shipping and distribution costs of the products. Cost of goods sold also includes the amortization of the costs of computer software and media developed for sale to third parties.

Property and Equipment

Property and equipment is stated at
cost. Included in property and equipment are the direct costs of developing or obtaining software for internal use. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold
improvements is computed using the straight-line method over the lesser of the useful life of the asset or the remaining term of the lease.

Useful lives
are as follows:



|                                |  |            
|------------------------------- |  | -----------
|Furniture and fixtures          |  | 2  7 years
|Education materials             |  | 2  5 years
|Computer equipment and software |  | 2  3 years
|Leasehold improvements          |  | Lease term 

Goodwill

Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired. The Company does not amortize goodwill, but rather reviews its carrying value for impairment
annually, and whenever an impairment indicator is identified. The Company performs impairment tests for goodwill and indefinite lived intangible assets as of October 1 of each year.

The goodwill impairment test involves a two-step approach. Under the first step, the Company determines the fair value of each reporting unit to which goodwill has been assigned. The reporting units of the Company for
purposes of the impairment test are the Companys major operating subsidiaries, as these are the components of reportable segments for which discrete financial information is available and segment management regularly reviews the operating
results of those components. The Company then compares the fair value of each reporting unit to its carrying value, including goodwill. The Company estimates the fair value of each reporting unit by estimating the present value of the reporting
units future cash flows. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is
completed in order to measure the impairment loss. Under the second step, the Company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets,
of the reporting unit from the fair value of the reporting unit as determined in the first step. The Company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the
carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

Intangible Assets Other Than Goodwill

Intangible assets other than goodwill consist principally of tradenames, franchise license rights, and licensing agreements acquired in business
combinations and internally developed software and media. Intangible assets with finite lives are amortized over their estimated useful lives, which range from 1 year to 25 years.



10



---

Intangible assets with indefinite lives are not amortized, but rather are tested for impairment annually and whenever an
impairment indicator is identified. The impairment test requires the determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss is recognized for an amount
equal to the difference. The intangible asset is then carried at its new fair value. Fair value is determined using estimates of discounted cash flows. These estimates of discounted cash flows will likely change over time as impairment tests are
performed. Estimates of fair value are also adversely affected by increases in interest rates and the applicable discount rate.

Impairment of
Long-Lived Assets

Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes
in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets
are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the
carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of
like risk.

Assets to be disposed of are reported at the lower of carrying value or fair values, less estimated costs of disposal.

Revenue Recognition

Company-Owned Centers and Educate
Online segments

Fees from providing supplemental education services to students through company-owned learning centers and online learning programs are
recognized as revenue in the period the services are provided.

Franchise Services and Educate Products segments

Revenue related to license fees on the initial sale of a franchise territory that transfer the right to operate a learning center in a specified geographic area is
recognized when all material services or conditions relating to the sales have been substantially performed or satisfied by the Company and collectibility of the fee is reasonably assured. The criteria for substantial performance include:



| | (1) | receipt of an executed franchise license agreement,
| | --- | ---------------------------------------------------



| | (2) | a determination that collectibility of the fee is reasonably assured,
| | --- | ---------------------------------------------------------------------



| | (3) | completion of requisite training by the franchisee or center director, and
| | --- | --------------------------------------------------------------------------



| | (4) | completion of required site selection assistance.
| | --- | -------------------------------------------------

Initial franchise fees
not meeting the recognition criteria are recorded as deferred revenue if not refundable, or deposits from franchisees if refundable.

Franchised learning
centers also pay a monthly royalty fee based on cash receipts, payable by the fifteenth day of the following month. Royalty fees are recorded in the month earned if collectibility is reasonably assured. Estimates of royalties earned but unreported
by franchisees at the balance sheet date are recorded as revenue and accounts receivable, and are adjusted to actual amounts when reported and paid by the franchisee.

Sales of educational products and materials to customers and franchisees is recognized when title passes and all substantial risks of ownership transfer to the buyer, which generally occurs either upon shipment or
upon delivery based on contractual terms. Revenue is net of provisions for cash discounts, returns, customer discounts, cooperative advertising and other sales-related discounts.

Catapult Learning and Progressus segments

Revenue consists principally of revenue from arrangements with school
districts receiving funds under federal and state-based programs. For arrangements that specify a fixed fee per student for educational services over a stated period, revenue is recognized ratably over the arrangements service period.
Arrangements with school districts generally specify monthly billings of service fees. The Company also earns revenue from arrangements that specify hourly rates for services provided, which is recognized as services are rendered.



11



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Deferred Costs

The Company incurs direct and incremental costs to set up site-based and virtual classrooms for its arrangements with school districts in the Catapult Learning and Educate Online segments. These costs are deferred and recognized ratably
over the service period. These deferred costs are included in other assets in the accompanying consolidated balance sheets.

Marketing and
Advertising

The Company expenses marketing and advertising costs as incurred.

Stock-Based Compensation

Prior to 2006, the Company accounted 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. The
Company recorded compensation expense for awards with pro rata vesting on a straight-line basis over the vesting period.

On January 1, 2006, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS 123(R)). This statement requires the Company to expense the fair value of grants of various stock-based
compensation programs over the vesting period of the awards. The Company adopted SFAS 123(R) using the modified prospective transition method, which does not result in the restatement of previously issued financial statements. The application of
SFAS 123(R)s transition provisions and the measurement of fair value are described more fully in Note 9. The resulting compensation expense is recognized in the statement of operations ratably over the vesting periods of the awards.

Foreign Currency Translation

The financial
statements of foreign subsidiaries with a functional currency other than the U.S. dollar have been translated into U.S. dollars using the current rate method. Assets and liabilities have been translated using the exchange rates at year-end. Income
and expense amounts have been translated using the average exchange rate prevailing for the period. Translation gains or losses resulting from the changes in exchange rates have been reported as a component of accumulated other comprehensive income
included in the consolidated statement of stockholders equity.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from non-owner sources. Other comprehensive
income refers to revenue, expenses, gains and losses that under U.S. generally accepted accounting principles, are included in comprehensive income, but excluded from net income. The elements of other comprehensive income (loss), net of tax,
consisted of foreign currency translation adjustments and the changes in fair value of derivative financial instruments accounted for as a hedge. Because deferred taxes are not provided for the unremitted earnings of foreign subsidiaries, deferred
taxes are not provided for translation adjustments.

Hedging and Derivative Activities

The Company sometimes uses derivative instruments, consisting primarily of interest rate swap agreements, to manage its exposure to changes in interest rates. The Company
does not use derivative instruments for trading or other speculative purposes.

All derivative instruments are reported in the consolidated balance sheets
at fair value in the other assets or other long-term liabilities captions. Changes in a derivatives fair value are recognized currently in earnings unless specified hedge criteria are met. If an interest rate swap is designated a cash flow
hedge, the effective portions of the changes in the fair value of the swap are recorded in other comprehensive income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

As part of managing its exposure to changes in the market interest rate of variable rate debt over a three-year period, the Company entered into interest rate swap
transactions with a financial institution acting as the counterparty. To ensure both appropriate use as a hedge and hedge accounting treatment, the swaps entered into were designated according to the hedge objective against a specific debt issue.
The notional amount, rate and maturities of the interest rate swaps are closely matched to the related terms of the hedged debt obligation, and any ineffective portion is not material. The interest rate swaps would not result in a significant loss
to the Company if the counterparty failed to perform according to the terms of the agreements.



12



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Income Taxes

The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities, measured at prevailing enacted tax rates that are expected to be in effect when these temporary differences are settled or realized.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company will adopt the provisions of FIN 48 effective January 1, 2007. The provisions of FIN 48 will be
applied to all tax positions upon initial adoption. Only tax positions that meet a more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption. The cumulative effect of applying the
provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the balance sheet) for fiscal year 2007. The Company is currently analyzing its uncertain
tax positions. However, based on information currently available, we believe that the impact of adopting FIN 48 will be immaterial to our financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that
market participants would use in pricing the asset or liability. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements
that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, which the Company intends to adopt on
January 1, 2008. SFAS 157 requires prospective application, with limited exceptions for certain financial instruments not currently held by the Company. The Company is still evaluating the impact of this pronouncement on its financial
statements, however, based on information currently available, we believe that the impact of adopting SFAS 157 will be immaterial to our financial condition.

2. Discontinued Operations

Education Station

On October 27, 2005, the Company announced its intention to sell its Education Station business, which delivered site-based No Child Left Behind services to public schools. Education Station was a component unit within the Catapult
Learning operating segment. On August 23, 2006, the Company completed the sale of its Education Station business to Knowledge Learning Corporation (KLC) for cash payments aggregating up to $6,000.

The aggregate purchase price of $6,000 consisted of $3,000 paid into escrow at closing, and $1,000 payable on each of the first three anniversaries of the closing date.
The escrow was to be released based on the attainment of specified customer contract renewals. The Company attained the required conditions and the escrow was fully collected by January 2007. The fair value of the total consideration to be received
from KLC was estimated to be $5,520.

The purchase agreement includes a non-competition provision whereby the Company has agreed, for a period of five
years after the closing date, not to engage in the site-based business conducted by Education Station. However, the Company is permitted to provide NCLB services online, and the Companys franchisees within the Sylvan Learning Center business
may also provide NCLB services in their current and future territories.

On the closing date, the Company and KLC also entered into a Technology License
Agreement (License Agreement) whereby the Company granted a non-exclusive, non-transferable license to KLC of certain proprietary software used in providing real-time online NCLB services. The term of the License Agreement is four years,
and provides for a license fee of $10,000, payable in three installments of $3,000 within 30 days following each of the first three anniversaries of the closing date, and a final installment of $1,000 within 30 days following the fourth anniversary.
KLC has the right to terminate the License Agreement if the Company fails to deliver the licensed technology within 30 days following the closing date, if KLC makes a warranty claim during the first year that cannot be timely remedied and results in
a material impairment to KLCs use of the licensed technology, or if the federal government terminates funding for NCLB services without replacing NCLB with, or approving, similar legislation.



13



---

On the closing date, the Company and KLC also entered into a Transition Services Agreement for the Company to provide
certain information technology, finance, and human resources and benefits services to KLC for an initial term of one year for $2,000. The Transition Services Agreement may be terminated by KLC upon 30 days written notice, or by either party for
default. The agreement also provides for possible renewal for two additional one-year terms.

As a result of the sale, the Company recorded a loss of
$1,248 (or $0.03 per diluted common share), net of a tax benefit of $620, which represented the difference between the fair value of the net proceeds received and the net assets sold. Goodwill in the amount of $353, representing a portion of the
Catapult reporting unit goodwill, was assigned to Education Station and was included in the net assets sold in determining the loss on disposal. The Company incurred $750 in transaction costs in connection with the sale.

The sale of Education Station will allow management to focus greater attention and resources on the opportunities available in the Companys other remaining
businesses.

The operations of Education Station are reported as discontinued operations for all periods presented. In addition, the net assets of
Education Station were classified as assets held for sale at December 31, 2005.

Connections Academy

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

Summarized Operating Results of Discontinued Operations

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



|                                         |  |                         |        |   |      |   |         |      |  |   |        |  
|---------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                         |  | Year Ended December 31, |       
|Education Station                        |  | 2006                    |        |   | 2005 |   |         | 2004 | 
|Revenues                                 |  | $                       | 27,508 |   |      | $ | 33,117  |      |  | $ | 27,153 |  
|                                         |  |                         |        |   |      |   |         |      |  |   |        |  
|Loss from operations before income taxes |  |                         | (2,930 | ) |      |   | (11,010 | )    |  |   | (6,903 | )
|Income tax benefit                       |  |                         | 973    |   |      |   | 4,404   |      |  |   | 2,623  |  
|                                         |  |                         |        |   |      |   |         |      |  |   |        |  
|Loss from discontinued operations        |  | $                       | (1,957 | ) |      | $ | (6,606  | )    |  | $ | (4,280 | )
|                                         |  |                         |        |   |      |   |         |      |  |   |        |  



|                                                    |  |                            |        |  
|--------------------------------------------------- |  | -------------------------- | ------ | -
|Connections Academy                                 |  | Year EndedDecember 31,2004 |       
|Revenues                                            |  | $                          | 5,160  |  
|                                                    |  |                            |        |  
|Loss from continuing operations before income taxes |  |                            | (4,283 | )
|Income tax benefit                                  |  |                            | 1,445  |  
|                                                    |  |                            |        |  
|Loss from discontinued operations                   |  | $                          | (2,838 | )
|                                                    |  |                            |        |  

Assets and liabilities of the discontinued operations of Education Station as of the date of sale and as of
December 31, 2005 were as follows:



|                                      |  |                |       |                  |   |       
|------------------------------------- |  | -------------- | ----- | ---------------- | - | ------
|                                      |  | August 23,2006 |       | December 31,2005
|Current assets                        |  | $              | 771   |                  | $ | 1,683 
|Property and equipment, net           |  |                | 5,105 |                  |   | 3,797 
|Other long-term assets                |  |                | 363   |                  |   | 5,958 
|Long-term liabilities                 |  |                | 531   |                  |   |      
|                                      |  |                |       |                  |   |       
|Net assets of discontinued operations |  | $              | 5,708 |                  | $ | 11,438
|                                      |  |                |       |                  |   |       



14



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3. Acquisitions

GPN

On April 10, 2006, the Company closed on a co-production agreement for Reading Rainbow and the acquisition of the assets of Great
Plains National Instructional Library (GPN) for $4,900 in cash and contingent payments based upon future revenues. Reading Rainbow, a PBS television series, has garnered more than 250 awards including the Peabody, 9 Parents Choice
Awards and 24 Emmy Awards. In this transaction, the Company acquired the rights to a library of 148 programs and rights to all Reading Rainbow programs to be produced in the future. GPN is the largest non-profit educators source for
classroom-use video and interactive media learning packages. The results of operations of the acquired business are included in the Companys consolidated statements of operations beginning April 10, 2006.

The purchase price totaled approximately $5,547 including acquisition costs of $647. Contingent consideration may be payable to the seller based upon future revenues
exceeding a threshold in any of the five annual periods commencing on the closing date. No amounts are currently payable nor are amounts expected to be paid under the contingent consideration provisions of the purchase agreement.

The purchase price was allocated to acquired assets, excluding goodwill, of $4,311, including inventory of $376 and identifiable amortizable and indefinite-lived
intangible assets of $526 (weighted-average amortization period of 6 years) and $3,409, respectively. The Company recognized $1,236 of goodwill, all of which is expected to be deductible for tax purposes.

Hooked on Phonics

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 Company plans to expand HOP product and service offerings and expand the
use of the Hooked on Phonics brand by developing products and services that appeal to a broader range of customers. The results of operations of HOP are included in the Companys consolidated statements of operations beginning February 1,
2005.

The purchase price totaled approximately $11,335 including acquisition costs of $1,319. The Company also extinguished $2,982 of acquired debt at
closing. The purchase price was allocated to acquired assets totaling $20,968, including identifiable amortizable and indefinite-lived intangible assets of $1,290 and $7,046 respectively, and liabilities of $11,621. The weighted average amortization
period for all identifiable amortizable intangible assets acquired was approximately 2.7 years. The purchase price allocation includes a contingent sales tax liability of $750 and an equal amount in escrow included within other current assets. The
sales tax contingency will be resolved based upon final determination of state sales tax obligations, which is expected to occur in 2007. The following table summarizes the allocation of the purchase price to acquired assets and liabilities, other
than cash received in the acquisition. This table has been updated to reflect the final determination of the amounts of acquired deferred tax assets and deferred tax liabilities, which occurred during 2006:



|                                                |  |   |       
|----------------------------------------------- |  | - | ------
|Accounts receivable, net                        |  | $ | 3,756 
|Other current assets                            |  |   | 1,866 
|Property and equipment                          |  |   | 13    
|Deferred tax assets                             |  |   | 6,959 
|Intangible assets subject to amortization:      |  |   |       
|Copyrights (amortization period of 3 years)     |  |   | 1,076 
|Customer list (amortization period of 1 year)   |  |   | 214   
|Indefinite lived intangible assets:             |  |   |       
|Tradenames                                      |  |   | 7,046 
|Other assets                                    |  |   | 38    
|                                                |  |   |       
|Total assets acquired, excluding cash of $1,988 |  |   | 20,968
|Current liabilities                             |  |   | 4,509 
|Contingent sales tax liability                  |  |   | 750   
|Long-term debt                                  |  |   | 2,982 
|Deferred tax liabilities                        |  |   | 3,380 
|                                                |  |   |       
|Total liabilities assumed                       |  |   | 11,621
|                                                |  |   |       
|Purchase price, net of cash received of $1,988  |  | $ | 9,347 
|                                                |  |   |       



15



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Franchisee-Owned Learning Center Territories

During the year ended December 31, 2006, the Company purchased two Sylvan Learning Center franchised territories comprising three centers. The combined purchase price of these territories was $902, consisting of
cash and short term notes payable to the sellers, including acquisition costs of $15. The combined purchase price was preliminarily allocated to acquired assets, including accounts receivable of $2 and identifiable indefinite-lived intangible assets
of $1,047, and liabilities assumed of $147, which consisted primarily of obligations to provide services to customers.

During the year ended
December 31, 2005, the Company purchased 60 Sylvan Learning Center franchised territories comprising 78 centers in 60 separate transactions with franchisees. The combined purchase price of these territories totaled cash paid of $28,723,
including acquisition costs of $309. Significant components of the combined purchase price allocation included goodwill of $25,624, identifiable indefinite-lived intangible assets of $14,325, and the assumption of liabilities of $12,739, which
consisted primarily of obligations to provide services to customers. Approximately $26,218 of goodwill and indefinite lived intangible assets is expected to be deductible for tax purposes.

These acquisitions were considered multiple element transactions due to the preexisting relationship between the Company and the franchisee. Management estimated the
fair value of settlement amounts using an income approach to determine the amount by which the royalty rate under the Sylvan Operating Agreement was favorable or unfavorable to the Company compared to pricing for current market transactions. During
the years ended December 31, 2006 and 2005, the Company recognized net settlement losses in the amount of $58 and $212, respectively, which were classified within foreign exchange gains (losses) and other in the consolidated statements of
operations.

Pro Forma Information  2006 and 2005

The following unaudited consolidated pro forma results of operations of the Company for the years ended December 31, 2006 and 2005 give effect to: (i) the acquisition of GPN as if the acquisition had occurred on January 1,
2006; (ii) the acquisitions of the Sylvan Learning Center territories as if the acquisitions had occurred on January 1 of the respective year; and (iii) the acquisition of HOP as if the acquisition had occurred on January 1,
2005:



|                                                             |  |                         |         |   |      |   |        
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | -------
|                                                             |  | Year ended December 31,
|                                                             |  | 2006                    |         |   | 2005
|Revenues                                                     |  | $                       | 355,741 |   |      | $ | 357,121
|Income (loss) from continuing operations before income taxes |  |                         | (7,647  | ) |      |   | 37,978 
|Net income (loss)                                            |  |                         | (11,676 | ) |      |   | 16,136 
|Diluted earnings (loss) per share                            |  | $                       | (0.27   | ) |      | $ | 0.37   

The pro forma information is not necessarily indicative of the results which actually would have occurred if the
above transactions had been consummated as described above, nor does it purport to represent the results of operations for future periods.



16



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4. Goodwill

Changes
in the carrying amount of goodwill are summarized by segment as follows:



|                                                                             |  |                   |        |                  |   |          |  |   |                           |   |  |                     |        |   |            |   |        |                 |  |       |       |   |  |   |       |  |   |        |  
|---------------------------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | -------- |  | - | ------------------------- | - |  | ------------------- | ------ | - | ---------- | - | ------ | --------------- |  | ----- | ----- | - |  | - | ----- |  | - | ------ | -
|                                                                             |  | FranchiseServices |        | CatapultLearning |   | European |  |   | Subtotal -EducateServices |   |  | CompanyOwnedCenters |        |   | Progressus |   |        | EducateProducts |  | Total |      
|Goodwill at January 1, 2005                                                  |  | $                 | 10,294 |                  | $ | 6,222    |  | $ | 14,937                    |   |  | $                   | 31,453 |   |            | $ | 34,329 |                 |  | $     | 2,637 |   |  | $ |      |  | $ | 68,419 |  
|Acquisition of franchisee-owned learning centers                             |  |                   |       |                  |   |         |  |   |                          |   |  |                     |       |   |            |   | 25,624 |                 |  |       |      |   |  |   |      |  |   | 25,624 |  
|Adjustment to purchase price allocation of Progressus                        |  |                   |       |                  |   |         |  |   |                          |   |  |                     |       |   |            |   |       |                 |  |       | (128  | ) |  |   |      |  |   | (128   | )
|Foreign currency translation adjustment                                      |  |                   |       |                  |   |         |  |   | (1,901                    | ) |  |                     | (1,901 | ) |            |   | 63     |                 |  |       |       |   |  |   |      |  |   | (1,838 | )
|                                                                             |  |                   |        |                  |   |          |  |   |                           |   |  |                     |        |   |            |   |        |                 |  |       |       |   |  |   |       |  |   |        |  
|Goodwill at December 31, 2005                                                |  |                   | 10,294 |                  |   | 6,222    |  |   | 13,036                    |   |  |                     | 29,552 |   |            |   | 60,016 |                 |  |       | 2,509 |   |  |   |      |  |   | 92,077 |  
|                                                                             |  |                   |        |                  |   |          |  |   |                           |   |  |                     |        |   |            |   |        |                 |  |       |       |   |  |   |       |  |   |        |  
|Adjustment to purchase price allocation of franchisee-owned learning centers |  |                   |       |                  |   |         |  |   |                          |   |  |                     |       |   |            |   | (1,996 | )               |  |       |      |   |  |   |      |  |   | (1,996 | )
|Acquisition of GPN                                                           |  |                   |       |                  |   |         |  |   |                          |   |  |                     |       |   |            |   |       |                 |  |       |      |   |  |   | 1,236 |  |   | 1,236  |  
|Adjustment to allocation of goodwill to discontinued operations              |  |                   |       |                  |   | 338      |  |   |                          |   |  |                     | 338    |   |            |   |       |                 |  |       |      |   |  |   |      |  |   | 338    |  
|Foreign currency translation adjustment                                      |  |                   |       |                  |   |         |  |   | 1,496                     |   |  |                     | 1,496  |   |            |   | (3     | )               |  |       |      |   |  |   |      |  |   | 1,493  |  
|                                                                             |  |                   |        |                  |   |          |  |   |                           |   |  |                     |        |   |            |   |        |                 |  |       |       |   |  |   |       |  |   |        |  
|Goodwill at December 31, 2006                                                |  | $                 | 10,294 |                  | $ | 6,560    |  | $ | 14,532                    |   |  | $                   | 31,386 |   |            | $ | 58,017 |                 |  | $     | 2,509 |   |  | $ | 1,236 |  | $ | 93,148 |  
|                                                                             |  |                   |        |                  |   |          |  |   |                           |   |  |                     |        |   |            |   |        |                 |  |       |       |   |  |   |       |  |   |        |  



17



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Educate, Inc.



5. Intangible Assets Other Than Goodwill

A summary of other intangible assets at December 31, 2006 and December 31, 2005 is as follows:



|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|-------------------------------------------------------------------- |  | ------------------- |  | ------------------- | ------- | ----------------------- | - | ----------------- |  | - | -------
|                                                                     |  | December 31, 2006  
|                                                                     |  | Useful LifeIn Years |  | GrossCarryingAmount |         | AccumulatedAmortization |   | NetCarryingAmount
|Intangible assets subject to amortization:                           |  |                     |  |                     |         |                         |   |                   |  |   |        
|Contract rights (Catapult Learning segment)                          |  | 5                   |  |                     | 1,084   |                         |   | 755               |  |   | 329    
|Schülerhilfe franchise license rights (European segment)             |  | 25                  |  |                     | 3,892   |                         |   | 822               |  |   | 3,070  
|Customer list (Educate Products segment)                             |  | 1                   |  |                     | 229     |                         |   | 225               |  |   | 4      
|Copyrights (Educate Products segment)                                |  | 3                   |  |                     | 1,211   |                         |   | 1,025             |  |   | 186    
|Distribution agreements (Educate Products segment)                   |  | 5                   |  |                     | 432     |                         |   | 65                |  |   | 367    
|Internet domain names (primarily Educate Products segment)           |  | 10                  |  |                     | 112     |                         |   | 7                 |  |   | 105    
|Internally developed software and media (Franchise Services segment) |  | 5-7                 |  |                     | 10,201  |                         |   | 2,359             |  |   | 7,842  
|Internally developed software and media (Educate Products segment)   |  | 5-7                 |  |                     | 7,274   |                         |   | 996               |  |   | 6,278  
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets subject to amortization                      |  |                     |  |                     | 24,435  |                         |   | 6,254             |  |   | 18,181 
|Indefinite-lived intangible assets not subject to amortization:      |  |                     |  |                     |         |                         |   |                   |  |   |        
|Tradenames (Company-Owned Centers segment)                           |  | N/A                 |  |                     | 132,349 |                         |   |                  |  |   | 132,349
|Tradenames (European segment)                                        |  | N/A                 |  |                     | 9,171   |                         |   |                  |  |   | 9,171  
|Tradenames (Educate Products segment)                                |  | N/A                 |  |                     | 6,968   |                         |   |                  |  |   | 6,968  
|Franchise license rights (Franchise Services segment)                |  | N/A                 |  |                     | 88,022  |                         |   |                  |  |   | 88,022 
|Licensing agreements (Educate Products)                              |  | N/A                 |  |                     | 3,409   |                         |   |                  |  |   | 3,409  
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total indefinite-lived intangible assets                             |  |                     |  |                     | 239,919 |                         |   |                  |  |   | 239,919
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets other than goodwill                          |  |                     |  | $                   | 264,354 |                         | $ | 6,254             |  | $ | 258,100
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        



|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|-------------------------------------------------------------------- |  | ------------------- |  | ------------------- | ------- | ----------------------- | - | ----------------- |  | - | -------
|                                                                     |  | December 31, 2005  
|                                                                     |  | Useful LifeIn Years |  | GrossCarryingAmount |         | AccumulatedAmortization |   | NetCarryingAmount
|Intangible assets subject to amortization:                           |  |                     |  |                     |         |                         |   |                   |  |   |        
|Acquired backlog (Company-Owned Centers segment)                     |  | 0.5                 |  | $                   | 115     |                         | $ | 115               |  | $ |       
|Contract rights (Catapult Learning segment)                          |  | 5                   |  |                     | 1,084   |                         |   | 539               |  |   | 545    
|Schülerhilfe franchise license rights (European segment)             |  | 25                  |  |                     | 3,491   |                         |   | 478               |  |   | 3,013  
|Customer list (Educate Products segment)                             |  | 1                   |  |                     | 228     |                         |   | 209               |  |   | 19     
|Copyrights (Educate Products segment)                                |  | 3                   |  |                     | 1,137   |                         |   | 672               |  |   | 465    
|Internally developed software and media (Franchise Services segment) |  | 5-7                 |  |                     | 7,323   |                         |   | 871               |  |   | 6,452  
|Internally developed software and media (Educate Products segment)   |  | 5-7                 |  |                     | 1,408   |                         |   | 73                |  |   | 1,335  
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets subject to amortization                      |  |                     |  |                     | 14,786  |                         |   | 2,957             |  |   | 11,829 
|Indefinite-lived intangible assets not subject to amortization:      |  |                     |  |                     |         |                         |   |                   |  |   |        
|Tradenames (Company-Owned Centers segment)                           |  | N/A                 |  |                     | 132,226 |                         |   |                  |  |   | 132,226
|Tradenames (European segment)                                        |  | N/A                 |  |                     | 8,225   |                         |   |                  |  |   | 8,225  
|Tradenames (Educate Products segment)                                |  | N/A                 |  |                     | 7,443   |                         |   |                  |  |   | 7,443  
|Franchise license rights (Franchise Services segment)                |  | N/A                 |  |                     | 87,099  |                         |   |                  |  |   | 87,099 
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total indefinite-lived intangible assets                             |  |                     |  |                     | 234,993 |                         |   |                  |  |   | 234,993
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        
|Total intangible assets other than goodwill                          |  |                     |  | $                   | 249,779 |                         | $ | 2,957             |  | $ | 246,822
|                                                                     |  |                     |  |                     |         |                         |   |                   |  |   |        



18



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Educate, Inc.



As of December 31, 2006, estimated future amortization expense of intangible assets subject to amortization is
as follows:



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31, |  |   |       
|2007                     |  | $ | 5,109 
|2008                     |  |   | 4,350 
|2009                     |  |   | 3,646 
|2010                     |  |   | 2,035 
|2011                     |  |   | 1,461 
|Thereafter               |  |   | 1,580 
|                         |  |   |       
|Total                    |  | $ | 18,181
|                         |  |   |       

6. Debt

Debt
consists of the following:



|                                                                                                                                                                                                                                                                                                                                    |  |                  |          |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                                                                                                                    |  | December 31,2006 |          |   | December 31,2005 |  
|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 9.36% and 6.03% per annum at December 31, 2006 and December 31, 2005, respectively). |  | $                | 158,844  |   |                  | $ | 138,950 |  
|Revolving loan payable to a bank (under the 2005 Term Loan) maturing April 27, 2009. The loan bears interest at the
banks prime rate or the Eurodollar rate, plus specified margins, as elected by the Company (various interest rates ranging from 9.31% to 11.25% per annum).                                                  |  |                  | 17,000   |   |                  |   | 20,000  |  
|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 $121 and $221 at December 31, 2006 and December 31, 2005, respectively.                                                                                                                  |  |                  | 1,089    |   |                  |   | 1,656   |  
|Various notes payable bearing interest at fixed rates ranging from 5.00% to 8.25% per annum, with maturity dates ranging from February
2007 to September 2015.                                                                                                                                                                      |  |                  | 1,424    |   |                  |   | 2,242   |  
|                                                                                                                                                                                                                                                                                                                                    |  |                  |          |   |                  |   |         |  
|                                                                                                                                                                                                                                                                                                                                    |  |                  | 178,357  |   |                  |   | 162,848 |  
|Less: current portion of long-term debt                                                                                                                                                                                                                                                                                             |  |                  | (176,597 | ) |                  |   | (2,734  | )
|                                                                                                                                                                                                                                                                                                                                    |  |                  |          |   |                  |   |         |  
|Total long-term debt                                                                                                                                                                                                                                                                                                                |  | $                | 1,760    |   |                  | $ | 160,114 |  
|                                                                                                                                                                                                                                                                                                                                    |  |                  |          |   |                  |   |         |  

In order to manage interest rate exposure and to comply with certain covenants of the Companys credit
agreement, the Company entered into three interest rate swap agreements. A notional amount of $40,000 in variable rate debt was swapped to a counterparty 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 was swapped to a counterparty in exchange for a fixed interest rate commitment of 3.44% per annum. These agreements terminated 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 was swapped to a counter party in exchange for a fixed interest rate commitment of 4.03% per annum. Net interest paid or received under these
agreements is recorded as interest expense in the period in which it is incurred.

On March 31, 2006, the Company amended the 2005 Term Loan with a
bank syndicate (the Amendment), which increased the term loan facility to $160,000, increased the interest rate spread over a base rate and the quarterly maturities over the existing term of the loan, and provided for increased
flexibility in certain other terms and conditions of the term loan facility, including covenants concerning financial condition, certain capital expenditures and required interest rate protection coverage. The Amendment also provided consent for the
sale of the Companys Education Station business, and modified the required prepayments of amounts outstanding under the facility to 50% of the net cash proceeds from such sale. No changes were made to the agreement concerning the $30,000
revolving credit facility. The Company paid down $21,050 of the revolving loan with the proceeds from the Amendment.



19



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Educate, Inc.



At the Companys election, the 2005 Term Loan and Amendment bears interest at the base rate or Eurodollar rate
plus a margin, which was 400 basis points at December 31, 2006. Pursuant to the 2005 Term Loan and Amendment, quarterly principal payments based upon a 100-year amortization schedule are due through September 30, 2011 with two balloon
payments in equal amounts due at the end of each of the following quarters. 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 the consolidated subsidiaries of the Company.

The Amendment constituted a substantial modification of the
terms of the prior agreement and as a result, the Company wrote-off unamortized deferred financing costs of approximately $144 related to the prior term loan facility and expensed an additional $922 related to the modification during the quarter
ended March 31, 2006.

The 2005 Term Loan and Amendment 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 also required compliance with financial
covenants and otherwise restricted certain payments to the Company. At December 31, 2006, restricted net assets of the subsidiary were $232,218.

On
August 8, 2006 the Company amended certain financial covenants within the 2005 Term Loan and Amendment for the June 30, 2006 and subsequent quarterly reporting periods to provide additional flexibility to achieve these covenants
(Second Amendment). Without the Second Amendment, the Company would not have been in compliance with two financial covenants at June 30, 2006 that require the Company to maintain a certain consolidated leverage ratio and an interest
coverage ratio.

On November 27, 2006, the Company amended the 2005 Term Loan, as amended (Third Amendment). The Third Amendment provides
for increased flexibility in the 2005 Term Loans financial covenants, including the required leverage ratio, interest coverage ratio and fixed charge coverage ratio, for the September 30, 2006 and December 31, 2006 quarterly
reporting periods. Without the Third Amendment, the Company would not have been in compliance with these covenants at September 30, 2006. The Third Amendment also increased the interest rate spread over a base rate for term loan and revolving
credit facility borrowings by an additional twenty-five to seventy-five basis points depending upon the leverage ratio achieved. The Third Amendment also restricts certain acquisition and new center opening expenditures through March 31, 2007
and amends the definitions of Product Development Expenditures and Consolidated EBITDA to clarify the treatment of certain product development expenditures in calculations of covenant compliance. During the year ended December 31, 2006, the
Company capitalized $1,695 and expensed $71 related to the Second and Third Amendments.

On March 15, 2007, in connection with the Fourth Amendment to
the 2005 Term Loan, the Company obtained a waiver from its bank syndicate for violations of certain financial covenants within the 2005 Term Loan, as amended, for the December 31, 2006 and March 31, 2007 reporting periods. As a result of
deteriorating operating results and the fact that the financial covenants are calculated using a rolling four quarter adjusted EBITDA measure, it is likely that the Company will be required to obtain waivers or amend the Term Loan facility in the
June 30, 2007 and subsequent quarters to remain in compliance with the covenants prescribed in the facility and avoid the facilitys demand repayment provisions. As a result, the Company classified all of the outstanding debt of $175,844
under the 2005 Term Loan as a current liability in the consolidated balance sheet as of December 31, 2006. Management considered negotiating with the lenders under the 2005 Term Loan to obtain, for the next four quarterly reporting periods,
covenant amendments that were achievable based on the projected operating results of the Company. Such amendments would provide for the classification of the debt as long-term or current under the maturity provisions of the facility. However, due to
the proposed sale of the Company as evidenced by a January 2007 definitive merger agreement, the Company chose to obtain a waiver for the current and likely March 31, 2007 violations without negotiating amendments as to future periods. The
merger is expected to close during the second quarter of 2007.

Of the $30,000 revolving credit facility, $11,740 was available to the Company due to
outstanding standby letters of credit totaling $1,260 as of December 31, 2006.

The fair value of debt at December 31, 2006 approximates its
carrying value at that date based on an assessment of market interest rates associated with similar debt.



20



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Educate, Inc.



Aggregate maturities of debt at December 31, 2006 are as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31: |  |   |        
|2007                     |  | $ | 176,597
|2008                     |  |   | 726    
|2009                     |  |   | 386    
|2010                     |  |   | 149    
|2011                     |  |   | 158    
|Thereafter               |  |   | 341    
|                         |  |   |        
|Total                    |  | $ | 178,357
|                         |  |   |        

7. Leases

The
Company conducts significant operations from leased facilities. These facilities include office locations, warehouse space and company-owned learning centers. The lease terms of substantially all of these leases are five years or less. Many of the
leases contain options to renew, generally with one or two renewal periods ranging from one to three years. The Company also leases certain equipment under non-cancelable operating leases, the majority of which are for terms of 36 months or less.

Future minimum lease payments at December 31, 2006, by year and in the aggregate, under all non-cancelable operating leases are as follows:



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31: |  |   |       
|2007                     |  |   | 22,293
|2008                     |  |   | 17,432
|2009                     |  |   | 12,495
|2010                     |  |   | 5,161 
|2011                     |  |   | 1,823 
|Thereafter               |  |   | 384   
|                         |  |   |       
|Total                    |  | $ | 59,588
|                         |  |   |       

Rent expense was approximately $26,537, $21,972 and $15,690 for the years ended December 31, 2006, 2005 and
2004, respectively.

8. Commitments and Contingencies

In connection with the 2003 acquisition of the pre-K-12 business from Laureate Education, Inc. (Laureate), the Company and Laureate entered into a three-year shared services agreement that expired June 30, 2006. Under the
terms of the shared service agreement, the Company provided certain support services including, but not limited to, specified accounting, benefits, information technology, human resources, purchasing and payroll services to Laureate. Conversely,
Laureate provided certain support services, primarily in the areas of tax, treasury, and facilities administration to the Company. Laureate and the Company are considered related parties because two individuals, one of whom is the Companys
CEO, serve on the Board of Directors of both companies.

On July 1, 2006, the Company and Laureate extended its shared service agreement through
December 31, 2007 for a portion of the originally contracted services. Under the extended agreement, the Company will continue to provide specified accounting, benefits, human resources, purchasing and payroll services to Laureate through the
end of 2007. Laureate will continue to provide certain facilities administration functions to the Company through the end of the first quarter of 2007.

The shared services agreement provides for the Company to receive net payments consisting of a base fee plus specified volume-based increases to the fees attributable to the services. The net base fees to be received by the Company under
the extended agreement are approximately $383 each quarter. These payments are accounted for as a reduction of general and administrative expenses.

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

The Company maintains a number of standby letters of credit totaling $1,260
as of December 31, 2006 to guarantee certain of its insurance programs and the potential payment under a franchisee acquisition through 2008.



21



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Educate, Inc.



The Company has guaranteed certain bank loans of franchisees related to financing the purchase of educational
programs and other purchased instructional material. Of the $680 of available credit under this program, $145 was outstanding at December 31, 2006. These guarantees are secured by the assets of the business of the individual franchisee
utilizing this financing arrangement.

The Company has guaranteed a bank loan of the Sylvan National Advertising Fund (Fund) in the amount of
$2.0 million, which expires in May 2007. All Sylvan Learning Centers pay advertising fees into the Fund, which coordinates national advertising campaigns for the benefit of the Learning Center network. The Fund is a separate legal entity, which the
Company does not control. Provision of the guarantee allowed the Fund to obtain external financing at more favorable terms. The Company would be required to perform under the guarantee in the event of default on the loan by the Fund. An event of
default under the 2005 Term Loan would be an event of default under this loan to the Fund.

9. Share-Based Payments

On January 1, 2006, the Company adopted Statement 123(R), Share-Based Payment, which is a revision of Statement 123, Accounting for Stock-Based
Compensation. 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.

Prior to January 1, 2006, the Company accounted for all stock-based awards under the intrinsic value recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations (Opinion 25), as permitted by Statement 123. On January 1, 2006, the Company adopted the provisions of Statement
123(R) using the modified prospective method. Under the modified prospective method, compensation cost is recognized beginning with the effective date for (a) all new share-based payments granted after the effective
date; (b) all awards modified, repurchased, or cancelled after the effective date; and (c) the remaining portion of the requisite service under previously-granted unvested awards outstanding as of the effective date. For options that vest
ratably, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award.

Unvested stock-based
awards issued prior to May 14, 2004, the date the Company filed a registration statement with the SEC to sell its common stock in a public offering, and disclosed in the financial statements using the minimum value method (rather than the
estimated fair value using an option-pricing model) were 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 were accounted for at the date of adoption using the same estimate of the grant-date fair value disclosed in the historical financial statements and estimated in accordance with the provisions of Statement 123. As a result of adopting
Statement 123(R), no future expense will be recognized for unvested options granted prior to May 14, 2004 that had no intrinsic value at the grant date.

As a result of adopting Statement 123(R), the Companys income before income taxes, income from continuing operations, and net income for the year ended December 31, 2006 are $561, $359 and $380 lower, respectively than if the
Company had continued to account for share-based compensation under Opinion 25. Basic and diluted loss per share for the year ended December 31, 2006 was $0.01 lower as a result of adopting Statement 123(R). Results for prior periods have not
been restated.

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock
options as operating cash flows in the statement of cash flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows.

Prior to adoption of Statement 123(R), the Company accounted for all stock-based compensation awards
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 was generally recognized.
Statement 123(R) requires the disclosure of pro forma data based on the original provisions of Statement 123 in the notes to the financial statements for periods prior to the date of adoption for companies adopting using the modified prospective
method.

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 SEC to sell its common stock in a public offering, the Company used the minimum value method. The minimum
value



22



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Educate, Inc.



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. These assumptions may change in future periods, and the effects could be material. Significant assumptions used during the year
to estimate the fair value of stock options are described below:



| |  |  | Expected Term. Because the Company was formed in June 2003, it has limited historical experience regarding its employees exercise and post-vesting
employment termination behavior. The Companys options have the characteristics of plain vanilla options described in Staff Accounting Bulletin No. 107 (SAB 107), and as such, the expected term is calculated using
SAB 107s simplified method.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected Volatility. Because the Companys common stock has only been publicly traded since September 2004, the expected stock price volatility over the
expected life of granted options has been based on published volatility measures of companies with similar characteristics.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected Dividend Yield. The Company does not anticipate paying dividends in the foreseeable future.
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Risk-Free Interest Rates. The risk-free interest rates for stock options are based on the U.S. Treasury yield curve rates in effect at the time of grant for
maturities similar to the expected term of the stock options.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted average assumptions used in the 2006 valuation model are
presented in the table below.



|                                |  |                             |  
|------------------------------- |  | --------------------------- | -
|                                |  | Year endedDecember 31, 2006 |  
|Expected term (in years)        |  | 6.02                        |  
|Expected volatility             |  | 40                          | %
|Expected dividend yield         |  | 0                           | %
|Risk-free interest rate (range) |  | 4.92  5.13                 | %

The following assumptions (weighted averages) were used in calculating 2005 and 2004 pro forma stock compensation
expense:



|                                |  |                         |   |  |             |  
|------------------------------- |  | ----------------------- | - |  | ----------- | -
|                                |  | Year ended December 31, |  
|                                |  | 2005                    |   |  | 2004        |  
|Expected term (in years)        |  | 4                       |   |  | 4           |  
|Expected volatility             |  | 45                      | % |  | 47          | %
|Expected dividend yield         |  | 0                       | % |  | 0           | %
|Risk-free interest rate (range) |  | 3.81  4.18             | % |  | 2.81  3.55 | %

The weighted average estimated fair value of stock-based awards granted during the year ended December 31,
2006, 2005 and 2004 was $3.85, $5.36 and $7.39, respectively.

For the purpose of pro forma disclosures, the estimated fair value of the options in periods
prior to adoption of Statement 123(R) was expensed over the options vesting periods. The Companys pro forma information is as follows:



23



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Educate, Inc.



|                                                                                                                                                                 |  |                         |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                 |  | Year ended December 31, |       
|                                                                                                                                                                 |  | 2005                    |        |   | 2004 |  
|Net income, as reported                                                                                                                                          |  | $                       | 15,405 |   |      | $ | 6,412  |  
|Add: Stock-based employee compensation expense included in net income as reported, net of tax benefit of $186 and $4,285 in 2005 and 2004,
respectively.         |  |                         | 277    |   |      |   | 4,642  |  
|Less: Stock-based employee compensation expense using prescribed fair value based methods, net of tax benefit of $482 and $4,546 in 2005 and
2004, respectively. |  |                         | (719   | ) |      |   | (4,925 | )
|                                                                                                                                                                 |  |                         |        |   |      |   |        |  
|Pro forma net income                                                                                                                                             |  | $                       | 14,963 |   |      | $ | 6,129  |  
|                                                                                                                                                                 |  |                         |        |   |      |   |        |  
|Earnings per common sharebasic                                                                                                                                  |  |                         |        |   |      |   |        |  
|As reported                                                                                                                                                      |  | $                       | 0.36   |   |      | $ | 0.17   |  
|Pro forma                                                                                                                                                        |  | $                       | 0.35   |   |      | $ | 0.16   |  
|Earnings per common sharediluted                                                                                                                                |  |                         |        |   |      |   |        |  
|As reported                                                                                                                                                      |  | $                       | 0.35   |   |      | $ | 0.16   |  
|Pro forma                                                                                                                                                        |  | $                       | 0.34   |   |      | $ | 0.15   |  

Description of Plans

2003 Omnibus Stock Incentive 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 3,898,800 shares of common stock were granted under this plan. Of this amount, 104,000 shares immediately vested with the
remainder vesting ratably over thirty-six or forty-eight months. Options under this plan expire 10 years after the grant date. Options to purchase 374,000 shares of common stock were granted in 2004 under this plan with an exercise price less than
the estimated fair value of the Companys common stock at the grant date. The Company can no longer grant options under this plan.

2004 Omnibus
Stock Incentive Plan

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 added automatically on the first day of the 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. Options under this plan expire 10 years after the grant date.

The annual automatic
increases on January 1, 2006 and 2005 each resulted in 400,000 additional shares of common stock available for issuance under the 2004 stock option plan, and after taking into account shares already granted, 901,208 shares of common stock are
available for issuance as of December 31, 2006. Options vest ratably over a forty-eight month period.

Restricted Common Stock Awards

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



24



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Educate, Inc.



The following tables summarize the Companys stock option activity (options in thousands):



|                                                |  |         |   |  |                              |      |                                                   |     |                         |   |       
|----------------------------------------------- |  | ------- | - |  | ---------------------------- | ---- | ------------------------------------------------- | --- | ----------------------- | - | ------
|                                                |  | Options |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm (inYears) |     | AggregateIntrinsicValue
|Outstanding  December 31, 2005                 |  | 3,586   |   |  | $                            | 4.78 |                                                   |     |                         |   |       
|Granted                                         |  | 388     |   |  |                              | 8.19 |                                                   |     |                         |   |       
|Exercised                                       |  | (320    | ) |  |                              | 3.91 |                                                   |     |                         |   |       
|Forfeited                                       |  | (273    | ) |  |                              | 9.22 |                                                   |     |                         |   |       
|                                                |  |         |   |  |                              |      |                                                   |     |                         |   |       
|Outstanding  December 31, 2006                 |  | 3,381   |   |  | $                            | 4.88 |                                                   | 7.0 |                         | $ | 9,197 
|                                                |  |         |   |  |                              |      |                                                   |     |                         |   |       
|Vested and expected to vest  December 31, 2006 |  | 3,276   |   |  | $                            | 4.80 |                                                   | 7.1 |                         | $ | 11,475
|                                                |  |         |   |  |                              |      |                                                   |     |                         |   |       
|Exercisable  December 31, 2006                 |  | 2,894   |   |  | $                            | 4.26 |                                                   | 6.7 |                         | $ | 8,980 
|                                                |  |         |   |  |                              |      |                                                   |     |                         |   |       

The aggregate intrinsic value in the table above represents the difference between the Companys closing
stock price on the last trading day of the year (December 29, 2006) and the exercise price, multiplied by the number of in-the-money options outstanding, whether vested or not vested.

The total intrinsic value of stock options exercised, based on the difference between the Companys stock price at the time of exercise and the related exercise price, was $1,302, $1,518 and $292 during the year
ended December 31, 2006, 2005 and 2004, respectively.

The total fair value of stock options vested was $999, $835 and $1,459 during the year ended
December 31, 2006, 2005 and 2004, respectively. The related income tax benefit recognized during the year ended December 31, 2006 was $350. At December 31, 2006, unrecognized compensation cost related to stock options outstanding as of
December 31, 2006 was $2,146 ($1,288 after income taxes), which is expected to be recognized over a weighted average remaining vesting period of 2.9 years.

10. Income Taxes

Significant components of income tax expense (benefit) from continuing operations are as follows:



|                                   |  |                         |        |   |      |   |        |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                                   |  | Year ended December 31, |       
|                                   |  | 2006                    |        |   | 2005 |   | 2004   | 
|Current:                           |  |                         |        |   |      |   |        |  |   |        |  
|U.S. Federal                       |  | $                       | (1,632 | ) |      | $ | 3,708  |  | $ | 688    |  
|U.S. State                         |  |                         | 496    |   |      |   | 408    |  |   | 952    |  
|Foreign                            |  |                         | 1,277  |   |      |   | 520    |  |   | 368    |  
|                                   |  |                         |        |   |      |   |        |  |   |        |  
|                                   |  |                         | 141    |   |      |   | 4,636  |  |   | 2,008  |  
|Deferred:                          |  |                         |        |   |      |   |        |  |   |        |  
|U.S. Federal                       |  |                         | (2,435 | ) |      |   | 8,102  |  |   | 7,926  |  
|U.S. State                         |  |                         | 1,501  |   |      |   | 299    |  |   | (447   | )
|Foreign                            |  |                         | 1,437  |   |      |   | 1,712  |  |   | 1,603  |  
|                                   |  |                         |        |   |      |   |        |  |   |        |  
|                                   |  |                         | 503    |   |      |   | 10,113 |  |   | 9,082  |  
|                                   |  |                         |        |   |      |   |        |  |   |        |  
|Total income tax expense           |  | $                       | 644    |   |      | $ | 14,749 |  | $ | 11,090 |  
|                                   |  |                         |        |   |      |   |        |  |   |        |  
|Foreign income before income taxes |  | $                       | 5,533  |   |      | $ | 5,424  |  | $ | 5,393  |  
|                                   |  |                         |        |   |      |   |        |  |   |        |  



25



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Educate, Inc.



The Company uses the liability method to account for income taxes. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the tax effects of operating loss and tax credit carryforwards. Significant components
of the Companys deferred tax assets and liabilities as of December 31, 2006 and 2005 are summarized as follows:



|                                            |  |              |        |   |      |   |       
|------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------
|                                            |  | December 31,
|                                            |  | 2006         |        |   | 2005
|Deferred tax assets:                        |  |              |        |   |      |   |       
|Net operating loss carryforwards            |  | $            | 22,649 |   |      | $ | 9,444 
|Receivables                                 |  |              | 428    |   |      |   |      
|Allowance for doubtful accounts             |  |              | 965    |   |      |   | 143   
|Inventory                                   |  |              | 916    |   |      |   |      
|Fixed asset basis                           |  |              | 3,163  |   |      |   | 883   
|Nondeductible reserves                      |  |              | 171    |   |      |   | 280   
|Deferred compensation                       |  |              | 2,123  |   |      |   | 1,722 
|Accrued compensation                        |  |              | 1,078  |   |      |   |      
|Tax credit carryforwards                    |  |              | 1,291  |   |      |   | 578   
|Other                                       |  |              | 90     |   |      |   |      
|                                            |  |              |        |   |      |   |       
|Total deferred tax assets                   |  |              | 32,874 |   |      |   | 13,050
|Deferred tax liabilities:                   |  |              |        |   |      |   |       
|Amortization of intangible assets           |  |              | 32,263 |   |      |   | 21,522
|Prepaid expenses                            |  |              | 526    |   |      |   |      
|Other                                       |  |              |       |   |      |   | 754   
|                                            |  |              |        |   |      |   |       
|Total deferred tax liabilities              |  |              | 32,789 |   |      |   | 22,276
|                                            |  |              |        |   |      |   |       
|Net deferred tax (assets) liabilities       |  |              | (85    | ) |      |   | 9,226 
|Valuation allowance for deferred tax assets |  |              | 5,165  |   |      |   | 569   
|                                            |  |              |        |   |      |   |       
|Net deferred tax liabilities                |  | $            | 5,080  |   |      | $ | 9,795 
|                                            |  |              |        |   |      |   |       

Federal, foreign, and state net operating loss carryforwards at December 31, 2006 were $52,075, $1,047 and
$79,297, respectively, of which $19,343 were acquired in the acquisition of HOP, $12,307 were acquired in the acquisition of the pre-K-12 business of Laureate and $4,020 were acquired in the acquisitions of various learning centers from franchisees.
These net operating loss carryforwards will begin to expire in 2019. Acquired net operating losses are subject to limitation under the Internal Revenue Code. A valuation allowance was recorded against certain federal tax credits and state and
foreign income tax benefits of certain subsidiaries for which the Company currently believes it is more likely than not that the asset will not be realizable. Of the valuation allowance that was recorded, $203 was recorded against certain tax
benefits that were generated by discontinued operations during the year ended December 31, 2006. Certain tax credit carryforwards will begin to expire in 2013.

The reconciliation of the reported income tax expense to the amount that would result by applying the U.S. federal statutory tax rate of 35% to income from continuing operations before income taxes is as follows:



|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                     |  | Year ended December 31, |       
|                                                     |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|Tax expense (benefit) at U.S. statutory rate         |  | $                       | (2,814 | ) |      | $ | 12,866 |      |  | $ | 8,588  |  
|Permanent differences                                |  |                         | 364    |   |      |   | 656    |      |  |   | 570    |  
|State income tax expense (benefit)                   |  |                         | (1,134 | ) |      |   | 707    |      |  |   | 390    |  
|Tax effect of foreign income taxed at different rate |  |                         | 205    |   |      |   | 334    |      |  |   | 43     |  
|Change in valuation allowance                        |  |                         | 4,302  |   |      |   | 268    |      |  |   |       |  
|Foreign tax credits                                  |  |                         | (279   | ) |      |   | (76    | )    |  |   | (241   | )
|Non-deductible stock compensation                    |  |                         |       |   |      |   |       |      |  |   | 1,740  |  
|Other                                                |  |                         |       |   |      |   | (6     | )    |  |   |       |  
|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Total income tax expense from continuing operations  |  | $                       | 644    |   |      | $ | 14,749 |      |  | $ | 11,090 |  
|                                                     |  |                         |        |   |      |   |        |      |  |   |        |  



26



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Educate, Inc.



11. Comprehensive Income

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



|                                                         |  |                         |         |   |      |   |        |      |  |   |      
|-------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | -----
|                                                         |  | Year ended December 31,
|                                                         |  | 2006                    |         |   | 2005 |   |        | 2004
|Net income (loss)                                        |  | $                       | (11,889 | ) |      | $ | 15,405 |      |  | $ | 6,412
|Change in fair value of derivative financial instruments |  |                         | (360    | ) |      |   | 411    |      |  |   | 303  
|Foreign currency translation adjustment                  |  |                         | 2,486   |   |      |   | (3,416 | )    |  |   | 661  
|                                                         |  |                         |         |   |      |   |        |      |  |   |      
|Comprehensive income (loss)                              |  | $                       | (9,763  | ) |      | $ | 12,400 |      |  | $ | 7,376
|                                                         |  |                         |         |   |      |   |        |      |  |   |      

Income tax expense (benefit) related to the derivative financial instrument in the table above was $(204), $252
and $185 for the years ended December 31, 2006, 2005 and 2004, respectively. Income tax expense (benefit) related to the foreign currency translation adjustment in the table above was $(410) and $410 for the years ended December 31, 2005
and 2004, respectively.

The components of accumulated other comprehensive income are summarized as follows:



|                                                                  |  |                                       |        |   |                                |   |      |       |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------ | - | ---- | ----- |  | - | ------ | -
|                                                                  |  | Foreign CurrencyTranslationAdjustment |        |   | DerivativeFinancialInstruments |   |      | Total | 
|Balance at January 1, 2004                                        |  | $                                     | 2,627  |   |                                | $ | (125 | )     |  | $ | 2,502  |  
|Gains (losses) recorded in other comprehensive income, net of tax |  |                                       | 661    |   |                                |   | 303  |       |  |   | 964    |  
|                                                                  |  |                                       |        |   |                                |   |      |       |  |   |        |  
|Balance at December 31, 2004                                      |  |                                       | 3,288  |   |                                |   | 178  |       |  |   | 3,466  |  
|Gains (losses) recorded in other comprehensive income, net of tax |  |                                       | (3,416 | ) |                                |   | 411  |       |  |   | (3,005 | )
|                                                                  |  |                                       |        |   |                                |   |      |       |  |   |        |  
|Balance at December 31, 2005                                      |  |                                       | (128   | ) |                                |   | 589  |       |  |   | 461    |  
|Gains (losses) recorded in other comprehensive income, net of tax |  |                                       | 2,486  |   |                                |   | (360 | )     |  |   | 2,126  |  
|                                                                  |  |                                       |        |   |                                |   |      |       |  |   |        |  
|Balance at December 31, 2006                                      |  | $                                     | 2,358  |   |                                | $ | 229  |       |  | $ | 2,587  |  
|                                                                  |  |                                       |        |   |                                |   |      |       |  |   |        |  

12. Earnings Per Share

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) 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.



27



---

Educate, Inc.



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



|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | Year ended December 31, |        
|                                              |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Numerator                                     |  |                         |         |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations      |  | $                       | (8,684  | ) |      | $ | 22,011 |      |  | $ | 13,447 |  
|Loss from discontinued operations, net of tax |  |                         | (3,205  | ) |      |   | (6,606 | )    |  |   | (7,035 | )
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                             |  | $                       | (11,889 | ) |      | $ | 15,405 |      |  | $ | 6,412  |  
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Denominator (shares in thousands)             |  |                         |         |   |      |   |        |      |  |   |        |  
|Basic:                                        |  |                         |         |   |      |   |        |      |  |   |        |  
|Weighted-average shares outstanding           |  |                         | 42,933  |   |      |   | 42,646 |      |  |   | 38,637 |  
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Diluted:                                      |  |                         |         |   |      |   |        |      |  |   |        |  
|Weighted-average shares outstanding           |  |                         | 42,933  |   |      |   | 42,646 |      |  |   | 38,637 |  
|Dilutive effect of stock options              |  |                         |        |   |      |   | 1,408  |      |  |   | 1,210  |  
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Total                                         |  |                         | 42,933  |   |      |   | 44,054 |      |  |   | 39,847 |  
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Earnings (loss) per common share - basic      |  |                         |         |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations      |  | $                       | (0.20   | ) |      | $ | 0.52   |      |  | $ | 0.35   |  
|Loss from discontinued operations, net of tax |  |                         | (0.08   | ) |      |   | (0.16  | )    |  |   | (0.18  | )
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                             |  | $                       | (0.28   | ) |      | $ | 0.36   |      |  | $ | 0.17   |  
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Earnings (loss) per common share - diluted    |  |                         |         |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations      |  | $                       | (0.20   | ) |      | $ | 0.50   |      |  | $ | 0.34   |  
|Loss from discontinued operations, net of tax |  |                         | (0.08   | ) |      |   | (0.15  | )    |  |   | (0.18  | )
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                             |  | $                       | (0.28   | ) |      | $ | 0.35   |      |  | $ | 0.16   |  
|                                              |  |                         |         |   |      |   |        |      |  |   |        |  

Because the Company reported a loss from continuing operations during the year ended December 31, 2006, all
stock options were excluded from that years weighted-average shares outstanding computation. Since their exercise price exceeded the market value of the Companys common stock, options to purchase 224,763 and 70,000 shares of common stock
were excluded from the 2005 and 2004 computations, respectively, because the effect was antidilutive.

13. Dividend to Common Stockholders

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

14. 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 discretionary contributions to this plan of 102,649 shares of Educate, Inc. common stock valued at $846 and $13 in cash during the year ended December 31, 2006 and $741 and $703 in cash during the years ended December 31,
2005 and 2004, respectively.



28



---

Educate, Inc.



15. Businesses and Geographic Segment Information

The Company is primarily organized on the basis of educational services or products provided. The Company operates through seven business segments that offer distinct
supplemental education services and products from which revenues are earned. During the fourth quarter of 2006, management changed the manner in which it reviews segment operating performance, and increased the number of reporting segments to
include Franchise Services, Catapult Learning, European, Company-Owned Centers, Educate Products, Progressus, and Educate Online. Additionally, Franchise Services, Catapult Learning and European segments are also reviewed together as Educate
Services for financial analysis purposes due to common executive management. Segment revenues and operating income are presented on this basis for all periods. The following describes the Companys reportable segments:



| |  |  | Franchise Services - manages our system of franchised Sylvan Learning territories
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Catapult Learning - provides tutoring and other supplemental education services, to eligible students in public and private schools through government-funded
contracts
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | European - operates a network of company-owned and franchised centers providing tutoring in Germany and Austria
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Company-Owned Centers - manages our network of company-owned Sylvan Learning territories
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Educate Products - creates, manufactures, and sells educational products including the Hooked on Phonics early reading, math and study skills programs
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Progressus - provides pediatric therapies such as physical, occupational and speech therapies to K-12 children with special education needs under contracts with
school districts
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Educate Online - provides online tutoring to students in the third through ninth grades
| | - |  | ---------------------------------------------------------------------------------------

The Company evaluates performance and allocates resources based on operating income. In the following tables, revenue of the Franchise Services segment and operating
income of the Company-Owned Centers segment includes an intercompany royalty and other service fees from the Company-Owned Centers segment to the Franchise Services segment which were $11,936, $10,779 and $8,024 during the years ended December 31,
2006, 2005 and 2004, respectively. The Corporate and Eliminations column combines the elimination of intercompany transactions and general and administrative expenses that are not allocated to segments, which are necessary to reconcile
the respective line items to the consolidated financial statements. All other significant intercompany sales or transfers are eliminated.



29



---

Educate, Inc.

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



|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -------- |  | - | ------------------------- | - |  | -------------------- | ------- | - | --------------- | - | ------- | ---------- |  | - | ------------- | - |  | ----------------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|Year ended December31,                                |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |  
|2006                                                  |  | FranchiseServices |        |   | CatapultLearning |   |        | European |  |   | Subtotal -EducateServices |   |  | Company-OwnedCenters |         |   | EducateProducts |   |         | Progressus |  |   | EducateOnline |   |  | Corporate &Eliminations |        |   | Total |  
|Revenues                                              |  | $                 | 59,670 |   |                  | $ | 73,516 |          |  | $ | 35,103                    |   |  | $                    | 168,289 |   |                 | $ | 143,848 |            |  | $ | 18,180        |   |  | $                       | 21,954 |   |       | $ | 14,333 |   |  | $ | (11,936 | ) |  | $ | 354,668 |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Operating income before depreciation and amortization |  |                   | 36,147 |   |                  |   | 14,077 |          |  |   | 6,389                     |   |  |                      | 56,613  |   |                 |   | (8,583  | )          |  |   | (13,270       | ) |  |                         | 780    |   |       |   | (3,098 | ) |  |   | (18,052 | ) |  |   | 14,390  |  
|Depreciation and amortization (1)                     |  |                   | (558   | ) |                  |   | (740   | )        |  |   | (490                      | ) |  |                      | (1,788  | ) |                 |   | (4,376  | )          |  |   | (271          | ) |  |                         | (49    | ) |       |   | (346   | ) |  |   | (1,617  | ) |  |   | (8,447  | )
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Operating income (loss)                               |  | $                 | 35,589 |   |                  | $ | 13,337 |          |  | $ | 5,899                     |   |  | $                    | 54,825  |   |                 | $ | (12,959 | )          |  | $ | (13,541       | ) |  | $                       | 731    |   |       | $ | (3,444 | ) |  | $ | (19,669 | ) |  | $ | 5,943   |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Total expenditures for additions to long-lived assets |  |                   | 3,194  |   |                  |   | 408    |          |  |   | 826                       |   |  |                      | 4,428   |   |                 |   | 9,243   |            |  |   | 6,322         |   |  |                         | 40     |   |       |   | 744    |   |  |   |        |   |  |   | 20,777  |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|2005                                                  |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |  
|Revenues                                              |  | $                 | 62,417 |   |                  | $ | 67,641 |          |  | $ | 30,340                    |   |  | $                    | 160,398 |   |                 | $ | 134,736 |            |  | $ | 23,638        |   |  | $                       | 18,519 |   |       | $ | 3,902  |   |  | $ | (10,779 | ) |  | $ | 330,414 |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Operating income before depreciation and amortization |  |                   | 36,709 |   |                  |   | 15,453 |          |  |   | 5,887                     |   |  |                      | 58,049  |   |                 |   | 6,791   |            |  |   | 5,727         |   |  |                         | 179    |   |       |   | (3,594 | ) |  |   | (14,720 | ) |  |   | 52,432  |  
|Depreciation and amortization (1)                     |  |                   | (310   | ) |                  |   | (650   | )        |  |   | (440                      | ) |  |                      | (1,400  | ) |                 |   | (3,228  | )          |  |   | (248          | ) |  |                         | (45    | ) |       |   | (228   | ) |  |   | (1,638  | ) |  |   | (6,787  | )
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Operating income (loss)                               |  | $                 | 36,399 |   |                  | $ | 14,803 |          |  | $ | 5,447                     |   |  | $                    | 56,649  |   |                 | $ | 3,563   |            |  | $ | 5,479         |   |  | $                       | 134    |   |       | $ | (3,822 | ) |  | $ | (16,358 | ) |  | $ | 45,645  |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Total expenditures for additions to long-lived assets |  |                   | 6,212  |   |                  |   | 949    |          |  |   | 532                       |   |  |                      | 7,693   |   |                 |   | 9,003   |            |  |   | 1,696         |   |  |                         | 46     |   |       |   | 533    |   |  |   |        |   |  |   | 18,971  |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|2004                                                  |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |  
|Revenues                                              |  | $                 | 59,011 |   |                  | $ | 72,156 |          |  | $ | 27,502                    |   |  | $                    | 158,669 |   |                 | $ | 100,296 |            |  | $ |              |   |  | $                       | 19,250 |   |       | $ | 2,933  |   |  | $ | (8,024  | ) |  | $ | 273,124 |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Operating income before depreciation and amortization |  |                   | 37,434 |   |                  |   | 16,975 |          |  |   | 5,162                     |   |  |                      | 59,571  |   |                 |   | 10,362  |            |  |   |              |   |  |                         | (235   | ) |       |   | (4,110 | ) |  |   | (21,092 | ) |  |   | 44,496  |  
|Depreciation and amortization (1)                     |  |                   | (544   | ) |                  |   | (726   | )        |  |   | (360                      | ) |  |                      | (1,630  | ) |                 |   | (2,631  | )          |  |   |              |   |  |                         | (39    | ) |       |   | (326   | ) |  |   | (1,674  | ) |  |   | (6,300  | )
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  
|Operating income (loss)                               |  | $                 | 36,890 |   |                  | $ | 16,249 |          |  | $ | 4,802                     |   |  | $                    | 57,941  |   |                 | $ | 7,731   |            |  | $ |              |   |  | $                       | (274   | ) |       | $ | (4,436 | ) |  | $ | (22,766 | ) |  | $ | 38,196  |  
|Total expenditures for additions to long-lived assets |  |                   | 6,805  |   |                  |   | 2,876  |          |  |   | 424                       |   |  |                      | 10,105  |   |                 |   | 3,258   |            |  |   |              |   |  |                         | 23     |   |       |   | 154    |   |  |   |        |   |  |   | 13,540  |  
|                                                      |  |                   |        |   |                  |   |        |          |  |   |                           |   |  |                      |         |   |                 |   |         |            |  |   |               |   |  |                         |        |   |       |   |        |   |  |   |         |   |  |   |         |  



|(1) | excludes amortization of copyrights and computer software and media intangible assets
|--- | -------------------------------------------------------------------------------------



30



---

Educate, Inc.



The following tables reconcile operating income from reportable segments in the table above to income (loss) from
continuing operations before income taxes reported in the consolidated statements of operations and segment assets to total assets reported on the consolidated balance sheets:



|                                                             |  |                         |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                             |  | Year ended December 31, |        
|                                                             |  | 2006                    |         |   | 2005 |   |        | 2004 | 
|Total operating income from reportable segments              |  | $                       | 5,943   |   |      | $ | 45,645 |      |  | $ | 38,196 |  
|Interest income                                              |  |                         | 411     |   |      |   | 411    |      |  |   | 380    |  
|Interest expense                                             |  |                         | (12,759 | ) |      |   | (7,932 | )    |  |   | (9,778 | )
|Other financing costs                                        |  |                         | (1,149  | ) |      |   | (1,506 | )    |  |   | (5,420 | )
|Foreign exchange gains (losses) and other                    |  |                         | (486    | ) |      |   | 142    |      |  |   | 1,159  |  
|                                                             |  |                         |         |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations before income taxes |  | $                       | (8,040  | ) |      | $ | 36,760 |      |  | $ | 24,537 |  
|                                                             |  |                         |         |   |      |   |        |      |  |   |        |  



|                                                |  |              |         |      |   |         |  |   |        
|----------------------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                                                |  | December 31,
|                                                |  | 2006         |         | 2005 |   | 2004   
|Franchise Services segment assets               |  | $            | 235,863 |      | $ | 235,189 |  | $ | 230,219
|Catapult Learning segment assets                |  |              | 30,600  |      |   | 38,553  |  |   | 38,667 
|European segment assets                         |  |              | 33,243  |      |   | 30,026  |  |   | 44,335 
|                                                |  |              |         |      |   |         |  |   |        
|Total Educate Services                          |  |              | 299,706 |      |   | 303,768 |  |   | 313,221
|Company-Owned Centers segment assets            |  |              | 92,925  |      |   | 89,718  |  |   | 35,028 
|Educate Products segment assets                 |  |              | 44,097  |      |   | 26,384  |  |   |       
|Progressus segment assets                       |  |              | 8,489   |      |   | 4,339   |  |   | 4,267  
|Educate Online segment assets                   |  |              | 6,720   |      |   | 2,326   |  |   | 960    
|                                                |  |              |         |      |   |         |  |   |        
|Total assets for reportable segments            |  |              | 451,937 |      |   | 426,535 |  |   | 353,476
|Unallocated corporate assets                    |  |              | 12,840  |      |   | 13,914  |  |   | 20,485 
|Assets of discontinued operations held for sale |  |              |        |      |   | 11,439  |  |   | 7,421  
|                                                |  |              |         |      |   |         |  |   |        
|Total assets                                    |  | $            | 464,777 |      | $ | 451,888 |  | $ | 381,382
|                                                |  |              |         |      |   |         |  |   |        

Revenues by geographic area are as follows:



|                   |  |                         |         |      |   |         |  |   |        
|------------------ |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                   |  | Year ended December 31,
|                   |  | 2006                    |         | 2005 |   | 2004   
|United States      |  | $                       | 312,978 |      | $ | 296,160 |  | $ | 243,620
|Germany            |  |                         | 34,698  |      |   | 29,958  |  |   | 27,197 
|Other              |  |                         | 6,992   |      |   | 4,296   |  |   | 2,307  
|                   |  |                         |         |      |   |         |  |   |        
|Consolidated total |  | $                       | 354,668 |      | $ | 330,414 |  | $ | 273,124
|                   |  |                         |         |      |   |         |  |   |        

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 for any period presented. Substantially all long-lived assets are located in the United States.

Information regarding the number of Sylvan Learning Centers is as follows:



|                                 |  |                  |  |                  |  |                 
|-------------------------------- |  | ---------------- |  | ---------------- |  | ----------------
|                                 |  | December 31,2006 |  | December 31,2005 |  | December 31,2004
|During the year ended:           |  |                  |  |                  |  |                 
|Franchises sold, net of closures |  | 10               |  | 58               |  | 66              
|Franchises purchased             |  | 3                |  | 78               |  | 32              
|                                 |  |                  | 
|At December 31,                  |  |                  |  |                  |  |                 
|Franchisee-owned                 |  | 883              |  | 876              |  | 896             
|Company-owned                    |  | 251              |  | 245              |  | 163             



31



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Educate, Inc.



16. Quarterly Financial Data (Unaudited, dollar amounts in thousands, except per share data)

The unaudited consolidated quarterly financial information presented below has been prepared on the same basis as the consolidated financial statements and includes all
adjustments necessary to state fairly the information for the periods presented. The results of operations for any quarter are not necessarily indicative of results for the full year or for any future period.

During the fourth quarter of 2006, as a result of the Companys identification of a material weakness in internal control related to revenue cut-off, the Company
performed a review of the timing of revenue recognition for product shipments by the Educate Products segment for each of the quarters during 2006. As a result of the review, management concluded that an error was made in the quarter ended
June 30, 2006 through the recordation of revenue and cost of goods sold on certain shipments of product prior to the time that title was transferred to the customer as specified by customer terms. As a result of this error, revenue and cost of
goods sold in the amount of $3,467 and $1,024 respectively, originally recorded in the quarter ended June 30, 2006, should have been recorded in the quarter ended September 30, 2006. The impact of the error on the Companys financial
condition at June 30, 2006, including current assets, liabilities and stockholders equity was not material and the error had no effect on cash or total operating cash flows.

The following tables present the impact of the error on previously reported amounts:



|                                  |  |                                  |        |   |                         |   |         |                    |  |   |        |  
|--------------------------------- |  | -------------------------------- | ------ | - | ----------------------- | - | ------- | ------------------ |  | - | ------ | -
|                                  |  | Quarter Ended June 30, 2006      |       
|                                  |  | (As Restated)                    |        |   | (As PreviouslyReported) |   |         | Increase(Decrease) | 
|Net revenues                      |  | $                                | 99,024 |   |                         | $ | 102,491 |                    |  | $ | (3,467 | )
|Cost of goods sold                |  |                                  | 2,783  |   |                         |   | 3,807   |                    |  |   | (1,024 | )
|Operating income                  |  |                                  | 10,519 |   |                         |   | 12,962  |                    |  |   | (2,443 | )
|Income tax expense                |  |                                  | (2,967 | ) |                         |   | (3,950  | )                  |  |   | (983   | )
|Income from continuing operations |  |                                  | 4,409  |   |                         |   | 5,869   |                    |  |   | (1,460 | )
|Net income                        |  | $                                | 2,819  |   |                         | $ | 4,279   |                    |  | $ | (1,460 | )
|Net income per share - basic      |  | $                                | 0.07   |   |                         | $ | 0.10    |                    |  | $ | (0.03  | )
|                                  |  |                                  |        |   |                         |   |         |                    |  |   |        |  
|Net income per share - diluted    |  | $                                | 0.06   |   |                         | $ | 0.10    |                    |  | $ | (0.04  | )
|                                  |  |                                  |        |   |                         |   |         |                    |  |   |        |  
|                                  | 
|                                  |  | Quarter Ended September 30, 2006 |       
|                                  |  | (Restated)                       |        |   | (As PreviouslyReported) |   |         | Increase(Decrease) | 
|Net revenues                      |  | $                                | 84,787 |   |                         | $ | 81,320  |                    |  | $ | 3,467  |  
|Cost of goods sold                |  |                                  | 6,538  |   |                         |   | 5,514   |                    |  |   | 1,024  |  
|Operating income (loss)           |  |                                  | 1,850  |   |                         |   | (593    | )                  |  |   | 2,443  |  
|Income tax expense                |  |                                  | (2,373 | ) |                         |   | (1,390  | )                  |  |   | 983    |  
|Loss from continuing operations   |  |                                  | (3,824 | ) |                         |   | (5,284  | )                  |  |   | 1,460  |  
|Net loss                          |  | $                                | (7,022 | ) |                         | $ | (8,482  | )                  |  | $ | 1,460  |  
|Net loss per share - basic        |  | $                                | (0.16  | ) |                         | $ | (0.20   | )                  |  | $ | 0.04   |  
|                                  |  |                                  |        |   |                         |   |         |                    |  |   |        |  
|Net loss per share - diluted      |  | $                                | (0.16  | ) |                         | $ | (0.20   | )                  |  | $ | 0.04   |  
|                                  |  |                                  |        |   |                         |   |         |                    |  |   |        |  



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Educate, Inc.

The following tables present certain quarterly information for each of the eight quarters ended December 31, 2006. The 2006 table has been restated to correct the error discussed above.



|                                                         |  |               |        |   |            |   |        |              |  |   |             |   |  |   |         |  
|-------------------------------------------------------- |  | ------------- | ------ | - | ---------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------- | -
|                                                         |  | Quarter Ended |       
|2006                                                     |  | March 31      |        |   | June 30    |   |        | September 30 |  |   | December 31 |  
|                                                         |  |               |        |   | (Restated) |   |        | (Restated)   |  |   |             |  
|Net revenues                                             |  | $             | 92,925 |   |            | $ | 99,024 |              |  | $ | 84,787      |   |  | $ | 77,932  |  
|Instructional and franchise operations costs             |  |               | 68,081 |   |            |   | 69,920 |              |  |   | 61,043      |   |  |   | 67,097  |  
|Cost of goods sold                                       |  |               | 4,155  |   |            |   | 2,783  |              |  |   | 6,538       |   |  |   | 7,024   |  
|Operating income (loss)                                  |  |               | 5,915  |   |            |   | 10,519 |              |  |   | 1,850       |   |  |   | (12,340 | )
|Income tax (expense) benefit                             |  |               | (870   | ) |            |   | (2,967 | )            |  |   | (2,373      | ) |  |   | 5,565   |  
|Income (loss) from continuing operations                 |  |               | 1,360  |   |            |   | 4,409  |              |  |   | (3,824      | ) |  |   | (10,629 | )
|Discontinued operations, net of tax and loss on disposal |  |               | 1,973  |   |            |   | (1,590 | )            |  |   | (3,198      | ) |  |   | (390    | )
|                                                         |  |               |        |   |            |   |        |              |  |   |             |   |  |   |         |  
|Net income (loss)                                        |  | $             | 3,333  |   |            | $ | 2,819  |              |  | $ | (7,022      | ) |  | $ | (11,019 | )
|                                                         |  |               |        |   |            |   |        |              |  |   |             |   |  |   |         |  
|Net income (loss) per share - basic                      |  | $             | 0.08   |   |            | $ | 0.07   |              |  | $ | (0.16       | ) |  | $ | (0.26   | )
|                                                         |  |               |        |   |            |   |        |              |  |   |             |   |  |   |         |  
|Net income (loss) per share  diluted                    |  | $             | 0.08   |   |            | $ | 0.06   |              |  | $ | (0.16       | ) |  | $ | (0.26   | )
|                                                         |  |               |        |   |            |   |        |              |  |   |             |   |  |   |         |  
|Weighted average shares (in thousands):                  |  |               |        |   |            |   |        |              |  |   |             |   |  |   |         |  
|Basic                                                    |  |               | 42,751 |   |            |   | 42,917 |              |  |   | 42,981      |   |  |   | 43,080  |  
|Diluted                                                  |  |               | 43,844 |   |            |   | 43,758 |              |  |   | 42,981      |   |  |   | 43,080  |  



|                                             |  |               |        |         |   |        |              |  |   |             |   |  |   |        |  
|-------------------------------------------- |  | ------------- | ------ | ------- | - | ------ | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                             |  | Quarter Ended |       
|2005                                         |  | March 31      |        | June 30 |   |        | September 30 |  |   | December 31 |  
|Net revenues                                 |  | $             | 82,495 |         | $ | 92,735 |              |  | $ | 78,540      |   |  | $ | 76,644 |  
|Instructional and franchise operations costs |  |               | 52,735 |         |   | 53,763 |              |  |   | 51,948      |   |  |   | 58,661 |  
|Cost of goods sold                           |  |               | 3,916  |         |   | 4,233  |              |  |   | 3,601       |   |  |   | 4,330  |  
|Operating income                             |  |               | 12,621 |         |   | 22,273 |              |  |   | 10,314      |   |  |   | 437    |  
|Income tax expense                           |  |               | 4,157  |         |   | 7,188  |              |  |   | 3,189       |   |  |   | 215    |  
|Income (loss) from continuing operations     |  |               | 6,782  |         |   | 11,728 |              |  |   | 5,204       |   |  |   | (1,703 | )
|Discontinued operations, net of tax          |  |               | 711    |         |   | (1,750 | )            |  |   | (2,537      | ) |  |   | (3,030 | )
|                                             |  |               |        |         |   |        |              |  |   |             |   |  |   |        |  
|Net income (loss)                            |  |               | 7,493  |         |   | 9,978  |              |  |   | 2,667       |   |  |   | (4,733 | )
|                                             |  |               |        |         |   |        |              |  |   |             |   |  |   |        |  
|Net income (loss) per share - basic          |  | $             | 0.18   |         | $ | 0.23   |              |  | $ | 0.06        |   |  | $ | (0.11  | )
|                                             |  |               |        |         |   |        |              |  |   |             |   |  |   |        |  
|Net income (loss) per share  diluted        |  | $             | 0.17   |         | $ | 0.23   |              |  | $ | 0.06        |   |  | $ | (0.11  | )
|                                             |  |               |        |         |   |        |              |  |   |             |   |  |   |        |  
|Weighted average shares (in thousands):      |  |               |        |         |   |        |              |  |   |             |   |  |   |        |  
|Basic                                        |  |               | 42,586 |         |   | 42,598 |              |  |   | 42,672      |   |  |   | 42,725 |  
|Diluted                                      |  |               | 44,022 |         |   | 44,010 |              |  |   | 44,166      |   |  |   | 44,016 |  



33



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Educate, Inc.



The table above presents quarterly information as if Education Station had been classified as a discontinued
operation as of January 1, 2005. Results for the quarter ended September 30, 2006 include the disposal of Education Station. Discontinued operations are more fully discussed in Note 2.

Results for the quarter ended June 30, 2005 included $1,500 of expense related to the substantial modification of our term debt facility.

Results for the quarter ended March 31, 2006 included $1,100 of expense related to the refinancing of our credit facility, which is more fully discussed in Note 6.

During the quarter ended September 30, 2006, the Company recorded a valuation allowance of approximately $1,700 to fully reserve certain historical
net state deferred tax assets due to uncertainty surrounding the future realization of these state tax benefits because of declines in operating results.

17. Liquidity and Capital Resources

As discussed more fully in Note 6, the Company maintains a credit facility that requires compliance
with certain financial covenants. On March 15, 2007, the Company obtained a waiver of violations of these financial covenants as of December 31, 2006 and March 31, 2007 from its bank syndicate. The Company believes it will fail to
comply with these same financial covenants at subsequent quarterly reporting dates in 2007, and accordingly, will need to obtain waivers or amend the terms of the credit facility to avoid triggering the facilitys demand repayment provisions.
As a result, the Company classified the $175,844 of outstanding borrowings under the credit facility at December 31, 2006 as a current liability in the accompanying 2006 consolidated balance sheet, resulting in a working capital deficit of
$170,003.

Management considered attempting to negotiate revised financial covenants to allow for compliance in 2007 based on projected operating results.
However, because the Company has entered into a definitive merger agreement for the sale of the Company and expects to close that transaction by June 30, 2007, the Company determined it was not prudent to negotiate new terms and incur
additional costs to amend its credit facility. However, there can be no assurance that lenders will waive their right to demand repayment of outstanding borrowings upon the likely default of the credit facilitys provisions in the June 30,
2007 and subsequent quarterly reporting periods, and in the event of demanded repayment, that the Company can refinance the loans on acceptable terms or meet its obligations in the ordinary course of business. The 2006 financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



34



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PART III

Item 10.Directors, Executive Officers and Corporate Governance

The Board of Directors is
comprised of nine persons, each subject to re-election for a one-year term.

Pursuant to an agreement between Educate and Apollo Advisors,
L.P. (Apollo), Apollo has the right, at any time until Apollo or its affiliates no longer beneficially own at least 50% of Educates outstanding common stock and have sold at least one share of common stock other than in the initial
public offering of shares of stock of Educate (the Educate IPO), to require Educate to increase the size of its Board of Directors by two and to fill those vacancies with directors nominated by Apollo. Until such time that Apollo or its
affiliates no longer beneficially own at least 33% of Educates outstanding common stock and have sold at least one share of common stock other than in the Educate IPO, Apollo will have the right to nominate four designees to Educates
Board of Directors, and certain important matters relating to Educates operations will require the approval of the majority of directors nominated by Apollo. Messrs. Berg, Stone, and Weiner and Ms. Krongard were nominated by Apollo and
were elected as directors at the 2006 annual meeting.

The following table sets forth certain information regarding our directors and
executive officers as of March 1, 2007.



|                           |  |     |  |                                                            
|-------------------------- |  | --- |  | -----------------------------------------------------------
|Name                       |  | Age |  | Position(s)                                                
|R. Christopher Hoehn-Saric |  | 44  |  | Chief Executive Officer; Chairman of the Board of Directors
|Peter J. Cohen             |  | 52  |  | President, Chief Operating Officer                         
|Kevin E. Shaffer           |  | 44  |  | Chief Financial Officer                                    
|Jeffrey H. Cohen           |  | 41  |  | Executive Vice President                                   
|Christopher Paucek         |  | 36  |  | President, Educate Products                                
|C. Alan Schroeder          |  | 49  |  | General Counsel, Secretary                                 
|Douglas L. Becker          |  | 41  |  | Director                                                   
|Laurence Berg              |  | 40  |  | Director                                                   
|Michael F. Devine, III     |  | 48  |  | Director                                                   
|David W. Hornbeck          |  | 65  |  | Director                                                   
|Cheryl Krongard            |  | 51  |  | Director                                                   
|Aaron Stone                |  | 34  |  | Director                                                   
|Michael D. Weiner          |  | 54  |  | Director                                                   
|Raul Yzaguirre             |  | 67  |  | Director                                                   

R. Christopher Hoehn-Saric became our Chief Executive Officer in July 2003 and Chairman of our Board of
Directors in April 2004. From February 2000 until July 2003, he was Chairman and Chief Executive Officer of Sylvan Ventures, the incubator subsidiary of our predecessor, Sylvan Learning Systems, Inc., which is now known as Laureate. He served as
Chairman of the Board and Co-Chief Executive Officer of Sylvan Learning Systems, Inc. from April 1993 until February 2000. He also served as Sylvan Learning Systems, Inc. President from 1988 to 1993. He was a member of Sylvan Learning Systems,
Inc.s Board of Directors from 1986 through July 2003 and has been a member of Laureates Board of Directors since July 2003. Mr. Hoehn-Saric is also Senior Managing Director of Sterling Capital Partners, L.P.

Peter J. Cohen became our President and Chief Operating Officer in July 2003. In January 2006 he also became President of the Learning Center segment of our
Company. From February 2000 until July 2003, he was President and Chief Operating Officer of Sylvan Learning Systems, Inc., which is now known as Laureate Education, Inc. He joined Sylvan Learning Systems, Inc. in 1996 as President of the Sylvan
Learning Centers division. From 1994 to 1996, he served as Chief Executive Officer of The Pet Practice, Inc., a national chain of branded pet hospitals.

Kevin E. Shaffer became our Chief Financial Officer in July 2003. From June 1999 until July 2003 he served as Vice President of Finance and Corporate Controller of Sylvan Learning Systems, Inc., which is now known as Laureate



35



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Education, Inc. Prior to joining Sylvan Learning Systems, Inc., he was an executive with Ernst & Young LLP, providing audit and consulting services
to clients in a variety of industries from 1984 to 1999.

Jeffrey H. Cohen is Executive Vice President. Previously, from July, 2003 to August, 2006,
he was the President of Catapult Learning. He previously served in that role with Sylvan Learning Systems, Inc., which is now known as Laureate Education, Inc., from August 2001 to July 2003. Prior to joining Sylvan Learning Systems, Inc., from
February 1998 until July 2001, he was with Prometric, Inc., a provider of computer-based assessment and examination services, serving first as the Vice President of Prometrics Academic, Professional and Corporate Services Business Unit and
later as the Senior Vice President for Business Unit Management. He also served as a political appointee in the Clinton Administration.

Christopher
(Chip) J. Paucek became the President of Educate Products in November 2005. From January 2005 to November 2005 he was General Manager of Hooked on Phonics and from July 2004 to January 2005 he was Vice President of Corporate Business Development
for Educate, Inc. From January 2004 to November 2004, he was Deputy Campaign Manager of U.S. Senator Barbara Mikulskis 2004 re-election campaign. In December 1993, he founded Cerebellum Corporation and served as Co-Chief Executive Officer from
that month until January 2004. Cerebellum Corporation sold products under the Cerebellum and Standard Deviants brands and produced, among other things, the PBS television series Standard Deviants.

C. Alan Schroeder became General Counsel and Secretary in August 2004. Previously, Mr. Schroeder was Of Counsel to Piper Rudnick LLP from May 2002 to August
2004. From March 1994 to January 2002, Mr. Schroeder was Executive Vice PresidentGeneral Counsel and Secretary of Prime Retail, Inc., an owner of shopping centers. On September 12, 2000, Mr. Schroeder was elected director and
officer of E-Outlets Resolution Corporation, a subsidiary of Prime Retail, Inc., for the sole purpose of executing the bankruptcy filings of E-Outlets Resolution Corporation, which had ceased operations on April 4, 2000. The bankruptcy petition
was filed November 6, 2000.

Douglas L. Becker has served as one of our directors since September 2004. Since February 2000, Mr. Becker
has been the Chairman and Chief Executive Officer of Laureate Education, Inc., which was known prior to May 2004 as Sylvan Learning Systems, Inc. (together, Laureate). Previously, Mr. Becker served as President and Co-Chief
Executive Officer of Laureate since April 1993. From February 1991 until April 1993, Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center Division of Laureate. Mr. Becker is also Senior Managing Director of Sterling Capital
Partners, LP. Mr. Becker also serves as a director of Constellation Energy Corporation.

Laurence Berg. Mr. Berg has served as one of our
directors since March 2003 and served as Chairman of our Board of Directors from March 2003 to April 2004. Mr. Berg is a senior partner of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the
Apollo Investment Funds, a series of private securities investment funds. He has worked at Apollo since 1992. Prior to joining Apollo, Mr. Berg was a member of the Mergers and Acquisition Group at Drexel Burnham Lambert. Mr. Berg is also a
director of Goodman Global Holdings, Jacuzzi Bath Inc., and Rexnord Inc.

Michael F. Devine, III.Mr. Devine has served as one of our directors
since December 2004. Mr. Devine is the Senior Vice President and Chief Financial Officer of Coach, Inc., a designer, producer, and marketer of fine accessories and gifts. He has served in that position since December 2001. Prior to joining
Coach, Inc., from 2000 to 2001, Mr. Devine was Executive Vice President and Chief Financial Officer of Mothers Work, Inc., the worlds largest designer, manufacturer and retailer of maternity apparel. From 1997 to 2000, Mr. Devine
served as Chief Financial Officer, Treasurer and Secretary of Strategic Distribution, Inc. Prior to that, from 1995 to 1997, Mr. Devine was Chief Financial Officer of Industrial Systems Associates, a subsidiary of Strategic Distribution, Inc.
Mr. Devine previously held Director of Operations and Director of Finance positions at McMaster-Carr Supply Company from 1989 to 1995 and progressively senior finance positions at Honeywell, Inc. from 1980 to 1989.

David Hornbeck.Mr. Hornbeck has served as one of our directors since September 2004. With support from the Hewlett Foundation, Mr. Hornbeck is doing design
work for a national advocacy organization for public education. Previously, Mr. Hornbeck served as President of the Childrens Defense Fund and, from October 2003 to December 2004, as President and Chief Executive Officer of the
International Youth Foundation, a public foundation dedicated to bringing resources and attention to the needs of young people around the world. From 2000 to 2003, Mr. Hornbeck was self-employed as a



36



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writer and consultant. Previously, Mr. Hornbeck served as Superintendent of the Philadelphia Public Schools for six years, State Superintendent of
Schools in Maryland for 12 years, Deputy Secretary of Education in Pennsylvania for four years, and a partner in the law firm of Hogan & Hartson. Mr. Hornbeck has been chairman of the board of the Carnegie Foundation for the Advancement of
Teaching, the Childrens Defense Fund, and the Public Education Network and President of the Council of State School Officers.

Cheryl Krongard.Ms. Krongard has served as one of our directors since June 2004. Ms. Krongard was nominated for election by Apollo. Ms. Krongard is a private investor. Ms. Krongard is a former partner of Apollo Advisors, L.P., where she
worked from 2002 until 2004. Ms. Krongard was the Chief Executive Officer of Rothschild Asset Management from 1995 to 2000. She served as Senior Managing Director for Rothschild North America from 1993 until 2000. Ms. Krongard is a
director of U.S. Airways Group, Inc. and Legg Mason, Inc. She is a Governor of the Iowa State University Board of Governors. Ms. Krongard is also a member of the Deans Advisory Council, Iowa State University College of Business. She is
Trustee of the Mount Sinai Medical Center.

Aaron Stone. Mr. Stone has served as one of our directors since April 2004. Mr. Stone is a
partner of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the Apollo Investment Funds, a series of private securities investment funds. Mr. Stone has worked at Apollo since 1997. Prior to joining
Apollo, Mr. Stone was a member of the Mergers and Acquisition Group at Smith Barney, Inc. Mr. Stone is also a director of AMC Entertainment Inc., Hughes Communications, Inc., Intelsat, Ltd., and SkyTerra Communications, Inc.

Michael D. Weiner.Mr. Weiner has served as one of our directors since April 2006. Mr. Weiner was nominated for election by Apollo. Since September
2006, Mr. Weiner has served as Chief Legal Officer and Co-Chief Operating Officer of Ares Management, LLC, a private investment management firm. From 1992 until August 2006, Mr. Weiner served as the General Counsel of Apollo Management,
L.P. Before joining Apollo in 1992, Mr. Weiner was a partner with Morgan, Lewis & Bockius, specializing in securities law, public and private financings, and corporate and commercial transactions. Mr. Weiner is also a director of
Hughes Communications, Inc., SkyTerra Communications, Inc., and Goodman Global Holdings, Inc.

Raul Yzaguirre. Mr. Yzaguirre has served as one
of our directors since September 2004. Mr. Yzaguirre is the Presidential Professor of Practice for Community Development and Civil Rights at Arizona State University. Mr. Yzaguirre resigned on January 1, 2005 from the post of
President and Chief Executive Officer of National Council of LaRaza, a community development and public policy organization, a capacity in which he served since 1974. Mr. Yzaguirre is also a past Chairperson of the Independent Sector, a
nonprofit coalition of over 850 corporate, foundation and voluntary organizations. He is the current Chairman of the board of directors of AARP Services, Inc., and was formerly a director of the Better Business Bureaus and Sears, Roebuck and
Company.

Code of Ethics

The Company
has adopted a Code of Business Conduct and Ethics for Directors and Employees (the Code of Ethics), including the principal executive officer, principal financial officer, principal accounting officer and persons performing similar
functions. Copies of the Code of Ethics are available free of charge by writing to Investor Relations at 1001 Fleet Street, Baltimore, Maryland 21202. Any waivers of the Code of Ethics must be approved, in advance, by the full Board of Directors.
Any amendments to, or waivers from the Code of Ethics must be approved, in advance, by the full Board of Directors. Any amendments to, or waivers from the Code of Ethics that apply to executive officers and directors will be posted on the
Corporate Governance section of our Internet website located at www.educate-inc.com.

Audit Committee and Audit Committee Financial
Expert

The Audit Committee meets with management and Educates independent auditors to: (i) review whether satisfactory
accounting procedures are being followed by Educate and whether its internal accounting controls are adequate, (ii) monitor audit and non-audit services performed by the independent auditors, and (iii) approve fees charged by the
independent auditors. The Audit Committee also reviews the performance of the independent auditors and selects annually the firm of independent auditors to recommend to the shareholders to audit Educates financial statements.



37



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The Audit Committee consists of independent directors Messrs. Devine, Hornbeck and Yzaguirre. The Board
of Directors has determined that Mr. Devine is an audit committee financial expert as that term is used in Item 407(d)(5) of Regulation S-K promulgated under the Securities Exchange Act. The current Audit Committee Charter is
available on Educates website at www.educate-inc.com or you may request a copy by writing to the Company at Educate, Inc., Attention: General Counsel/Corporate Secretary, 1001 Fleet Street, Baltimore, Maryland 21202.

Shareholder Communication with the Board of Directors

Under Educates Bylaws, nominations for director may be made only by the Board of Directors or a committee thereof or by a stockholder of record who delivers notice along with the additional information and materials required by
Educates Bylaws to Educates Corporate Secretary not less than 90 days and not more than 120 days before the first anniversary date of the mailing date for the preceding years annual meeting. Educate will only hold an annual meeting
of stockholders if the Agreement and Plan of Merger dated as of January 28, 2007 (the Merger Agreement) by and among Edge Acquisition, LLC, a Delaware limited liability company (Parent), Edge Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of Parent (MergerCo), and Educate is not adopted by Educates stockholders or the merger is not otherwise completed. A copy of Educates Bylaws may be obtained by writing to its
General Counsel/Corporate Secretary at Educate, Inc., 1001 Fleet Street, Baltimore, Maryland 21202. A copy of Educates Bylaws has been filed with the SEC.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that
Educates executive officers and Directors, and persons who own more than ten percent of a registered class of Educates securities, file reports of ownership and changes in ownership with the SEC and provide Educate with copies of such
reports. Educate has reviewed such reports received by it and written representations from its Directors and executive officers. Based solely on such review, Educate believes that all ownership filing requirements were made timely during 2006.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Overview

Our Compensation Committee is responsible for evaluating and determining the compensation of all of our executive officers, including the senior executive officers who are named in the Summary Compensation Table of
this annual report on Form 10-K (our Named Executive Officers or NEOs).

Our NEO compensation was designed to
develop and foster the continued growth of the management team best suited to our operations, and to ensure that their compensation was appropriately linked to the long-term creation of value for our stockholders. We typically grant equity
compensation with relatively long vesting thresholds in order to keep an emphasis on long-term growth. We also provide annual compensation that rewards our NEOs for success over a shorter period.

Compensation Committee Procedures

Our Compensation
Committee (the Compensation Committee) consists of two independent directors, none of whom has ever been an officer or employee of Educate. The function of the Compensation Committee is to review and, if appropriate, amend, or recommend
amendment of, Educates policies regarding the compensation of Educates executive officers and directors and to review and set, or recommend the setting of, compensation of Educates executive officers and directors. The Compensation
Committees responsibilities also include administering Educates stock option plans and making decisions or recommendations regarding option grants to officers, directors and other employees. The Compensation Committee also periodically
reviews Educates employee benefit plans that are intended to qualify under Section 401 of the Internal Revenue Code to determine whether any changes to those plans may be appropriate. The Compensation Committee meets at least once a year
to



38



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review management performance and compensation; to approve compensation increase, bonus and option grants for the CEO; to review the compensation increases,
bonuses and option grants for other executive officers; and to establish performance objectives for the executive officers. The Committee also meets on an as-needed basis to recommend compensation for newly created or expanded executive positions
and as the need arises.

Our NEO Compensation Reflects our Core Values

The ultimate objective of our NEO compensation program is to increase stockholder value by fostering the management environment that will best develop our business. As a result, we structure our executive compensation
programs to serve two principal objectives:



| |  |  | Attract, motivate and retain executives of outstanding ability and potential. We believe that our success depends on our ability to attract and retain the
management team that will cultivate the highest levels of performance, service and integrity. We recognize that these candidates have a variety of career options, and that we must offer them attractive compensation packages while respecting the
overarching interest of our stockholders in a fair compensation arrangement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintain an appropriate relationship between executive compensation and the creation of stockholder value. We strive to provide compensation packages that
will reward exceptional service to our company. We include components of both annual and long-term compensation to reflect our determination to keep management invested in our short-term success and our long-term growth.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2006 Compensation Review

During 2006 the Compensation Committee worked with an outside executive compensation firm to develop our NEO compensation program. Before the Compensation Committee recommended the new compensation program to the Board of Directors,
however, the Company received a letter expressing an interest in acquiring the Company from a group including Mr. Hoehn-Saric and Mr. P. Cohen, the Chairman and Chief Executive Officer and the President and Chief Operating Officer,
respectively. As a result of the expression of interest in acquiring the Company, the Board of Directors postponed the consideration of the NEO compensation program until after the termination of the consideration by the Company of the proposed
transaction. Because the proposed transaction has been neither closed nor terminated, the Board has not yet considered adopting the NEO compensation program considered and approved by the Compensation Committee during 2006.

Annual Compensation

Base Salary

Pursuant to Mr. Hoehn-Sarics employment agreement, he is entitled to an annual base salary of $400,000 (which was set at $500,000 for 2006),
which must be reviewed annually for increases by the Board or the Compensation Committee. We do not have employment agreements with any other executive officer. All NEO salaries are set by the Compensation Committee, based on their skills,
experience, level of responsibility, and individual accomplishments. The Compensation Committee also considers typical compensation levels paid by other companies in our industry to individuals with similar credentials. The Compensation Committee
confers with our chief executive officer when setting base salaries for the other NEOs, but he did not participate in deliberations regarding his own salary.

Incentive Bonus

Our employment agreement with Mr. Hoehn-Saric provides that he is eligible for
an annual performance bonus of up to 100% of his base salary if we meet certain performance goals based on our earnings before interest, taxes, depreciation and amortization (EBITDA). For 2006, the Company failed to achieve its targeted
EBITDA, so no annual performance bonus was paid to Mr. Hoehn-Saric.



39



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All other NEOs are eligible for an annual performance bonus of a percentage of base salary if we
meet certain performance goals based on our EBITDA. Potential annual payments are equal to 100% of base salary for Mr. P. Cohen, 60% of base salary for Mr. J. Cohen and 50% of base salary for Messrs Shaffer and Paucek. For 2006, the
Company failed to achieve its targeted EBITDA, so no annual performance bonus was paid to the other NEOs.

All other NEOs are
also eligible to receive discretionary cash bonuses based on their performance during the prior fiscal year. These bonuses are set by our Compensation Committee in consultation with Mr. Hoehn-Saric. All of these bonuses are designed to reward
superior corporate performance, exceptional personal contributions, or a combination of both factors. Mr. J. Cohen was paid a bonus of $345,414 in connection with the Companys sale of Education Station LLC in August 2006.

401(k) Contributions

All of our NEOs
are entitled to participate in our 401(k) savings plan. Under this plan, each employee who has completed at least one year and 800 hours of service may contribute up to 100% of his or her eligible compensation, less applicable withholdings, and we
will make 50% matching contributions to that employees account up to 6% of eligible compensation. We provide this compensation to our NEOs in order to remain competitive with compensation packages available in our industry generally and assist
our employees with their retirement planning. Balances in the 401(k) account, which will vary based on contributions and the investment performance of each participants account, will be paid in a lump sum upon termination of employment.

Benefits

We provide
additional benefits to our NEOs in order to remain competitive with compensation packages available in our industry generally and foster an attractive working environment. In many cases, these benefits are identical or substantially identical to
those provided to all employees at the same location. For NEOs, we also provide an auto allowance, parking subsidies, supplemental disability and supplemental health plan services and the ability to defer a portion of their eligible
compensation through a deferred compensation plan.

Long-Term Compensation

We believe that a significant portion of our NEO compensation should be contingent on increases in the market price of our common stock, in order to
ensure that our management team remains focused on growth in stockholder value. As a result, we emphasize longer-term equity compensation as a complement to our annual compensation arrangements. Our 2004 Omnibus Stock Incentive Plan permits the
grant of stock options, stock appreciation rights, restricted stock, deferred stock, and performance shares. To date, we have only granted stock options and restricted stock to our NEOs under this Plan. We grant options and restricted stock awards
with vesting periods of three of four years in order to create a strong incentive for our NEOs to remain part of our management team. Restricted stock is typically fully vested upon grant, but subject to restrictions on transfer that generally
survive for three years after the date of grant; provided, however, if employment is terminated during such period, then the restrictions on transfer shall survive for five years from the date of termination of employment if such termination is by
the Company for cause or by the employee for other than good reason. We did not grant any equity awards to our NEOs during 2005 or 2006 because of the Companys performance level during those periods and also because grants made in 2003 and
2004 continued to vest during 2005 and 2006.

Post-Termination Payments

We do not have employment or severance agreements with any executive officer other than Mr. Hoehn-Saric.

In the event Mr. Hoehn-Sarics employment with Educate is terminated as a result of his death or total disability, he will be entitled to all
amounts of accrued but unpaid base salary and benefits through the date of such termination and the bonus that he would have been entitled to had he worked the full year during which his death or



40



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total disability occurred. In the event Mr. Hoehn-Sarics employment with Educate is terminated by Educate other than for cause, death or total
disability or by Mr. Hoehn-Saric for good reason after June 30, 2006, he will be entitled to (i) his base salary until the later of the first anniversary of the date of termination or the expiration of the agreement without giving
effect to any further extensions, (ii) the bonus that he would have been entitled to had he worked the full year during which the termination occurred, (iii) continue to participate in, and be covered under, Educates group life,
disability, sickness, accident and health insurance programs on the same basis as other of Educates executives through the first anniversary of the date of termination, and (iv) automatic vesting of his options which will be exercisable
as to the greater of the then vested shares or 920,000 shares, effective as of the day immediately preceding his termination date, and, the options will remain outstanding and exercisable for the longer of six (6) months or the duration
provided in the Plan and/or his option agreement.

Mr. Hoehn-Sarics agreement provides that if the benefits payable to him would
be subject to the imposition of the excise tax under Section 4999 of the Code, the amount of his benefits will be reduced to the highest amount that may be paid by us or another entity without subjecting such benefits to the excise tax;
provided, however, no benefit reduction will apply if Mr. Hoehn-Saric would, on a net after tax basis, receive less benefits than if the benefits were not so reduced.

Tax and Accounting Implications

Compensation Deduction Limit. As part of its role, the
Compensation Committee considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that we may not deduct compensation of more than $1 million that is paid to certain individuals. The
Compensation Committee has considered the $1 million limit for federal income tax purposes on deductible executive compensation that is not performance-based, and believes that the executive compensation paid in 2006 and prior years satisfied
the requirements of federal tax law and thus the compensation should be fully deductible.

Compensation Committee Interlocks and Insider Participation
in Compensation Decisions

The Compensation Committee consists of Mr. Weiner and Ms. Krongard. Neither was a party to any
transaction with Educate which requires disclosure under applicable regulations of the SEC. None of Educates officers serves as a director or member of the compensation committee of another entity, which has an executive officer who serves on
Educates Compensation Committee.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with
management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report.

Compensation Committee

Cheryl Krongard

Michael D. Weiner



41



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SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the compensation earned during the fiscal year ended December 31, 2006 by our Chief Executive
Officer, Chief Financial Officer, and our three other most highly-compensated executive officers:



|                                                                           |  |      |  |            |         |          |   |                    |  |                                         |         |  |                             |         |           |  |   |        |  |   |        
|-------------------------------------------------------------------------- |  | ---- |  | ---------- | ------- | -------- | - | ------------------ |  | --------------------------------------- | ------- |  | --------------------------- | ------- | --------- |  | - | ------ |  | - | -------
|Name and Principal Position                                                |  | Year |  | Salary ($) |         | Bonus($) |   | OptionAwards($)(1) |  | Non-EquityIncentive PlanCompensation($) |         |  | All OtherCompensation($)(3) |         | Total ($)
|R. Christopher Hoehn-Saric                                                 |  | 2006 |  | $          | 500,000 |          | $ | 0                  |  | $                                       | 0       |  | $                           | 0       |           |  | $ | 41,388 |  | $ | 541,388
|Chairman of the Board andChief Executive Officer                           |  |      |  |            |         |          |   |                    |  |                                         |         |  |                             |         |           |  |   |        |  |   |        
|                                                                           |  |      |  |            |         |          |  
|Kevin E. Shaffer                                                           |  | 2006 |  | $          | 258,333 |          | $ | 0                  |  | $                                       | 178,750 |  | $                           | 0       |           |  | $ | 33,769 |  | $ | 470,852
|Chief Financial Officer                                                    |  |      |  |            |         |          |   |                    |  |                                         |         |  |                             |         |           |  |   |        |  |   |        
|                                                                           |  |      |  |            |         |          |  
|Peter J. Cohen                                                             |  | 2006 |  | $          | 343,980 |          | $ | 0                  |  | $                                       | 0       |  | $                           | 0       |           |  | $ | 43,724 |  | $ | 387,704
|President, Chief Operating Officer andPresident of Learning Center segment |  |      |  |            |         |          |   |                    |  |                                         |         |  |                             |         |           |  |   |        |  |   |        
|                                                                           |  |      |  |            |         |          |  
|Jeffrey H. Cohen                                                           |  | 2006 |  | $          | 300,000 |          | $ | 0                  |  | $                                       | 0       |  | $                           | 345,414 | (2)       |  | $ | 35,800 |  | $ | 681,214
|President, Catapult Learning                                               |  |      |  |            |         |          |   |                    |  |                                         |         |  |                             |         |           |  |   |        |  |   |        
|                                                                           |  |      |  |            |         |          |  
|Christopher J. Paucek                                                      |  | 2006 |  | $          | 230,000 |          | $ | 0                  |  | $                                       | 103,425 |  | $                           | 0       |           |  | $ | 23,158 |  | $ | 356,583
|President, Educate Products                                                |  |      |  |            |         |          |   |                    |  |                                         |         |  |                             |         |           |  |   |        |  |   |        

---

|(1) | Reflects the dollar amount recognized for financial reporting purposes in accordance with FAS 123(R) and thus includes amounts from awards granted prior to 2006. Assumptions used in
the calculation of these amounts are included in Note 9 to our audited financial statements included in our Annual Report on Form 10-K. Options previously granted to Messrs Hoehn-Saric, P. Cohen and J. Cohen were fully expensed in 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents non-equity incentive plan compensation paid for 2006 in connection with the Companys sale of Education Station LLC in August 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes auto allowance, 401(k) match made in Educate, Inc. stock, parking subsidies, supplemental disability and supplemental health plan services. Auto allowance, 401(k) match,
and parking subsidies amounts were less than $10,000 per person. Supplemental disability amounts were $11,758 and $13,594 respectively for Messrs. Hoehn-Saric and P. Cohen. Supplemental health plan services were $15,410, $15,383, $15,910, $16,566
and $15,213 for Messrs. Hoehn-Saric, Shaffer, P. Cohen, J. Cohen and Paucek, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



42



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GRANTS OF INCENTIVE PLAN BASED AWARDS

The following table sets forth certain information with respect to non-equity incentive plan based awards applicable to the fiscal year ended
December 31, 2006 to our named executive officers. No equity awards were granted to named executive officers during 2006.



|                           |  |               |     |            |                                                                |             |  |   |           |  |   |          
|-------------------------- |  | ------------- | --- | ---------- | -------------------------------------------------------------- | ----------- |  | - | --------- |  | - | ---------
|Name                       |  | GrantDate     |     |            | Estimated Future Payouts Under Non-EquityIncentive Plan Awards
|                           |  | Threshold ($) |     | Target ($) |                                                                | Maximum ($)
|R. Christopher Hoehn-Saric |  | 1/1/06        | (1) |            | $                                                              | 500,000     |  | $ | 500,000   |  | $ | 500,000  
|                           |  |               |     |           
|Kevin E. Shaffer           |  | 1/1/06        | (1) |            | $                                                              | 130,000     |  | $ | 130,000   |  | $ | 130,000  
|                           |  |               |     |           
|Peter J. Cohen             |  | 1/1/06        | (1) |            | $                                                              | 343,980     |  | $ | 343,980   |  | $ | 343,980  
|                           |  |               |     |           
|Jeffrey H. Cohen           |  | 1/1/06        | (1) |            | $                                                              | 180,000     |  | $ | 180,000   |  | $ | 180,000  
|                           |  | 8/06          | (2) |            | $                                                              | 0           |  | $ | 1,140,000 |  | $ | 1,140,000
|                           |  |               |     |           
|Christopher J. Paucek      |  | 1/1/06        | (1) |            | $                                                              | 115,000     |  | $ | 115,000   |  | $ | 115,000  

---

|(1) | The Companys annual incentive plan is an evergreen plan that provides for annual cash payments to participants if the Company exceeds its targeted EBITDA for the applicable
year. The Company failed to achieve its targeted EBITDA during 2006, so no payments were made. The annual payments are equal to 100% of base salary for Messrs Hoehn-Saric and P. Cohen, 60% of base salary for Mr. J. Cohen and 50% of base salary
for Messrs Shaffer and Paucek.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents cash payments payable in connection with the Companys sale of Education Station, LLC in August 2006. The payments are equal to (a) 10% of the first $10 million in
net cash received by the Company in connection with the transaction plus (b) 2% of the amount by which the net cash received by the Company exceeds $10 million plus (c) miscellaneous payments related to the sale agreed upon by the parties. Target
and Maximum amounts are based on total anticipated net cash receipts of $17 million (which assumes $1 million of related costs), which are expected to be received through August 2010. Payments are made only when net cash is received by the Company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Educate does not have employment agreements with any of the named executive officers, other than Mr. Hoehn-Saric.
Educate entered into an employment agreement with Mr. Hoehn-Saric on June 30, 2003. Mr. Hoehn-Sarics agreement has a term of three years, which is automatically extended by one year beginning on the third anniversary of the
agreement, unless either party provides written notice that it does not wish to extend the term. The agreement provides for an annual base salary of $400,000 per year ($500,000 per year for 2006) that is subject to annual increases by the Board or
the Compensation Committee of the Board. Mr. Hoehn-Saric is eligible to receive annual performance bonuses of 100% of his base salary based upon Educates attainment of certain earnings before interest, taxes, depreciation and amortization
goals. On July 1, 2003 Mr. Hoehn-Saric was granted options to purchase 1,380,000 shares of Educate common stock pursuant to the 2003 Plan, with a per share exercise price equal to $3.71. These options vest as to 1/36 of the shares subject
to the options at the end of each full month following the date of grant, and vest in full in the event of a change of control. The agreement also provides for Mr. Hoehn-Saric to be automatically nominated to serve as Chairman of Educates
Board of Directors.



43



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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth certain information with respect to the value of all unexercised options previously awarded to our named executive
officers as of December 31, 2006. All stock awards granted to the named executive officers were fully vested on the date of grant, but continue to be subject to restrictions on transfer.



|                           |                                                                  |               |     |                                                                    |        |                                                                                          |   |                        |   |                      |  |          
|-------------------------- | ---------------------------------------------------------------- | ------------- | --- | ------------------------------------------------------------------ | ------ | ---------------------------------------------------------------------------------------- | - | ---------------------- | - | -------------------- |  | ---------
|Name                       |                                                                  | Option Awards
|                           | Number ofSecuritiesUnderlyingUnexercisedOptions (#)
 Exercisable |               |     | Number ofSecuritiesUnderlyingUnexercisedOptions (#)
 Unexercisable |        | Equity IncentivePlan Awards: Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions (#) |   | OptionExercisePrice($) |   | OptionExpirationDate
|R. Christopher Hoehn-Saric |                                                                  | 1,380,000     | (1) |                                                                    |       |                                                                                          |  |                        | $ | 3.71                 |  | 6/30/2013
|                           |                                                                  |               |     |                                                                    |       
|Kevin E. Shaffer           |                                                                  | 124,104       | (2) |                                                                    | 17,729 |                                                                                          |  |                        | $ | 3.71                 |  | 6/30/2013
|                           |                                                                  | 51,667        | (3) |                                                                    | 28,333 |                                                                                          |  |                        | $ | 5.06                 |  | 5/12/2014
|                           |                                                                  |               |     |                                                                    |       
|Peter J. Cohen             |                                                                  | 336,000       | (2) |                                                                    | 48,000 |                                                                                          |  |                        | $ | 3.71                 |  | 6/30/2013
|                           |                                                                  |               |     |                                                                    |       
|Jeffrey H. Cohen           |                                                                  | 227,500       | (2) |                                                                    | 32,500 |                                                                                          |  |                        | $ | 3.71                 |  | 6/30/2013
|                           |                                                                  |               |     |                                                                    |       
|Christopher J. Paucek      |                                                                  | 10,000        | (4) |                                                                    | 5,000  |                                                                                          |  |                        | $ | 11.00                |  | 9/16/2014
|                           |                                                                  | 36,563        | (5) |                                                                    | 98,438 |                                                                                          |  |                        | $ | 8.22                 |  | 4/9/2016 

---

|(1) | These options were granted on July 1, 2003 and vest as to 1/36 of the shares subject to the options at the end of each full month following the date of grant. These options are
fully vested.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | These options were granted on July 1, 2003 and vest as to 1/48 of the shares subject to the options at the end of each full month following the date of grant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | These options were granted May 13, 2004 and vest as to 1/48 of the shares subject to the options at the end of each full month following the date of grant.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | These options were granted on September 17, 2004 and vest as to 1/48 of the shares subject to the options at the end of each full month following the date of grant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | These options were granted April 10, 2006 and vest as to 1/48of the shares subject to the options at the end of each month following the date of grant.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



44



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OPTION EXERCISES AND STOCK VESTED

The named executive officers did not exercise any options during the fiscal year ended December 31, 2006. No restricted stock held by the named
executive officers vested during the fiscal year ended December 31, 2006.

NONQUALIFIED DEFERRED COMPENSATION

Educate maintains a deferred compensation plan to provide eligible employees with a convenient way to save on a regular and long-term basis, thereby
providing for their retirement. The plan is intended to be an unfunded plan for purposes of the Employee Retirement Income Security Act of 1974, as amended, and maintained primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees. Both pre-tax contributions and their respective earnings will remain tax deferred until withdrawn through plan benefit payments. Salary and bonus contributions are typically invested in various
mutual funds, stocks and bonds as selected by each participant and approved by the plan trustee. The following table sets forth certain information concerning the nonqualified deferred compensation plan in which our named executive officers
participated during the fiscal year ended December 31, 2006:



|                           |  |                                              |         |                                                |   |                                         |  |                                        |         |                                            |   |   |  |   |          
|-------------------------- |  | -------------------------------------------- | ------- | ---------------------------------------------- | - | --------------------------------------- |  | -------------------------------------- | ------- | ------------------------------------------ | - | - |  | - | ---------
|Name                       |  | ExecutiveContributions in Last FiscalYear($) |         | RegistrantContributions In Last FiscalYear ($) |   | AggregateEarningsin Last FiscalYear ($) |  | AggregateWithdrawals/ Distributions($) |         | AggregateBalance at Last FiscalYear-End($)
|R. Christopher Hoehn-Saric |  | $                                            | 250,000 |                                                | $ | 0                                       |  | $                                      | 327,110 |                                            | $ | 0 |  | $ | 2,154,423
|                           |  |                                              |         |                                                |  
|Kevin E. Shaffer           |  | $                                            | 0       |                                                | $ | 0                                       |  | $                                      | 0       |                                            | $ | 0 |  | $ | 0        
|                           |  |                                              |         |                                                |  
|Peter J. Cohen             |  | $                                            | 0       |                                                | $ | 0                                       |  | $                                      | 113,177 |                                            | $ | 0 |  | $ | 768,329  
|                           |  |                                              |         |                                                |  
|Jeffrey H. Cohen           |  | $                                            | 0       |                                                | $ | 0                                       |  | $                                      | 3,973   |                                            | $ | 0 |  | $ | 33,059   
|                           |  |                                              |         |                                                |  
|Christopher J. Paucek      |  | $                                            | 0       |                                                | $ | 0                                       |  | $                                      | 0       |                                            | $ | 0 |  | $ | 0        

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

Educate does not have agreements providing for potential payments upon termination or change of control with any of the named executive officers, other
than Mr. Hoehn-Saric. In the event Mr. Hoehn-Sarics employment with Educate is terminated as a result of his death or total disability, he will be entitled to all amounts of accrued but unpaid base salary and benefits through the
date of such termination and the bonus that he would have been entitled to had he worked the full year during which his death or total disability occurred. In the event Mr. Hoehn-Sarics employment with Educate is terminated by Educate
other than for cause, death or total disability or by Mr. Hoehn-Saric for good reason after June 30, 2006, he will be entitled to (i) his base salary until the later of the first anniversary of the date of termination or the
expiration of the agreement without giving effect to any further extensions, (ii) the bonus that he would have been entitled to had he worked the full year during which the termination occurred, (iii) continue to participate in, and be
covered under, Educates group life, disability, sickness, accident and health insurance programs on the same basis as other of Educates executives through the first anniversary of the date of termination, and (iv) automatic vesting
of his options which will be exercisable as to the greater of the then vested shares or 920,000 shares, effective as of the day immediately preceding his termination date, and, the options will remain outstanding and exercisable for the longer of
six (6) months or the duration provided in the Plan and/or his option agreement. As a result of the foregoing, Mr. Hoehn-Saric would be entitled to receive a cash payment of approximately $500,000, assuming that the Company would fail to
reach or exceed its targeted EBITDA for the applicable year, as the Company failed to do during 2006, and benefits and other perquisites having a value of approximately $39,894.



45



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Mr. Hoehn-Sarics agreement provides that if the benefits payable to him would be subject to
the imposition of the excise tax under Section 4999 of the Code, the amount of his benefits will be reduced to the highest amount that may be paid by us or another entity without subjecting such benefits to the excise tax; provided, however, no
benefit reduction will apply if Mr. Hoehn-Saric would, on a net after tax basis, receive less benefits than if the benefits were not so reduced.

Mr. Hoehn-Sarics agreement also contains non-competition and non-solicitation provisions effective through the term of the agreement, unless his employment is terminated by Educate except as a result of his
death or disability, until the first anniversary of the date of termination.

DIRECTOR COMPENSATION

The following table sets forth information concerning the compensation earned during the last fiscal year by each individual who served as a director at
any time during the fiscal year:



|                               |  |                               |        |                 |   |                     |  |           |        |  |   |        
|------------------------------ |  | ----------------------------- | ------ | --------------- | - | ------------------- |  | --------- | ------ |  | - | -------
|Name                           |  | Fees Earned orPaid in Cash($) |        | Stock Awards($) |   | Option Awards($)(6) |  | Total ($)
|Douglas L. Becker (1)          |  | $                             | 0      |                 | $ | 0                   |  | $         | 0      |  | $ | 0      
|Laurence Berg                  |  | $                             | 72,000 |                 | $ | 0                   |  | $         | 0      |  | $ | 72,000 
|Michael F. Devine, III (2)     |  | $                             | 93,700 |                 | $ | 0                   |  | $         | 15,440 |  | $ | 109,140
|Michael Gross (3)              |  | $                             | 2,500  |                 | $ | 0                   |  | $         | 0      |  | $ | 2,500  
|R. Christopher Hoehn-Saric (4) |  | $                             | 0      |                 | $ | 0                   |  | $         | 0      |  | $ | 0      
|David W. Hornbeck              |  | $                             | 78,100 |                 | $ | 0                   |  | $         | 0      |  | $ | 78,100 
|Cheryl Krongard                |  | $                             | 79,400 |                 | $ | 0                   |  | $         | 0      |  | $ | 79,400 
|Aaron Stone                    |  | $                             | 52,000 |                 | $ | 0                   |  | $         | 0      |  | $ | 52,000 
|Michael D. Weiner (5)          |  | $                             | 72,000 |                 | $ | 0                   |  | $         | 46,320 |  | $ | 118,320
|Raul Yzaguirre                 |  | $                             | 76,100 |                 | $ | 0                   |  | $         | 0      |  | $ | 76,100 

---

|(1) | Mr. Becker serves on the board of directors without receiving any compensation.
|--- | -------------------------------------------------------------------------------



|(2) | Mr. Devine received a vested stock option to purchase 4,000 shares of Educate Common Stock at an exercise price of $8.22 per share, which was equal to the fair market value of the
Common Stock on the grant date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Mr. Gross resigned from the Board of Directors on February 2, 2006.
|--- | -------------------------------------------------------------------



|(4) | Mr. Hoehn-Saric is not included in the table as he is an employee of the Company. The compensation received by Mr. Hoehn-Saric as an employee is set forth in the Summary
Compensation Table.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Mr. Weiner was elected to the Board of Directors on April 10, 2006. Upon his appointment, Mr. Weiner received a vested stock option to purchase 12,000 shares of
Educate Common Stock at an exercise price of $8.22 per share, which was equal to the fair market value of the Common Stock on the grant date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Reflects the dollar amount recognized for financial reporting purposes in accordance with FAS 123(R). Assumptions used in the calculation of these amounts are included in Note 9 to
our audited financial statements included in our Annual Report on Form 10-K. As of December 31, 2006, each director had the following number of options outstanding: Mr. Berg 20,000; Mr. Devine 20,000; Mr. Hornbeck 12,000;
Ms. Krongard 20,000; Mr. Stone 20,000; Mr. Weiner 12,000; and Mr. Yzaguirre 12,000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Directors who are
not employees of Educate receive cash compensation of $25,000 per year for service on the Board, $15,000 per year for service as the Chair of the Audit Committee, $7,000 per year for service as Chair of other Committees of the Board, $1,200 per
committee meeting attended, and $1,000 per committee meeting participated by telephone. In addition, each Director who is not an employee receives an annual grant of restricted stock equal in value to $30,000, with such stock vesting at each such
Directors termination as a member of the Board. For each of 2006 and 2007, in lieu of grants of restricted stock, because of the pending transaction involving the Company, each Director who is not an employee has received or will receive
additional cash compensation of $25,000. In connection with the Boards consideration of the offer for the Company and other possible transactions, the Board of Directors formed the Negotiation Committee, which consists of members who are
neither members of management nor affiliates of the buyer group. As compensation for work as members of the Negotiation Committee, each member shall be paid a one-time fee of $20,000 and a payment of $2,000 for each Negotiation Committee meeting in
which the member participates. (Currently, Mr. Becker does not receive compensation from Educate.) All directors are reimbursed for their out-of-pocket expenses in connection with attending meetings and serving on the Board.



46



---

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Stock Ownership of Certain Beneficial Owners, Directors and Management

The following table sets forth information regarding the beneficial ownership of Educate Common Stock as of April 16, 2007 by (i) each person or
entity that Educate knows beneficially owns more than 5% of Educate Common Stock, (ii) each Director, (iii) the Chief Executive Officer and each of the other Named Executive Officers and (iv) all Directors and Executive Officers as a
group. Unless otherwise indicated, the named persons exercise sole voting and investment power over the shares shown as beneficially owned by them.



|                                                     |  |                      |  |              |  
|---------------------------------------------------- |  | -------------------- |  | ------------ | -
|Name and Address of Beneficial Owner(1)              |  | Number ofSharesOwned |  | PercentOwned |  
|Apollo Advisors IV, L.P. (2)(3)                      |  | 22,588,278           |  | 53           | %
|Kornitzer Capital Management, Inc. (4)               |  | 2,405,432            |  | 6            | %
|                                                     |  |                     
|Directors, Nominees and Executive Officers           |  |                      |  |              |  
|                                                     |  |                     
|Douglas L. Becker                                    |  |                     |  | *            |  
|Michael F. Devine, III (5)                           |  | 20,000               |  | *            |  
|Laurence Berg (3)(6)(14)                             |  | 22,608,277           |  | 53           | %
|Cheryl Krongard (15)                                 |  | 20,000               |  | *            |  
|David Hornbeck (16)                                  |  | 12,000               |  | *            |  
|Aaron Stone (3)(7)(14)                               |  | 22,608,277           |  | 53           | %
|Michael D. Weiner (8)(18)                            |  | 12,000               |  | *            |  
|Raul Yzaguirre (16)                                  |  | 12,000               |  | *            |  
|R. Christopher Hoehn-Saric (9)(10)                   |  | 2,029,187            |  | 5            | %
|Peter J. Cohen (11)                                  |  | 484,000              |  | 1            | %
|Jeffrey Cohen (12)                                   |  | 270,583              |  | *            |  
|Kevin E. Shaffer (13)                                |  | 299,211              |  | *            |  
|Christopher J. Paucek (17)                           |  | 46,563               |  | *            |  
|All executive officers and directors as a group (19) |  | 25,308,807           |  | 59           | %

---

|* | Represents beneficial ownership of less than 1% of the outstanding shares of common stock.
|- | ------------------------------------------------------------------------------------------



|(1) | Unless otherwise indicated, the address for each of the individuals listed below is: c/o Educate, Inc., 1001 Fleet Street, Baltimore, Maryland 21202.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents shares held by Apollo Sylvan, LLC and Apollo Sylvan II, LLC, two special purpose entities created in connection with Educates acquisition of the pre-K-12 business
of Laureate. Apollo Investment Fund IV, L.P. is the managing member of Apollo Sylvan, LLC and Apollo Overseas Partners IV, L.P. serves as managing member of Apollo Sylvan II, LLC. Apollo Advisors IV, L.P. is the general partner of Apollo Investment
Fund IV, L.P. and Apollo Overseas Partners IV, L.P. Messrs. Leon Black and John Hannan are directors and principal executive officers of the general partner of Apollo Advisors IV, L.P., and each expressly disclaim beneficial ownership of the
indicated shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | c/o Apollo Advisors, L.P., Two Manhattanville Road, Purchase, New York 10577.
|--- | -----------------------------------------------------------------------------



|(4) | Based solely upon a Form 13G filed by Kornitzer Capital Management, Inc. (KCM) on March 2, 2007. The
filing indicates that KCM is an investment adviser and that its principal business address is 5420 West 61stPlace,
Shawnee Mission, KS 66205.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | On December 10, 2004, Mr. Devine was granted 16,000 options to purchase common stock. On April 10, 2006, Mr. Devine was granted 4,000 options to purchase common
stock. As of April 16, 2007, all the options had vested.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47



---

|(6) | Includes shares of common stock beneficially owned by Apollo Advisors IV, L.P. as to which Mr. Berg, a director of the company and senior partner of Apollo Advisors IV, L.P.,
expressly disclaims beneficial ownership.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Includes shares of common stock beneficially owned by Apollo Advisors IV, L.P. as to which Mr. Stone, a director of the company and partner of Apollo Advisors IV, L.P.,
expressly disclaims beneficial ownership.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | c/o Ares Management, LLC, 1999 Avenue of the Stars, Suite 1900, Los Angeles, California 90067.
|--- | ----------------------------------------------------------------------------------------------



|(9) | Includes: (i) 41,880 shares of common stock that Mr. Hoehn-Saric holds as trustee of the CHS Trust; and (ii) 125,640 shares of common stock that Mr. Hoehn-Saric
holds as trustee of the RCHS Trust #9.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) | Mr. Hoehn-Saric was granted 1,380,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of his stock option agreement, his options vest and
become exercisable as to 1/36 of the options at the end of each full month after June 30, 2003. As of April 16, 2007, all the options had vested. Also includes 520,000 restricted shares of common stock Mr. Hoehn-Saric was awarded on
May 13, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) | Mr. Peter Cohen was granted 424,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of his stock option agreement, his options vest and
become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003. As of April 16, 2007, 400,000 options had vested and another 16,000 options were to vest within 60 days. Also includes 28,000 restricted shares
of common stock Mr. Peter Cohen was awarded on May 13, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(12) | Mr. Jeffrey Cohen was granted 260,000 options to purchase shares of common stock on July 1, 2003. Pursuant to the terms of his stock option agreement, his options vest and
become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003. As of April 16, 2007, 243,750 options had vested and another 10,833 options were to vest within 60 days. Also includes 16,000 shares of
restricted stock Mr. Jeffrey Cohen was awarded on May 13, 2004.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(13) | Mr. Shaffer was granted 184,000 and 80,000 options to purchase shares of common stock on July 1, 2003 and May 13, 2004, respectively. Pursuant to the terms of his
stock option agreements, his options vest and become exercisable as to 1/48 of the options at the end of each full month after June 30, 2003 and May 31, 2004, respectively. As of April 16, 2007, 231,802 options had vested and another
9,243 options were to vest within 60 days. Also includes 16,000 shares of restricted stock Mr. Shaffer was awarded on May 13, 2004.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(14) | On May 13, 2004, Messrs. Berg and Stone were each granted 20,000 options to purchase common stock. As of April 16, 2007, all the options had vested.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------



|(15) | On June 23, 2004, Ms. Krongard was granted 20,000 options to purchase common stock. As of April 16, 2007, all of the options had vested.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------



|(16) | On September 17, 2004, Messrs. Hornbeck and Yzaguirre were each granted 12,000 options to purchase common stock. As of April 16, 2007, all of the options had vested.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(17) | Mr. Paucek was granted 15,000 options to purchase shares of common stock on September 17, 2004. As of April 16, 2007, 9,375 of these options had vested and 625 of
these options were to vest within 60 days. Mr. Paucek was granted 135,000 options to purchase shares of common stock on April 10, 2006. As of April 16, 2007, 30,938 of these options had vested and 5,625 of these options were to vest within 60 days.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(18) | On April 10, 2006, Mr. Weiner was granted 12,000 options to purchase common stock. As of April 16, 2007, all of the options had vested.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------



|(19) | Includes options of NEOs to purchase common stock which will vest within 60 days after April 16, 2007.
|---- | ------------------------------------------------------------------------------------------------------



48



---

Equity Compensation Plans

The following tables set forth information regarding outstanding options and shares reserved for future issuance under the plans listed below, which are Educates only equity-based compensation plans, as of
December 31, 2006. There are no outstanding warrants or rights other than options and restricted shares under these plans.



|                                                           |  |                                                                    |  |                                                     |      |                                                                                            |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------ | -------
|Plan Category                                              |  | Number of Securitiesto be Issued UponExercise ofOutstandingOptions |  | Weighted-AverageExercise Price ofOutstandingOptions |      | Number of SecuritiesRemainingAvailablefor Future IssuanceUnder EquityCompensation
Plans(1)
|Equity compensation plans approved by security holders     |  | 3,294,316                                                          |  | $                                                   | 4.89 |                                                                                            | 910,000
|Equity compensation plans not approved by security holders |  |                                                                   |  |                                                     |     |                                                                                            |       
|                                                           |  |                                                                    |  |                                                     |      |                                                                                            |        
|Total                                                      |  | 3,294,316                                                          |  | $                                                   | 4.89 |                                                                                            | 910,000
|                                                           |  |                                                                    |  |                                                     |      |                                                                                            |        

---

|(1) | 910,000 was the number of shares of Educate Common Stock available for future issuance, as of December 31, 2006. On January 1 of each successive year during the term of
the 2004 Plan, the number of shares of Educate Common Stock available for issuance shall increase by an amount equal to the lesser of 400,000 shares or one percent of the number of outstanding shares of Educate Common Stock on December 31 of
the immediately preceding year.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13. Certain Relationships and Related Transactions and Director Independence

Certain Relationships and Related Transactions

Educate has a policy whereby all transactions between the Company and our officers, directors and affiliates will be on terms no less favorable to the Company than could be obtained from unrelated third parties. These transactions must be
approved by the Audit Committee of our Board of Directors. The transactions set forth below were conducted under application of this policy and we believe were no less favorable to us than we would have obtained in an arms length transaction with an
unaffiliated third party.

Educate and Laureate Education, Inc. entered into a Shared Services Agreement dated as of June 30, 2003
pursuant to which Educate provides to Laureate certain accounting, benefits, IT, human resources, purchasing and payroll services and Laureate provides to Educate certain tax, real estate, risk management, and treasury services. During 2006,
pursuant to the agreement, Laureate incurred amounts due to Educate of $2.94 million and Educate incurred amounts due to Laureate of $0.42 million. The original written agreement expired on June 30, 2006. Educate and Laureate are currently
operating pursuant to the terms of an extension of the agreement. Mr. Hoehn-Saric is a Director, and Mr. Becker is Chairman and Chief Executive Officer, of Laureate.

On April 27, 2004, Educate entered into a new secured credit facility with a syndicate of lenders. Funds from the new facility were used in part to
repay all amounts outstanding under a subordinated $55 million note issued to Laureate by Educate in connection with the acquisition by Educate on June 30, 2003 of Laureates pre-K-12 education business. Mr. Hoehn-Saric is a Director,
and Mr. Becker is Chairman and Chief Executive Officer, of Laureate.

Educate subleases its corporate headquarters, consisting of
57,471 square feet of office space, from Laureate, pursuant to a lease which expires August 30, 2011. In addition, Educate subleases other property from Laureate. During 2006, Educate incurred $2.71 million as rent under the subleases. In March
2006, Educate and Laureate agreed to the terms of a Memorandum of Understanding concerning Educate leasing additional space in its corporate



49



---

headquarters building currently leased and occupied by Laureate. Educate and Laureate, along with the owner of the building in which Educate has its
corporate headquarters, are currently engaged in negotiations concerning the expansion of Educates space in its corporate headquarters building. Mr. Hoehn-Saric is a Director, and Mr. Becker is Chairman and Chief Executive Officer,
of Laureate.

On September 20, 2004, Educate sold for $2,100,000 its ownership interest in Connections Academy, Inc., which operates
virtual public and charter schools for K-8 students, to certain of Educates stockholders, including affiliates of Apollo Advisors, L.P. When Educate acquired Connections Academy from Laureate in June 2003, Educate agreed to pay to Laureate up
to $10,000,000 of contingent consideration if Connections Academy achieved specified levels of earnings through 2007. As part of the sale, Educate transferred this contingent liability to the purchaser of Connections Academy. In connection with the
sale, Educate and the entity which purchased Connections Academy entered into a transition services agreement, pursuant to which Educate provides certain services to Connections Academy. The agreement provides for payment to Educate of $24,000 on an
annual basis. In addition, Connections Academy subleases office space from Educate. Connections Academy and Educate, along with the owners of the buildings in which Connections Academy and Educate have their respective corporate headquarters, are
currently engaged in negotiations concerning the expansion and move of Connections Academys corporate headquarters from its current building to the building in which Educate has its corporate headquarters. Messrs. Berg and Stone, who are
Directors of Educate, are affiliated with Apollo. Mr. Weiner was affiliated with Apollo until September 2006. In addition, Messrs. Hoehn-Saric, Peter Cohen, Jeff Cohen and Shaffer, all of whom are officers of Educate, are stockholders of the
entity which purchased Connections Academy.

As previously disclosed, in connection with the Companys initial public offering, the
Company entered into an agreement with Apollo pursuant to which Apollo has the right, at any time until Apollo or its affiliates no longer beneficially own at least 50% of the Companys outstanding Common Stock and have sold at least one share
of Common Stock other than in the Companys initial public offering, to require the Company to increase the size of its Board by two and to fill those vacancies with directors nominated by Apollo. Until such time that Apollo or its affiliates
no longer beneficially own at least 33% of the Companys outstanding Common Stock and have sold at least one share of Common Stock other than in the initial public offering, Apollo will have the right to nominate four designees to the Company
Board, and certain important matters relating to the operations of the Company will require the approval of the majority of directors nominated by Apollo, including:



| | - | amendment, modification or repeal of any provision of the certificate of incorporation, bylaws or similar organizational documents in a manner that adversely affects Apollo;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | the redemption, purchase or acquisition of any of the Companys securities or those of the Companys subsidiaries;
| | - | ------------------------------------------------------------------------------------------------------------------



| | - | the issuance of additional shares of any class of capital stock (other than the grant of options or the issuance of shares upon the exercise of options);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | the payment or declaration of any dividend or other distribution, with respect to any shares of any class or series of capital stock;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| | - | a consolidation or merger with or into any other entity, or transfer (by lease, assignment, sale or otherwise) of all or substantially all of the Companys assets to another
entity;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | a complete or partial liquidation, dissolution, winding-up, recapitalization, reclassification or reorganization;
| | - | -----------------------------------------------------------------------------------------------------------------



| | - | a split, combination or reclassification of any shares of capital stock;
| | - | ------------------------------------------------------------------------



| | - | a disposition of any assets in excess of $5 million in the aggregate;
| | - | ---------------------------------------------------------------------



| | - | consummation of any acquisition of the stock or assets of any other entity involving consideration in excess of $5 million in the aggregate;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| | - | entering into certain transactions with affiliates;
| | - | ---------------------------------------------------



| | - | the incurrence of indebtedness aggregating more than $5 million, except for borrowings under a revolving credit facility that has previously been approved or is in existence (with
no increase in maximum availability) on the date of closing of this offering;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50



---

| | - | change in the Companys chief executive officer; and
| | - | ----------------------------------------------------



| | - | change in size of the Companys Board of Directors.
| | - | ---------------------------------------------------

Messrs. Berg and Stone are affiliated with Apollo and, at the time of the Companys initial public offering, Ms. Krongard was affiliated with Apollo. Mr. Weiner was affiliated with Apollo until September 2006.

On January 28, 2007, Educate entered into an Agreement and Plan of Merger by and among Edge Acquisition, LLC, a Delaware limited liability company
(Parent), Edge Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Parent (MergerCo), and the Company, pursuant to which MergerCo will merge with and into the Company, with the Company as the
surviving corporation (the Merger). Parent is affiliated with certain affiliates of Sterling Partners and Citigroup Private Equity, and with Mr. Hoehn-Saric and Mr. Becker. Peter Cohen, President and Chief Operating Officer,
and certain other members of management are expected to participate in the transaction by continuing to hold options with respect to the surviving corporation after the consummation of the Merger.

Apollo Sylvan, LLC and Apollo Sylvan II, LLC, holders of approximately 53% of the Companys common stock, have entered into a Voting Agreement
agreeing to vote their shares in favor of the proposed merger.

An independent committee of the Companys Board of Directors,
consisting of certain members of the Companys Board of Directors who are not members of management or affiliates of the buyer group (the Negotiation Committee), unanimously approved the Merger Agreement. The merger agreement was
also approved by the Companys Board of Directors. Credit Suisse, Houlihan Lokey Howard & Zukin Capital, Inc. and Goldman, Sachs & Co. acted as financial advisors to the Negotiation Committee.

Director Independence

The Educate Board has three
standing committees: an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The Board has determined that Mr. Devine, Mr. Hornbeck, Ms. Krongard, Mr. Weiner and Mr. Yzaguirre meet
the independence requirements of The NASDAQ Global Market and have made such determination based on the fact that none of such persons have had, or currently have, any relationship with the Company or its affiliates or any executive officer of the
Company or his or her affiliates, that would currently impair their independence, including, without limitation, any commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship. Each member of the Audit,
Compensation and the Nominating and Corporate Governance Committees is independent as defined under current NASDAQ listing standards.



51



---

Item 14. Principal Accountant Fees and Services

The Audit Committee of the Board of Directors has appointed Ernst & Young LLP (E&Y) to serve as Educates independent
auditors for the year ending December 31, 2007, subject to the ratification by stockholders of Educate. E&Y has served as independent auditors of Educate since 2003. Fees for professional services provided to Educate by E&Y in each of
the last two fiscal years, in each of the following categories, are:



|                       |  |               |     |      |   |    
|---------------------- |  | ------------- | --- | ---- | - | ---
|                       |  | 2006          |     | 2005
|                       |  | (in millions)
|Audit Services         |  | $             | 1.1 |      | $ | 1.2
|Audit-Related Services |  |               | 0.2 |      |   | 0.2
|Tax Services           |  |               | 0.3 |      |   | 0.1
|All Other Fees         |  |               |    |      |   |   

In the above table, fees paid to E&Y in 2006 and 2005 are set forth in accordance with the
rules and regulations of the SEC. Audit Services are fees Educate paid to E&Y for the audit of Educates annual consolidated financial statements, reviews of Educates quarterly consolidated financial statements, assistance with and
review of documents filed with the SEC, consent procedures, accounting consultations related to transactions and the adoption of new accounting pronouncements that impact the audited financial statements, statutory audits required internationally,
and audit of subsidiaries required by state or federal regulations. Audit-Related Services principally consist of assurance and related services that are reasonably related to the performance of the audit or review of Educates financial
statements. Tax services are services rendered for tax compliance, tax advice and tax planning. The Audit Committee considered whether E&Y providing non-audit services was compatible with their maintaining independence.

The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services, and other services performed by the
independent auditors. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to a specific year, the Audit Committee
must approve the permitted service before the independent auditors are engaged to perform it.

The appointment of the independent auditors
of Educate is approved annually by the Audit Committee and submitted by the Board of Directors to the stockholders for ratification. The Audit Committee has concluded that the provision by E&Y of non-audit services for the last completed fiscal
year is compatible with E&Y maintaining its independence.

Before making its recommendation for the appointment of E&Y, the Audit
Committee carefully considered that firms qualifications as auditors for Educate. This consideration included a review of E&Ys performance last year and E&Ys audit plans for 2007, as well as its reputation for integrity and
competence in the fields of accounting and auditing. The Audit Committee has expressed its satisfaction with E&Y in all of these respects.



52



---

Educate, Inc.



PART IV



|Item 15. | Exhibits, Financial Statement Schedules.
|-------- | ----------------------------------------

(a) The
following documents are filed as a part of this report:



| | (1) | Financial Statements
| | --- | --------------------

The financial statements filed as a
part of this report are included in the Index to the Financial Statements under Item 8 of this Annual Report on Form 10-K/A.



53



---

Educate, Inc.



| | (3) | Exhibits
| | --- | --------



|        |  |                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                        
|        | 
|2.1     |  | Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C. and Apollo
Management IV, L.P., dated as of March 10, 2003. (1)                                                                                                                                    
|        | 
|2.2     |  | Amendment No. 1 to Asset Purchase Agreement among Educate, Inc., Educate Operating Company, LLC, Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Sylvan Learning Systems, Inc., Sylvan Ventures, L.L.C.
and Apollo Management IV, L.P., dated as of June 30, 2003. (1)                                                                                                                  
|        | 
|2.3     |  | Agreement and Plan of Merger, dated as of January 28, 2007, by and among Edge Acquisition, LLC, Edge Acquisition Corporation and Educate, Inc. (9)                                                                                                                                                                                                                                 
|        | 
|3.1     |  | Amended and Restated Certificate of Incorporation of Educate, Inc., a Delaware corporation. (2)                                                                                                                                                                                                                                                                                    
|        | 
|3.2     |  | Amended and Restated By-Laws of Educate Inc., a Delaware corporation. (1)                                                                                                                                                                                                                                                                                                          
|        | 
|3.3     |  | Specimen of stock certificate for common stock. (1)                                                                                                                                                                                                                                                                                                                                
|        | 
|4.1     |  | Form of Registration Rights Agreement, by and among Educate, Inc., and certain of its stockholders. (1)                                                                                                                                                                                                                                                                            
|        | 
|10.1    |  | $170,000,000 Amended and Restated Credit Agreement, dated as of April 28, 2005, among Educate Operating Company, LLC, the several banks and other financial institutions party thereto, Merrill
Lynch Capital, as documentation agent and JPMorgan Chase Bank, N.A. as administrative agent. (3)                                                                                   
|        | 
|10.2    |  | First Amendment, dated as of April 28, 2005, to the Guarantee and Collateral Agreement, dated as of April 27, 2004, among Educate, Inc., Educate Operating Company, LLC and the other guarantors
party thereto in favor of JPMorgan Chase Bank, N.A. as administrative agent for the banks and other financial institutions party to the Amended and Restated Credit Agreement. (3)
|        | 
|10.3    |  | Sublease, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC, for the property located at 1001 Fleet Street, Baltimore, Maryland 21202.
(1)                                                                                                                                                                                       
|        | 
|10.4    |  | Sublease, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC, for the property located at 506 S. Central, Baltimore, Maryland 21202.
(1)                                                                                                                                                                                          
|        | 
|10.5    |  | Shared Services Agreement, dated June 30, 2003, between Sylvan Learning Systems, Inc. and Educate Operating Company, LLC. (1)                                                                                                                                                                                                                                                      
|        | 
|10.6    |  | Patent License Agreement, dated as of June 30, 2003, between Sylvan Learning Systems, Inc. and Educate, Inc. (1)                                                                                                                                                                                                                                                                   
|        | 
|10.7    |  | Employment Agreement of Christopher Hoehn-Saric, dated June 30, 2003. (1)                                                                                                                                                                                                                                                                                                          



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Educate, Inc.



|        |  |                                                                                                                                                                                                                                                                                                                                                      
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8    |  | Indemnification Agreement between Educate, Inc. and Christopher Hoehn-Saric, dated June 30, 2000. (1)                                                                                                                                                                                                                                                
|        | 
|10.9    |  | Stock Subscription Agreement, dated June 30, 2003 among the stockholders party thereto and Educate, Inc. (1)                                                                                                                                                                                                                                         
|        | 
|10.10   |  | Stock Subscription Agreement, dated June 30, 2003 among Apollo Sylvan, LLC, Apollo Sylvan II, LLC and Educate, Inc. (1)                                                                                                                                                                                                                              
|        | 
|10.11   |  | Educate, Inc. 2003 Omnibus Stock Incentive Plan. (1)                                                                                                                                                                                                                                                                                                 
|        | 
|10.12   |  | Indemnification Agreement. (1)                                                                                                                                                                                                                                                                                                                       
|        | 
|10.13   |  | Nominating Agreement, dated as of July 26, 2004, among Educate, Inc., Apollo Sylvan, LLC and Apollo Sylvan II, LLC. (1)                                                                                                                                                                                                                              
|        | 
|10.14   |  | Educate, Inc. 2004 Omnibus Stock Incentive Plan. (4)                                                                                                                                                                                                                                                                                                 
|        | 
|10.15   |  | Form of Employee Option Grant Agreement. (5)                                                                                                                                                                                                                                                                                                         
|        | 
|10.16   |  | Form of Director Option Grant Agreement. (5)                                                                                                                                                                                                                                                                                                         
|        | 
|10.17   |  | First Amendment and Consent, dated as of March 31, 2006, to the Amended and Restated Credit Agreement, dated as of April 28, 2005, among Educate Operating Company, LLC, the several banks and
other financial institutions party thereto, Merrill Lynch Capital, as documentation agent, and JPMorgan Chase Bank, N.A., as administrative agent. (6)
|        | 
|10.18   |  | Second Amendment, dated as of August 8, 2006, to the Amended and Restated Credit Agreement, dated as of April 28, 2005, among Educate Operating Company, LLC, the several banks and other
financial institutions party thereto, Merrill Lynch Capital, as documentation agent, and JPMorgan Chase Bank, N.A., as administrative agent. (7)           
|        | 
|10.19   |  | Third Amendment, dated as of November 27, 2006, to the Amended and Restated Credit Agreement, dated as of April 28, 2005, among Educate Operating Company, LLC, the several banks and other
financial institutions party thereto, Merrill Lynch Capital, as documentation agent, and JPMorgan Chase Bank, N.A., as administrative agent. (8)         
|        | 
|10.20   |  | Limited Guarantee, dated as of January 28, 2007, by Sterling Capital Partners, L.P. in favor of Educate, Inc. (9)                                                                                                                                                                                                                                    
|        | 
|10.21   |  | Limited Guarantee, dated as of January 28, 2007, by Sterling Capital Partners II, L.P. in favor of Educate, Inc. (9)                                                                                                                                                                                                                                 
|        | 
|10.22   |  | Limited Guarantee, dated as of January 28, 2007, by Citigroup Capital Partners II 2007 Citigroup Investment, L.P. in favor of Educate, Inc. (9)                                                                                                                                                                                                      
|        | 
|10.23   |  | Limited Guarantee, dated as of January 28, 2007, by Citigroup Capital Partners II Employee Master Fund, L.P. in favor of Educate, Inc. (9)                                                                                                                                                                                                           
|        | 
|10.24   |  | Limited Guarantee, dated as of January 28, 2007, by Citigroup Capital Partners II Onshore, L.P. in favor of Educate, Inc. (9)                                                                                                                                                                                                                        
|        | 
|10.25   |  | Limited Guarantee, dated as of January 28, 2007, by Citigroup Capital Partners II Cayman Holdings, L.P. in favor of Educate, Inc. (9)                                                                                                                                                                                                                
|        | 
|10.26   |  | Limited Guarantee, dated as of January 28, 2007, by CGI CPE LLC in favor of Educate, Inc. (9)                                                                                                                                                                                                                                                        
|        | 
|21.1    |  | List of Subsidiaries. (10)                                                                                                                                                                                                                                                                                                                           
|        | 
|23.1    |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                         
|        | 
|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 E. 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 E. Shaffer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                         

---

|(1) | Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-115496).
|--- | ------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to the Registrants Registration Statement on Form 8-A filed on September 22, 2004.
|--- | -------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the period ended March 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------



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Educate, Inc.



|(4) | Incorporated by reference to the Registrants Registration Statement on Form S-8 (File No. 333-121244).
|--- | -------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the Registrants Current Report on Form 8-K filed on September 30, 2004.
|--- | -----------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
|--- | ----------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to the Registrants Current Report on Form 8-K filed on November 29, 2006.
|--- | ----------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to the Registrants Current Report on Form 8-K filed on January 29, 2007.
|--- | ---------------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed on March 16, 2007.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------



56



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SIGNATURES

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



EDUCATE, INC.By:

/s/ Kevin E. ShafferName:

Kevin E. ShafferTitle:

Chief Financial OfficerDate:

April 30, 2007






57