UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~Washington~~WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ~~AND EXCHANGE ACT OF 1934~~

~~For~~AND ~~the~~EXCHANGE ~~quarter~~ACT ~~ended~~OF ~~September 30, 2002~~ 1934

orFor the quarter ended June 30, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-42530

eSylvan, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

(410) 843-2622

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

AsIndicate ofby ~~November~~a 12chek ,mark ~~2002,~~whether the registrant ~~had~~is ~~16,512,484~~an ~~outstanding~~accelerated ~~shares~~filer of(as ~~Common~~defined ~~Stock~~In Exhange Act Rule 12b-2). Yes ¨ No x

As of August 12 , 2003, the registrant had 14,000,000 outstanding shares of Common Stock and 2,517,984 outstanding shares of Class A Convertible Common Stock.

eSylvan, Inc.

INDEX

		PAGE
PART I.
ITEM 1.	Financial Statements (Unaudited):
	Balance Sheets—September 30, 2002 and December 31, 2001	2
	Balance Sheets—June 30, 2003 and December 31, 2002	2
	Statements of Operations—Three Months Ended September 30, 2002 and 2001	4
	Statements of Operations—Three Months Ended June 30, 2003 and 2002	4
	Statements of Operations—Nine Months Ended September 30, 2002 and 2001	5
	Statements of Operations—Six Months Ended June 30, 2003 and 2002	5
	Statements of Cash Flows—Nine Months Ended September 30, 2002 and 2001	6
	Statements of Cash Flows—Six Months Ended June 30, 2003 and 2002	6
	Notes to Financial Statements—September 30, 2002	7
	Notes to Financial Statements—June 30, 2003	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
ITEM 4.	Controls and Procedures	15
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	16
ITEM 4.	Controls and Procedures	16
PART II.
ITEM 1.	Legal Proceedings	17
ITEM 2.	Changes in Securities and Use of Proceeds	17
ITEM 3.	Defaults upon Senior Securities	17
ITEM 4.	Submission of Matters to a Vote of Security Holders	17
ITEM 5.	Other Information	17
ITEM 6.	Exhibits and Reports on Form 8-K	17
SIGNATURES		1718
CERTIFICATIONS

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~ Inc.)

~~BALANCE~~Balance ~~SHEETS~~Sheets

	September 30, 2002			December 31, 2001
	June 30, 2003			December 31,2002
	(Unaudited)
ASSETS
Assets
Current assets:
Cash	$	~~281~~7,~~088~~694		$	~~250~~94,~~880~~497
Accounts receivable, net of allowance of $48,417and $32,713 at September 30, 2002 and December 31, 2001, respectively		288,027			85,475
Accounts receivable, net of allowance of $50,693and $49,844 at June 30, 2003 and December 31, 2002, respectively		124,415			194,716
Prepaid expenses		174,733			127,456
Accounts receivable from related party		—			54,717
Prepaid royalties to Sylvan		539,153			839,153
Prepaid expenses		84,316			60,783
Total current assets		1,283,001			1,302,964
Prepaid royalties to related party		199,153			439,153
Total current assets		415,578			843,866
Property and equipment:
Furniture and equipment		1,~~641~~653,~~703~~314			1,~~532~~642,~~672~~608
Software		2,~~516~~918,~~849~~552			2,~~430~~554,~~969~~848
Educational content		969,427			969,427
Leasehold improvements		5,897			45,~~374~~897
		5,133,876			4,937,442
		5,547,190			5,172,780
Accumulated depreciation and amortization		(34,~~854~~584,~~212~~470	)		(24,~~414~~197,~~992~~827	)
		1,279,664			2,522,450
		962,720			974,953
Intangible assets:
Participation agreements, net of accumulated amortization of $536,480 and $268,240 at September 30, 2002 and December 31, 2001, respectively		1,609,443			1,877,683
Participation agreements, net of accumulated amortization of $804,721 and $625,894 at June 30, 2003 and December 31, 2002, respectively		1,341,202			1,520,029
Total assets	$	42,~~172~~719,~~108~~500		$	53,~~703~~338,~~097~~848

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

~~BALANCE~~Balance ~~SHEETS~~Sheets (continued)

	September 30, 2002			December 31, 2001
	June 30, 2003			December 31,2002
	(Unaudited)
LIABILITIES AND DEFICIENCY OF ASSETS
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and accrued expenses	$	1878,~~168,228~~493		$	~~979~~822,~~788~~128
Fees payable to Sylvan		210,900			201,740
Accrued severance costs Fees payable to related party		154,079 —			— 202,690
Borrowings under line of credit with Sylvan Ventures		3,119,449			4,469,673
Borrowings from related party		—			5,485,329
Deferred revenue		~~264~~296,~~243~~033			~~387~~337,~~122~~339
Total current liabilities		41,~~762~~328,~~820~~605			6,~~038~~847,~~323~~486
Commitments and contingent liabilities		—			—
Deficiency of assets:
Stockholders’ equity (deficit):
Series A Convertible Preferred Stock, par value $.001 per share—20,000,000 shares authorized, 15,473,684 and 10,526,316 shares issued and outstanding as of September 30, 2002 and December 31, 2001, respectively		15,474			10,526
Series A Convertible Preferred Stock, par value $.001 per share—30,000,000 shares authorized, 20,332,515 and 15,473,684 shares issued and outstanding as of June 30, 2003 and December 31, 2002, respectively		20,333			15,474
Class A Convertible Common Stock, par value $.001 per share—10,000,000 shares authorized, 2,512,484 and 2,452,484 shares issued and outstanding as of September 30, 2002 and December 31, 2001, respectively		2,512			2,452
Class A Convertible Common Stock, par value $.001 per share—10,000,000 shares authorized, 2,517,984 shares issued and outstanding as of June 30, 2003 and December 31, 2002		2,518			2,518
Common stock, par value $.001 per share—authorized 70,000,000 shares, 14,000,000 shares issued and outstanding as of September 30, 2002 and December 31, 2001		14,000			14,000
Common stock, par value $.001 per share—authorized 60,000,000 shares, 14,000,000 shares issued and outstanding as of June 30, 2003 and December 31, 2002		14,000			14,000
Additional paid-in capital		3342,~~472~~673,~~424~~414			2433,~~019~~446,~~228~~494
Accumulated deficit		(3441,~~095~~319,~~122~~370	)		(2436,~~381~~987,~~432~~124	)
Total deficiency of assets		(590,712	)		(335,226	)
Total stockholders’ equity (deficit)		1,390,895			(3,508,638	)
Total liabilities and deficiency of assets	$	4,172,108		$	5,703,097
Total liabilities and stockholders’ equity (deficit)	$	2,719,500		$	3,338,848

See accompanying notes.

eSylvan, Inc.

(a Subsidiary of ~~Sylvan~~ ~~Ventures~~Educate, ~~LLC~~Inc.)

~~STATEMENTS~~Statements OFof ~~OPERATIONS~~Operations (Unaudited)

	Three months ended September 30,
	Three months ended June 30,
	2002			2001
	2003			2002
Revenues	$	~~858~~487,~~336~~023		$	~~140~~729,~~738~~789
Costs and expenses
Direct costs of services provided		~~766~~392,~~029~~054			~~271~~667,~~232~~135
Sales and marketing		185,~~007,632~~874			~~341~~934,~~435~~425
General and administrative		1,~~459~~137,~~420~~042			1,~~431~~621,~~008~~566
Research and development		~~494~~208,~~835~~185			~~479~~418,~~608~~703
Management services and facilities usage charges from Sylvan		343,425			323,620
Management services and facilities usage charges		253,198			337,635
Total operating costs and expenses		42,~~071~~076,~~341~~353			23,~~846~~979,~~903~~464
Loss from operations		(3,213,005	)		(2,706,165	)
Net loss	$	(1,589,330	)	$	(3,249,675	)
Interest expense		—			91,100
Basic and diluted loss per common share	$	(0.10	)	$	(0.20	)
Net loss	$	(3,213,005	)	$	(2,797,265	)
Basic and diluted loss per common share	$	(0.19	)	$	(0.17	)

See accompanying notes.

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

~~STATEMENTS~~Statements OFof ~~OPERATIONS~~Operations (Unaudited)

	Nine months ended September 30,
	Six months ended June 30,
	2002			2001
	2003			2002
Revenues	$	2973,~~104,309~~192		$	~~203~~1,~~592~~245,973
Costs and expenses
Direct costs of services provided		1886,~~931,800~~073			~~662~~1,~~248~~165,771
Sales and marketing		2634,~~743,579~~484			1,~~515~~735,~~461~~947
General and administrative		42,~~717~~663,~~910~~724			53,~~009~~269,~~278~~238
Research and development		1530,~~349,922~~622			1855,~~970,976~~087
Management services and facilities usage charges from Sylvan		1,074,788			848,608
Management services and facilities usage charges		590,535			720,615
Total operating costs and expenses		115,~~817~~305,~~999~~438			107,~~006~~746,~~571~~658
Loss from operations		(9,713,690	)		(9,802,979	)
Net loss	$	(4,332,246	)	$	(6,500,685	)
Interest expense		—			320,105
Basic and diluted loss per common share	$	(0.26	)	$	(0.39	)
Net loss	$	(9,713,690	)	$	(10,123,084	)
Basic and diluted loss per common share	$	(0.59	)	$	(0.64	)

See accompanying notes.

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

~~STATEMENTS~~Statements OFof ~~CASH~~Cash ~~FLOWS~~Flows (Unaudited)

	Nine months ended September 30,
	Six months ended June 30,
	2002			2001
	2003			2002
Operating activities
Net loss	$	(94,~~713~~332,~~690~~246	)	$	(106,~~123~~500,~~084~~685	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1565,~~707,460~~470			1,~~610~~217,~~462~~662
Non-cash compensation expense		~~58,204~~—			—58,204
Changes in operating assets and liabilities:
Accounts receivable, net		~~(202~~70,~~552~~301	)		(32146,~~732~~302	)
Prepaid expenses		(47,277	)		(23,043	)
Accounts receivable from related party		54,717			(53,202	)
Prepaid royalties to Sylvan		300,000			(858,385	)
Prepaid expenses		(23,533	)		(12,761	)
Other assets		—			7,246
Prepaid royalties to related party		240,000			200,000
Accounts payable and accrued expenses		~~188~~56,~~440~~365			~~(963~~350,~~837~~612	)
Fees payable to Sylvan		9,160			630,962
Accrued severance costs		154,079			—
Deferred revenue		(122,879	)		96,488
Fees payable to related party		(202,690	)		(15,390	)
Net cash used in operating activities		(7,823,134	)		(9,655,923	)
Deferred revenue		(41,306	)		25,119
Net cash used in operating activities		(3,458,843	)		(4,876,743	)
Investing activities
Purchase of property and equipment		(~~237~~374,~~932~~410	)		(~~818~~165,~~735~~592	)
Proceeds from sale of property and equipment		~~41,498~~—			~~111~~41,~~335~~498
Net cash used in investing activities		(~~196~~374,~~434~~410	)		(~~707~~124,~~400~~094	)
Financing activities
Payment of direct costs incurred in connection with Class A Convertible Common Stock offering		—			(173,236	)
Proceeds from borrowings from related party		3,584,080			1,905,055
Proceeds from borrowings under line of credit with Sylvan Ventures		4,855,444			10,847,040
Payments on line of credit with related party		(9,069,409	)		(6,205,668	)
Payments on line of credit with Sylvan Ventures		(6,205,668	)		(10,000,000	)
Sale of Series A Convertible Preferred Stock to related party		9,231,779			9,400,000
Sale of Series A Convertible Preferred Stock to Sylvan Ventures		9,400,000			10,000,000
Net cash provided by financing activities		3,746,450			5,099,387
Net cash provided by financing activities		8,049,776			10,673,804
Net change in cash		(86,803	)		98,550
Net change in cash		30,208			310,481
Cash at beginning of period		94,497			250,880
Cash at beginning of period		250,880			—
Cash at end of period	$	7,694		$	349,430
Cash at end of period	$	281,088		$	310,481

See accompanying notes.

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

Notes to Financial Statements (Unaudited)

~~September~~June 30, ~~2002~~2003

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to historical financial statements in order to conform to current period presentation. Operating results for the ~~three-month~~ ~~and~~six ~~nine-~~month ~~periods~~period ended ~~September~~June 30, ~~2002~~2003 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2002~~2003. The balance sheet at December 31, ~~2001~~2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the eSylvan, Inc. (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2001~~2002.

~~Since~~On ~~inception~~June ~~through~~30, ~~December 31~~2003, ~~2001~~Sylvan Learning Systems, Inc. (“Sylvan”) completed the ~~Company~~sale of its K-12 education operating units. Under the transaction, Sylvan’s ~~activities~~ownership ~~consisted~~interest ~~primarily~~in ofthe ~~organizational~~Company, ~~and~~along ~~research~~with ~~and~~certain ~~development~~other ~~activities~~Sylvan ~~for~~assets, ~~its~~were ~~planned~~sold ~~principal~~to ~~operations~~Educate Operating Company LLC (“Educate”), a wholly owned subsidiary of Educate Inc. ~~Accordingly~~To consummate the transaction, ~~prior~~Educate topurchased ~~January~~from 1Sylvan Ventures LLC, ~~2002~~(“Sylvan Ventures”) a majority owned subsidiary of Sylvan, 13,857,143 shares of the Company’s common stock and 20,332,515 shares of the Company’s ~~was~~Series ~~considered~~A aPreferred ~~development~~Stock. ~~stage~~Educate ~~company~~now owns 83.89% and 100% of the outstanding common and series A preferred stock, respectively, of the Company.

2Educate is currently in the process of determining the fair market value of the assets and liabilities it acquired from Sylvan of each specific entity. ~~New~~ ~~Accounting~~As ~~Pronouncements~~of June 30, 2003, the determination of the amount of the purchase price allocable to the assets and liabilities of the Company has not been completed. Upon the completion of the determination of the amount of the purchase price allocable to the Company’s net assets, the identifiable assets and liabilities of the Company will be remeasured at fair value, with any excess reported as goodwill. Management expects to complete this assessment by September 30, 2003.

~~In August 2001, the Financial Accounting Standards Board issued Statement No~~2. ~~144,~~Stock ~~Accounting~~Options ~~for~~Granted ~~the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets~~ to BeEmployees ~~Disposed Of,~~ and ~~provides a single accounting model for long~~Non-lived assets to be disposed of. Effective January 1, 2002, the Company adopted the provisions of Statement No. 144 and the adoption of the new standard did not have a material impact on the Company’s financial position or results of operations. Employees

The Company records compensation expense for its stock-based compensation plan using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”) encourages companies to recognize expense for stock-based awards based on their estimated value on the date of grant. Statement No. 123 requires the disclosure of pro forma income and earnings per share data in the notes to the financial statements if the fair value method is not elected. The Company has supplementally disclosed in the following table the required pro forma information as if the fair value method had been elected, as required by Statement No. 123.

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

Notes to Financial Statements (~~Unaudited~~continued)

32. ~~Income~~ ~~Taxes~~Stock Options Granted to Employees and Non-Employees (continued)

The Company is a majority owned subsidiary of Sylvan Ventures, LLC (“Sylvan Ventures”). Sylvan Ventures is organized as a limited liability company, and under applicable income tax regulations, is unable to utilize or pass through losses to its members resulting from its investment in the Company. For the three month and nine month periods ended September 30, 2002 and September 30, 2001, the Company has not reported a tax benefit from operating losses because of an increase in the valuation allowance for deferred tax assets that result from the inability to determine the realizability of the net operating loss carry forward.

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Net loss, as reported	$	(1,589,330	)	$	(3,249,675	)	$	(4,332,246	)	$	(6,500,685	)
Less stock-based employee compensation expense as if fair value accounting was applied		(28,120	)		(22,000	)		(54,256	)		(41,905	)

Pro forma net loss	$	(1,617,450	)	$	(3,271,675	)	$	(4,386,502	)	$	(6,542,590	)

Basic and diluted loss per share:
As reported	$	(0.10	)	$	(0.20	)	$	(0.26	)	$	(0.39	)
Pro forma	$	(0.10	)	$	(0.20	)	$	(0.26	)	$	(0.39	)

4The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. ~~Issuance~~ In addition, option valuation models require the input of ~~Class~~highly Asubjective ~~Convertible~~assumptions, ~~Common~~including ~~Stock~~the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

OnFor ~~March~~purposes ~~30, 2001, the Company distributed 2,452,484 shares~~ of ~~Class~~pro Aforma ~~Common~~disclosures ~~Stock (“Class A”) pursuant to the receipt of executed participation agreements from the Sylvan Learning Center franchisees that provide~~ for ~~the~~employee ~~franchisee’s support of the Company’s Internet-based delivery of educational services. Upon issuance~~options, ~~$880,156 of direct costs incurred in connection with~~ the stock issuance were removed from deferred stock issuance costs and recorded as a reduction to additional paid-in-capital. The Company also recorded an intangible asset entitled participation agreements of $2,145,923, which is equal to the estimated fair value of the ~~Class~~options ~~A on the date of issuance. The Company~~ is ~~amortizing~~ ~~this~~amortized ~~asset~~to expense over ~~six years,~~ the ~~estimated~~options’ ~~average~~vesting ~~useful life of the participation agreements, using the straight-line method~~period. ~~At September 30, 2002 and December 31, 2001, accumulated amortization totaled $536,480 and $268,240,~~ ~~respectively.~~

InThe ~~connection with this offering, the~~ Company ~~was~~has ~~obligated~~also togranted ~~pay~~stock anoptions ~~amount in cash~~ to ~~each~~employees ~~Class~~of ASylvan ~~shareholder~~and ~~equal to~~Sylvan ~~$0.35~~Ventures ~~multiplied~~(“non-employee ~~by the number of shares received~~options”). InThe ~~April~~Company ~~2001,~~measured the ~~Company~~fair ~~paid~~value ~~an aggregate amount~~ of ~~$858,385~~non-employee tooptions ~~the~~at ~~shareholders. These payments have been recorded as prepaid royalties to Sylvan as~~ the ~~license~~grant ~~agreement~~date ~~with~~using ~~Sylvan provides for~~ the ~~offset~~Black-Scholes ofoption ~~this~~pricing ~~payment~~model ~~against any future royalties due Sylvan. For the three months ended September 30, 2002~~ and ~~2001, the Company~~ recognized ~~royalty~~that ~~expense~~fair ofvalue ~~$100,000~~as ~~and~~a ~~$2,982,~~dividend ~~respectively.~~to ~~For~~Sylvan ~~the~~through ~~nine~~June ~~months ended September~~ 30, ~~2002 and 2001, the Company recognized royalty expense of $300,000 and $5,235 respectively~~2003.

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

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

Notes to Financial Statements (~~Unaudited~~continued)

53. ~~Preferred~~ ~~Stock~~Restructuring Plan

OnIn ~~June~~February 302003, ~~2000,~~ the Company ~~entered~~initiated, ~~into~~with board of directors approval, a ~~stock~~restructuring ~~purchase~~plan. ~~agreement~~Under ~~with~~the ~~Sylvan~~plan ~~Ventures~~the ~~under~~employee ~~which~~workforce itwas ~~sold~~reduced 10by 14 full time employees,~~526,316~~ ~~shares~~or 33% of ~~Series~~the Afull ~~Convertible~~time ~~Preferred~~workforce. ~~Stock (“Preferred~~The ~~Stock”)~~terminated ~~for~~employees ~~aggregate~~were ~~proceeds~~engaged ofin ~~$20~~providing direct services to customers,~~000~~ sales and marketing,~~000~~ general and administrative and research and development activities. ~~The~~Under ~~subscription~~the restructuring plan, which was completed in May 2003, the Company paid $200,300 and $280,900 in severance benefits to terminated employees in the three month and six ~~separate~~month ~~closings~~periods ~~that~~ended ~~occurred~~June at30, 2003, respectively. In the ~~end~~three ofand ~~each~~six ~~calendar~~month ~~quarter~~periods ~~between~~ended ~~September~~June 30, ~~2000~~2003, general and ~~December~~administrative 31expense included $100,000 ~~2001~~and $435,000 for severence benefits paid and to be paid, respectively.

~~In February 2002, the Company issued~~ 4~~,947,368 additional shares of the Preferred Stock to Sylvan Ventures for a total aggregate purchase price of $9,400,000 (see Note 7)~~. Income Taxes

6Through June 30, 2003 the Company was a majority owned subsidiary of Sylvan Ventures. ~~Loss~~ ~~Per~~Sylvan ~~Share~~Ventures is organized as a limited liability company, and under applicable income tax regulations, is unable to utilize or pass through losses to its members resulting from its investment in the Company. For the six month periods ended June 30, 2003 and 2002, the Company has not reported an income tax benefit from operating losses because of an increase in the valuation allowance for deferred tax assets that result from the inability to determine the realizability of the net operating loss carry forwards and other deferred tax assets.

Loss Per Share

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

	Three months ended September 30,						Nine months ended September 30,
	Three months ended June 30,						Six months ended June 30,
	2002			2001			2002			2001
Net loss	$	(31,~~213~~589,~~005~~330	)	$	(23,~~797~~249,~~265~~675	)	$	(94,~~713~~332,~~690~~246	)	$	(106,~~123~~500,~~084~~685	)
Weighted-average common and Class A common shares outstanding during the period		16,~~512~~517,~~484~~984			16,~~452~~512,484			16,~~499,~~517,984			1516,~~913~~492,~~477~~926
Shares used in computations		16,~~512~~517,~~484~~984			16,~~452~~512,484			16,~~499,~~517,984			1516,~~913~~492,~~477~~926
Basic and diluted loss per common share	$	(0.1910	)	$	(0.1720	)	$	(0.5926	)	$	(0.6439	)

Basic and diluted loss per common share are equal because the assumed conversion of preferred stock and exercise of outstanding stock options would result in the computation being antidilutive as a result of the net loss in each period presented.

eSylvan, Inc.

(a Subsidiary of ~~Sylvan Ventures~~Educate, ~~LLC~~Inc.)

Notes to Financial Statements (Unaudited)

76. Liquidity and Capital Resources

The Company ~~has~~had a revolving credit facility with Sylvan Ventures under which it ~~may~~could borrow, through December 31, 2002, up to $10,000,000. AtIn ~~September~~light ~~30,~~of ~~2002~~Sylvan Ventures’ commitments to purchase additional shares of the Company’s Preferred Stock and ~~December~~to 31sell its shares to Educate, ~~2001~~Inc., Sylvan Ventures has continued to advance funds to the Company ~~had~~on $3the same terms as the now expired line of credit. At December 31,~~119~~ 2002,~~449~~ ~~and~~the Company had $45,~~469~~485,~~673~~329 outstanding under the line of credit~~, respectively~~.

In February ~~2002~~2003, the Company issued 43,~~947~~578,~~368~~947 additional shares of the Preferred Stock to Sylvan Ventures for a total purchase price of $96,~~400~~800,000. The Preferred Stock was issued with the same terms as the existing Preferred Stock. The Company used $6,~~205~~637,~~668~~630 of the proceeds to repay the line of credit with Sylvan Ventures and $3162,~~194,332~~370 to fund operations of the Company.

In ~~July~~June ~~2002~~2003, ~~Sylvan Ventures~~the ~~agreed~~Company toissued ~~purchase 2~~1,~~000~~279,~~000~~884 additional shares of the Preferred Stock ~~for~~to ~~a total purchase price of $3,800,000. In November 2002,~~ Sylvan Ventures ~~agreed to purchase 1,578,947 additional shares of the Preferred Stock~~ for a total purchase price of $32,~~000~~431,~~000~~779. ~~This~~The Preferred Stock ~~will be~~ was issued with the same terms ~~and price~~ as the ~~previously~~existing ~~issued~~ Preferred Stock. AsThe ofCompany ~~September~~used ~~30, 2002,~~ the ~~Company~~proceeds ~~had not yet issued these securities. Proceeds will be utilized~~ to repay amounts ~~due~~ ~~under~~advanced to the ~~line~~Company ofby ~~credit~~Sylvan ~~and fund operations of the Company~~Ventures.

The Company’s operating losses, forecasted operating losses and limited committed funding sources raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing the expansion of its online tutoring business and is also pursuing additional financing through ~~Sylvan~~Educate, ~~Ventures~~Inc. ~~However~~While the Company anticipates continued funding from Educate, Inc., at least through the end of 2003, there can be no assurance that the Company will be able to generate sufficient cash flow from operations or additional financing to meet its development and operating needs, or that such financing would be available on terms acceptable to the Company.

~~I TEM~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ~~OPERATIONS~~

OPERATIONS

All statements contained herein that are not historical facts, including but not limited to the Company’s future development plans and future capital requirements, are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Factors that could cause actual results to differ materially include the following: the reliability of our technology, our efforts to establish, maintain and strengthen the eSylvan brand, consumer acceptance of online tutoring, our ability to secure additional financing and other risk factors described in the Company’s reports filed from time to time with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

The Company delivers supplemental education to families and children through a variety of applications on the Internet. From October 1, 1999 (date of inception) through December 31, 2001, the Company was a development stage business. The Company’s lack of an operating history makes it difficult to evaluate its business and prospects. The Company’s results of operations and future prospects should be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies dependent upon the relatively new and rapidly evolving Internet environment.

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

Results of Operations

Comparison of results for the three months ended ~~September~~June 30, ~~2002~~2003 to results for the three months ended ~~September~~June 30, ~~2001~~ 2002

The Company incurred net losses of $31.26 million and $23.82 million for the three months ended ~~September~~June 30, ~~2002~~ 2003 and ~~2001~~2002, respectively. The net loss for the three months

Revenues for the three months ended September 30, 2002 and September 30, 2001 were $0.9 million and $0.1 million, respectively. The increase in revenues was due to higher enrollments resulting from an increase in the amount of media spending combined with improved effectiveness of media spending.

During the three months ended September 30, 2002 and 2001, the Company incurred $4.1 million and $2.8 million, respectively, of total operating costs and other expenses in implementing its business plan.

~~Direct~~ended ~~costs~~June 30, 2003 includes $0.1 million of ~~services~~incurred ~~provided~~and ~~for~~accrued ~~the~~severance ~~three~~costs ~~months~~related ~~ended~~to ~~September~~a ~~30,~~restructuring ~~2002~~plan ~~and~~implemented ~~September~~in ~~30,~~February ~~2001~~2003. ~~were~~Under ~~$0.8~~the ~~million~~plan we expect to reduce the size of our annual operating loss and ~~$0.3~~cash ~~million,~~flow ~~respectively,~~requirements ~~which~~by ~~consisted~~enrolling ~~primarily~~and ofservicing ~~labor~~fewer ~~for~~students ~~instructional~~in 2003 than we did in 2002, ~~technical~~by enrolling and ~~operations~~servicing ~~support.~~those ~~The~~students $0on a more economical basis and by reducing our personnel and other overhead costs.5 ~~million~~By ~~increase~~reducing ~~was~~our ~~the~~enrollments ~~direct~~and ~~result~~the number of ~~higher~~students ~~enrollments~~enrolled and ~~corresponding~~served in 2003, we believe we can develop certain software applications and operational processes that ~~tutoring~~will ~~sessions~~enable ~~delivered~~us to operate more efficiently as we increase enrollments in the future.

~~Sales~~Revenues ~~and~~for ~~marketing~~the ~~expenses~~three ~~increased~~months byended ~~$0.7~~June ~~million~~30, or2003 ~~195~~declined 33%, to $1.0.5 million ~~for the three months ended September 30, 2002,~~ from $0.37 million for the three months ended ~~September~~June 30, ~~2001.~~2002 ~~The~~as ~~increase~~a inresult ~~sales~~of ~~and~~a ~~marketing~~64% ~~expenses~~decline ~~was~~in ~~due~~enrollments toand ~~the~~related ~~Company’s~~assessment ~~increased efforts to enroll students. The Company incurs sales~~ and ~~marketing~~registration ~~costs~~revenue ~~for media~~ and ~~marketing~~a ~~campaigns~~22% ~~and~~decline ~~for~~in ~~establishing~~tutoring ~~and growing the “eSylvan” brand~~revenue.

~~General~~During ~~and administrative expenses increased 2.0%, to $1.5 million for~~ the three months ended ~~September~~June 30, ~~2002~~2003, ~~from~~total ~~$1.4~~operating ~~million for the three months ended September 30, 2001. General and administrative expenses consist of personnel~~ costs, ~~professional fees, maintenance expenses, depreciation~~ and other expenses. ~~During~~decreased ~~2002,~~by ~~the Company and Sylvan Learning Systems, Inc~~$1.,9 ~~the Company’s majority stockholder (“Sylvan”)~~million, ~~identified~~or ~~certain information systems functions that could be performed more economically by Sylvan. Accordingly~~48%, ~~general~~to ~~and administrative expenses reflect the outsourcing of approximately~~ $02.1 million ~~of additional functions to Sylvan, which led to an increase in management services and facilities usage charges~~ from ~~Sylvan~~$4.0 ~~and~~million afor ~~reduction~~the inthree ~~general~~months ~~and~~ended ~~administrative~~June ~~expenses~~30, 2002.

~~Research~~Direct ~~and~~costs ~~development~~of ~~expenses~~services ~~increased~~provided ~~3.2%~~for the three months ended June 30, 2003 decreased 41% to $0.54 million from $0.7 million for the three months ended ~~September~~June 30, 2002. In both periods, ~~from~~direct ~~$0.5~~costs ~~million~~of services provided consisted primarily of labor for instructional, technical and operations support. The decline was attributable to a 29% decline in the ~~three~~number ~~months~~of ~~ended~~tutoring ~~September~~sessions ~~30,~~delivered ~~2001~~as well as an increase in efficiency in delivering sessions.

~~Management~~Sales ~~services~~ and ~~facilities~~marketing ~~usage~~expenses ~~charges~~decreased ~~from~~by ~~Sylvan~~$0.8 ~~increased~~million, ~~6.1~~or 91%, to $0.31 million for the three months ended ~~September~~June 30, ~~2002~~2003, from $0.39 million for the ~~three~~ three months ended ~~September~~June 30, ~~2001~~2002. ~~Under~~The decrease in sales and marketing expenses was due to the Company’s ~~services~~increased ~~agreement~~focus ~~with~~on ~~Sylvan,~~utilizing ~~Sylvan~~customer ~~provides~~acquisition ~~management~~channels ~~services,~~that ~~information~~were ~~systems~~more ~~support~~efficient ~~services,~~than ~~corporate~~those ~~accounting~~utilized ~~services,~~in ~~database~~the ~~management~~prior ~~services,~~year ~~human resources~~ and ~~payroll~~an ~~services,~~overall ~~general~~reduction in ~~liability~~the ~~insurance~~number ~~and~~of ~~legal~~students ~~services~~we sought to enroll in the ~~Company.~~three ~~During~~month ~~2002,~~period ~~certain~~ended ~~information~~June ~~systems~~30, ~~functions~~2003. ~~previously~~The ~~performed~~Company byincurs ~~the~~sales ~~Company~~and ~~were~~marketing ~~transferred~~costs tofor ~~Sylvan,~~media ~~resulting~~and inmarketing ancampaigns ~~increase~~and offor ~~$0.1~~establishing ~~million~~and ingrowing ~~these charges~~the “eSylvan” brand.

~~The~~General ~~Company~~and ~~incurred~~administrative noexpenses ~~interest~~decreased ~~expense~~by $0.5 million, or 30%, to $1.1 million for the three months ended ~~September~~June 30, ~~2002~~2003, ~~compared~~from to $0.1 .6 million for the three months ended ~~September~~June 30, ~~2001~~2002. ~~Effective~~A ~~December~~decrease ~~31,~~in ~~2001~~depreciation and amortization expense of $0.4 million was partially offset by $0.1 million of severance costs recognized in the three months ended June 30, ~~Sylvan~~2003 ~~Ventures~~in ~~agreed~~conjunction towith ~~forgive~~Company’s ~~all~~restructuring ~~past~~plan. The remainder of the decline in general and ~~future~~administrative ~~interest~~expenses onwas ~~the~~in ~~line~~result of ~~credit~~lower ~~between~~costs ~~the~~after ~~Company~~implementing our restructuring plan. The company terminated 14 of its full-time personnel, or 33% of total full-time personnel in February 2003. General and ~~Sylvan’s~~administrative ~~affiliate~~expenses consist of personnel costs, ~~Sylvan~~professional ~~Ventures~~fees, maintenance expenses, depreciation and other expenses.

Research and development expenses decreased by 50%, to $0.2 million for the three months ended June 30, 2003, from $0.4 million for the three months ended June 30, 2002. The decrease in research and development expenses resulted from the need for less

~~Comparison~~intensive development of ~~results~~our ~~for~~on-line ~~the~~tutoring ~~nine~~technical ~~months~~infrastructure ~~ended~~in ~~September~~the ~~30,~~2003 ~~2002~~period toversus ~~results for~~ the ~~nine~~2002 ~~months~~period. ~~ended September 30, 2001~~

~~The~~Management ~~Company~~services ~~incurred~~and ~~net~~facilities ~~losses~~usage ofcharges from Sylvan decreased by $~~9.7~~84,437, ~~million~~or ~~and~~25%, to $~~10.1~~253,198 ~~million~~for the three months ended June 30, 2003, from $337,635 for the ~~nine~~ three months ended ~~September~~June 30, 2002. Under the Company’s services agreement with Sylvan, Sylvan provides management services, information systems support services, corporate accounting services, database management services, human resources and ~~2001~~payroll services, ~~respectively~~general liability insurance and legal services to the Company. Sylvan and Educate, Inc. have agreed to provide these services to the Company on the same terms as previously provided.

~~Revenues~~The Company incurred no interest expense for the ~~nine~~three months ended ~~September~~June 30, ~~2002~~2003 ~~and September~~or ~~30,~~for ~~2001~~the ~~were~~three ~~$2.1~~months ~~million~~ended ~~and~~June ~~$0.2 million~~30, ~~respectively.~~2002 ~~The~~because ~~increase~~Sylvan inVentures ~~revenues~~did ~~was~~not ~~due~~charge tointerest ~~higher~~on ~~enrollments~~amounts ~~resulting from an increase in the amount of media spending combined with improved effectiveness of media spending~~advanced.

~~During~~Comparison of results for the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003 ~~and~~to ~~2001,~~results for the ~~Company~~six ~~incurred~~months ended ~~$11.8~~June ~~million and $10.0 million~~30, ~~respectively,~~ of2002 ~~total operating costs and other expenses in implementing its business plan.~~

~~Direct~~The ~~costs~~Company incurred net losses of ~~services~~$4.3 ~~provided~~million and $6.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003 and ~~September 30~~2002, ~~2001 were $1~~respectively.9 ~~million~~The ~~and~~net ~~$0.7~~loss ~~million,~~for ~~respectively,~~the ~~which~~six ~~consisted~~months ~~primarily~~ended ofJune ~~labor for instructional~~30, ~~technical~~2003 ~~and~~includes ~~operations support. The~~ $10.34 million ~~increase was~~of ~~the~~incurred ~~direct~~and ~~result~~accrued ofseverance ~~the~~costs ~~significantly~~related ~~higher~~to ~~enrollments~~a ~~and~~restructuring ~~corresponding~~plan implemented ~~tutoring~~in ~~sessions~~February ~~delivered~~2003.

~~Sales~~Revenues ~~and~~for ~~marketing~~the ~~expenses~~six ~~increased~~months ended byJune ~~$1.2 million~~30, or2003 81declined 22%, to $21.70 million ~~for the nine months ended September 30, 2002,~~ from $1.52 million for the ~~nine~~six months ended ~~September~~June 30, ~~2001.~~2002 ~~The~~as ~~increase~~a inresult ~~sales~~of ~~and~~a ~~marketing expenses~~63% ~~was~~decline ~~due~~in toenrollments ~~the Company’s increased efforts to enroll students. The Company incurs sales~~ and ~~marketing~~related ~~costs~~assessment ~~for media~~ and ~~marketing~~registration ~~campaigns~~revenue and ~~for~~an ~~establishing~~8% ~~and~~decline ~~growing~~in ~~the~~tutoring ~~“eSylvan” brand~~revenue.

~~General~~During ~~and administrative expenses decreased by $0.3 million, or 5.8%, to $4.7 million for~~ the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003, ~~from $5.0~~total ~~million~~operating ~~for the nine months ended September 30, 2001. General and administrative expenses consist of personnel~~ costs, ~~professional fees, maintenance expenses, depreciation~~ and other expenses. ~~This~~decreased ~~decrease~~by ~~in general and administrative expenses resulted from the outsourcing of approximately~~ $02.34 million, ofor ~~additional functions to Sylvan~~33%, ~~which led~~ to an$5.3 ~~increase~~million ~~in management services and facilities usage charges~~ from ~~Sylvan~~$7.7 ~~and~~million afor ~~reduction~~the insix ~~general~~months ~~and~~ended ~~administrative~~June ~~expenses~~30, 2002.

~~Research~~Direct ~~and~~costs ~~development~~of ~~expenses~~services ~~decreased~~provided byfor ~~$0.6~~the ~~million~~six months ended June 30, or2003 ~~31.5~~decreased 24%, to $10.39 million ~~for the nine months ended September 30, 2002,~~ from $21.02 million for the ~~nine~~six months ended ~~September~~June 30, ~~2001~~ 2002. The ~~decrease~~decline inwas ~~research~~attributable ~~and~~to ~~development~~a ~~expenses~~10% ~~was~~decline ~~due~~in to the ~~fact~~number ~~that~~of ~~the~~tutoring ~~Company’s~~sessions ~~on-line~~delivered ~~tutoring~~as ~~technical~~well ~~infrastructure~~as ~~reached~~an aincrease ~~more~~in ~~mature~~efficiency ~~stage~~ in ~~its~~delivering ~~development~~sessions.

~~Management~~Sales ~~services~~ and ~~facilities~~marketing ~~usage~~expenses ~~charges~~decreased ~~from Sylvan increased~~ by $01.21 million, or ~~26.7~~ 63%, to $10.16 million for the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003, ~~compared~~from to $01.87 million for the ~~nine~~ six months ended ~~September~~June 30, ~~2001~~2002. ~~This~~The ~~increase~~decrease in sales and marketing expenses was due to the Company’s increased focus on utilizing customer acquisition channels that were more efficient than those utilized in the prior year along with an overall reduction in the number of students we sought to enroll.

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

~~resulted~~million ~~from~~was ~~the~~partially ~~outsourcing~~offset toby ~~Sylvan,~~$0.4 ~~during~~million ~~2002,~~ of ~~certain~~severance ~~information~~costs ~~systems~~recognized ~~functions~~in ~~previously~~the ~~performed~~six bymonths ~~the~~ended June 30, 2003 in conjunction with Company’s restructuring plan.

~~The~~Research and ~~Company~~development ~~incurred~~expenses nodecreased ~~interest~~by ~~expense~~38%, to $0.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003, ~~compared~~from to $0.39 million for the ~~nine~~six months ended ~~September~~June 30, ~~2001~~2002. ~~Effective~~The ~~December~~decrease ~~31,~~in ~~2001,~~research ~~Sylvan~~and ~~Ventures~~development ~~agreed~~expenses toresulted ~~forgive~~from ~~all~~the ~~past~~need ~~and~~for ~~future~~less ~~interest~~intensive development of our on-line tutoring technical infrastructure in the ~~line~~2003 ofperiod ~~credit~~versus the 2002 period.

Management services and facilities usage charges decreased by $0.1 million, or 18%, to $0.6 million for the six months ended June 30, 2003, from $0.7 million for the six months ended June 30, 2002.

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

Liquidity and Capital Resources

The ~~company~~Company used net cash in its operating activities for the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003 of $73.85 million, primarily to fund the ~~Company’s~~ $73.98 million loss before depreciation and amortization, ~~and~~compared ~~other~~to ~~non-cash charges. The Company used~~ net cash inused ~~its~~of ~~operating~~$4.9 ~~activities for~~million in the ~~nine~~six months ended ~~September~~June 30, ~~2001 of $9~~2002.7 ~~million,~~The ~~primarily to fund the~~ Company’s ~~loss~~capitalized ~~before depreciation and amortization of~~ $80.54 million ~~and prepaid royalties to Sylvan~~ of ~~$0.9~~software ~~million.~~development ~~Capital~~costs ~~expenditures~~during ~~for~~ the ~~nine~~six months ended ~~September~~June 30, ~~2002 were $0.2 million~~2003, ~~consisting~~compared ~~primarily~~to of capital expenditures for ~~computer software. Capital expenditures for~~ the ~~nine~~six months ended ~~September~~June 30, ~~2001~~2002 ~~were~~of $0.82 million, ~~consisting~~for ~~primarily of educational content and~~ computer software.

~~The~~In ~~Company~~February ~~has a revolving credit facility with Sylvan Ventures that expires on December 31~~2003, ~~2002, under which~~ the Company ~~may~~issued ~~borrow up to $10.0 million. Through December 31~~3, ~~2001~~578,947 ~~borrowings~~shares ~~under the line~~ of ~~credit bore interest on~~ the ~~unpaid~~Preferred ~~principal~~Stock ~~balance equal~~ to ~~the prime-lending rate. Effective December 31, 2001,~~ Sylvan Ventures ~~agreed to~~for ~~forgive~~an ~~all~~aggregate ~~past~~purchase ~~and~~price ~~future~~of ~~interest~~$6.8 Asmillion. ofThe ~~September~~Company ~~30,~~used ~~2002,~~ $36.16 million ~~was outstanding under the line~~ of ~~credit. Proceeds from~~ the ~~sale~~proceeds ~~of Preferred Stock, as discussed below, will be utilized~~ to repay ~~amounts~~the ~~due~~then outstanding balance under the line of credit with Sylvan Ventures.

In ~~February~~June ~~2002~~2003, the Company issued 41,~~947~~279,~~368~~884 shares of the Preferred Stock to Sylvan Ventures for an aggregate purchase price of $92,431,779.4 ~~million.~~ The Company used ~~$6.2 million of~~ the proceeds to repay ~~the~~amounts ~~then~~advanced ~~outstanding balance on the line of credit with Sylvan Ventures. The proceeds not used~~ to ~~repay~~ the ~~line~~Company ofby ~~credit with~~ Sylvan Ventures ~~were used to fund operations of the Company~~.

InThe ~~July~~Company ~~2002,~~expects ~~Sylvan Ventures agreed~~ to ~~purchase~~incur ~~2,000,000~~significant ~~additional~~negative ~~shares~~cash offlow ~~Preferred~~from ~~Stock~~operations for athe ~~total~~foreseeable ~~purchase~~future. ~~price~~The ofCompany ~~$3.8~~does ~~million.~~not Inexpect ~~November~~that ~~2002,~~its ~~Sylvan~~current ~~Ventures~~resources ~~agreed~~will be sufficient to ~~purchase~~support ~~1,578,947~~its ~~additional~~growth ~~shares~~and ofoperations until it becomes profitable. Since its founding, the ~~Preferred~~Company ~~Stock~~has relied upon its investors for the acapital ~~total~~necessary ~~purchase~~to ~~price~~operate ofthe ~~$3.0~~Company’s ~~million~~business. ~~This~~While ~~Preferred~~the ~~Stock~~Company ~~will~~expects beEducate, ~~issued~~Inc. ~~with~~ to fund the ~~same~~Company’s ~~terms~~operations ~~and~~at ~~price~~least asthrough the ~~previously~~end ~~issued~~of ~~Preferred~~2003, ~~Stock.~~we Ascannot ofpredict ~~September~~whether 30Educate, ~~2002,~~Inc. will continue to provide the necessary capital to the Company ~~had~~on ~~not~~a ~~issued~~longer ~~these~~term ~~securities~~basis.

The Company expects to incur significant negative cash flow from operations for the foreseeable future. The Company believes that its line of credit with Sylvan Ventures and the $6.8 million committed by Sylvan Ventures will satisfy its cash requirements through January 2003. However, the Company does not expect that its current resources will be sufficient to support its growth and operations until it becomes

~~profitable.~~Therefore, ~~The~~the Company cannot be certain that it will be able to raise additional funds as needed, or, if it can, that it will be able to do so on terms that it deems acceptable. In particular, potential third party investors may be unwilling to invest in the Company due to ~~Sylvan~~Educate, ~~Venture~~Inc.’s voting control ~~over it~~. The Company is unable to predict the amount of additional financing it will need because the amount is substantially dependent upon the Company’s success in implementing its business plan, including its marketing and advertising efforts and a variety of factors outside the Company’s control, such as unexpected technical difficulties with the on-line tutoring infrastructure and other factors discussed ~~herein~~in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission. The Company’s failure to obtain the funds necessary to establish and grow its business will have a material adverse effect on the business and the Company’s ability to generate and grow revenues. If the Company raises funds through the issuance of equity or equity-related securities, these securities will likely have rights, preferences or privileges senior to those of the rights of the Company’s Common Stock, and current holders of the Common Stock will experience dilution, which may be substantial.

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

Impact of Recently Issued Accounting Standards

In August 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. Effective January 1, 2002, the Company adopted the provisions of Statement No. 144. The adoption of the new standard did not have a material effect on the Company’s financial position or results of operation.

Effects of Inflation

Inflation has not had a material effect on the Company’s revenues and expenses since inception on October 1, 1999. Inflation is not expected to have a material future effect for the foreseeable future.

~~ITEM~~Seasonality ~~4. CONTROLS~~in ~~AND~~Results ~~PROCEDURES~~of Operations

AsThe Company experiences seasonality in its results of ~~November~~operations ~~11,~~primarily ~~2002~~as (a result of quarterly fluctuations in the ~~“Evaluation~~level ~~Date”),~~of ~~an evaluation~~student ~~was~~enrollments. ~~performed~~The ~~under~~strongest ~~the~~operating ~~supervision~~results ~~and~~are ~~with~~achieved in the ~~participation~~third quarter of the ~~Company’s~~year ~~management~~when we expect to deliver our highest tutoring session volume, ~~including~~while ~~the~~our ~~CEO~~marketing and ~~CFO,~~student ofacquisition expenses are lowest given that the ~~effectiveness~~third quarter has been our weakest enrollment quarter. The aforementioned seasonality trend is based upon our very limited operating experience and may not be indicative of ~~the~~actual ~~design~~operating results, particularly as student enrollments increase or decrease dramatically. Revenues and ~~operation~~profits in any period will not necessarily be indicative of ~~the~~results in subsequent periods.

~~Company’s~~ITEM ~~disclosure controls and procedures~~3. ~~Based~~QUANTITATIVE onAND ~~that~~QUALITATIVE ~~evaluation,~~DISCLOSURES ~~the~~ABOUT ~~Company’s~~MARKET management, including its CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date to ensure that information required to be disclosed in the reports that the Company files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date and no corrective actions with regard to significant deficiencies and material weaknesses. RISK

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from the changes in the price of financial instruments. The Company’s operations are exclusively in the United States and have been funded without an interest charge. Therefore, the Company currently has no direct exposure to financial market risks, as we have no exposure to fluctuations in foreign currency exchange rates, interest rates, equity prices or investment values.

ITEM 4.

CONTROLS AND PROCEDURES

As of August 4, 2003 (the “Evaluation Date”), an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date to ensure that information required to be disclosed in the reports that the Company files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date and no corrective actions with regard to significant deficiencies and material weaknesses.

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 2.

CHANGES IN SECURITIES AND USE OF PROCEEDS

See Note 76 to Notes to Financial Statements (unaudited) filed with this Form 10-Q, which is incorporated herein by reference.

ITEM 53. DEFAULTS UPON SENIOR SECURITIES

The Company has filed with the Securities and Exchange Commission the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (the “Act”) as an exhibit to this Quarterly Report on Form 10-QNone. ~~The Certifications required by Section 302 of the Act are included as part of this Quarterly Report on Form 10-Q.~~

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

OTHER INFORMATION

The Company has filed with the Securities and Exchange Commission the certifications of its principal executive officer and principal financial officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (the “Act”) as an exhibit to this Quarterly Report on Form 10-Q. The Certifications required by Section 302 of the Act are included as part of this Quarterly Report on Form 10-Q.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

9931.1 —Certification of ~~Chief~~principal ~~Executive~~executive ~~Officer~~offices under Section ~~906~~302 of Sarbanes-Oxley Act of 2002.

9931.2 —Certification of ~~Chief~~principal ~~Financial~~financial ~~Officer~~offices under Section ~~906~~302 of Sarbanes-Oxley Act of 2002.

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

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

(b)

Reports on Form 8-K

The Company did not file any reports on Form 8-K during the three months ended ~~September~~June 30, ~~2002~~2003. However, a Form 8-K was filed July 15, 2003 regarding the sale of Sylvan’s K-12 business to Educate, Inc.

SIGNATURES

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

		eSylvan, Inc.
		ESYLVAN, INC.
Date: November 12, 2002		/s/ David S. Graves
Date: August 14, 2003		/s/ R. CHRISTOPHER HOEHN-SARIC
		David S. Graves President and Chief Operating Officer
		R. Christopher Hoehn-Saric Chairman and Chief Executive Officer (principal executive officer)
Date: November 12, 2002		/s/ Barry C. Offutt
Date: August 14, 2003		/s/ KEVIN E. SHAFFER
		Barry C. Offutt Chief Financial Officer
		Kevin E. Shaffer Chief Financial Officer (principal financial officer)
Date: August 14, 2003		/s/ GLENN F. MCAVOY
		Glenn F. McAvoy Vice President—Finance (principal accounting officer)

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