SYLVAN LEARNING SYSTEMS INC - 10-K Annual Report

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

FORM 10-K

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 1999.
------------------

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 0-22844
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SYLVAN LEARNING SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)

Maryland 52-1492296
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1000 Lancaster Street, Baltimore, Maryland 21202
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(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:

Name of each exchange on
Title of each class which registered
---------------------------- ------------------------
Common Stock, Par Value $.01 NASDAQ
Preferred Stock Purchase Rights NONE

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

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 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. [ ]

The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was approximately $800 million as of March 7, 2000.

The registrant had 50,970,196 shares of Common Stock outstanding as of March
7, 2000.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------

Certain information in Sylvan Learning Systems, Inc.'s definitive Proxy
Statement for its 2000 Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A no later than
April 30, 2000 is incorporated by reference in Part III of this Form 10-K.

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INDEX
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Page No.
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PART I.

Item 1. Business.............................................. 3
Item 2. Properties............................................ 11
Item 3. Legal Proceedings..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders... 12

PART II

Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters............... 12
Item 6. Selected Consolidated Financial Data.................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 24
Item 8. Financial Statements and Supplementary Data........... 25
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............... 25

PART III

Items 10., 11., 12. and 13. are incorporated by reference from
Sylvan Learning Systems, Inc.'s definitive Proxy
Statement which will be filed with the Securities and
Exchange Commission, pursuant to Regulation 14A,
not later than April 30, 2000......................... 26

PART IV

Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................. 26

SIGNATURES............................................................. 30

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PART I.
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Item 1. Business
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") is the leading
international provider of educational services to families and schools. The
Company provides lifelong educational services through four separate business
segments. The Sylvan Learning Centers segment designs and delivers
individualized tutorial programs to school age children through franchised and
Company-owned Learning Centers. This segment also includes the operations of
Schulerhilfe, a major provider of tutoring services in Germany. The Sylvan
Contract Educational Services segment principally provides educational programs
to students of public and non-public school districts through contracts funded
by Title 1 and state-based programs. This segment also provides professional
development and graduate degree programs to teachers through the Canter Group.
The Sylvan English Language Instruction segment includes the operations of Wall
Street Institute, B.V., ("WSI"), a European-based franchiser and operator of
learning centers that teach the English language to professionals, and Aspect
International Language Schools, B.V. ("Aspect"), which focuses primarily on
intensive English language instruction to students. The Company's newest
segment, Sylvan International Universities, commenced operation in the second
quarter of 1999 with the acquisition of a controlling interest in Universidad
Europea de Madrid ("UEM"), a private, for-profit university. This segment
principally earns tuition and dormitory fees paid by university students.
Through its affiliate Caliber Learning Network, Inc., formed as a joint venture
initiative between Sylvan and MCI Communications Corp., Sylvan has the ability
to distribute world-class adult professional education and training programs.

On September 30, 1999, the Company adopted a formal plan to dispose of The
PACE Group ("PACE"), the Company's corporate training business. The sale
transaction closed December 31, 1999, whereby the Company contributed PACE in
exchange for an equity investment in Frontline Group, Inc., the owner of a
corporate training enterprise. On March 3, 2000, the Company sold its computer-
based testing segment, Prometric, for approximately $775 million in cash.
Unless specifically noted, all discussion of financial results excludes the
results of PACE and Prometric except as disclosed as discontinued operations.
Management's decision to discontinue business in the corporate training and
computer-based testing segments of the industry is consistent with the stated
goal of refocusing management's efforts and the Company's resources on the core
business of educational services. The proceeds from the disposal of Prometric
will also provide the necessary seed capital to develop an Internet incubator
for educational service companies that are bringing emerging Internet solutions
to the education and instruction marketplace.

On February 24, 2000, Management announced a new business strategy.
Building on brand recognition and an industry-leading position in education
services, the Company will seek to create shareholder value by capitalizing on
the opportunity to establish a leadership position in the education and training
Internet marketplace. The Company will also seek to maintain a leadership
position in the core educational services businesses. Our business will focus on
these two areas:

. Internet Incubator Company. Launching an incubator company to invest
in and incubate companies focusing on emerging Internet technology
solutions for the education and training marketplace. The goal of the
incubator is to create asset value by investing in and starting
companies that have strong potential for market leadership.

. Core Educational Services. Providing consumer-oriented education
services, through an operating company that will include Sylvan
Learning Centers, Contract Educational Services, English Language
Instruction and the International Universities initiative.

An important part of the new business strategy is to launch the Internet
incubator company by the end of the first quarter of 2000. The Company will
have a controlling interest in the Internet incubator company. The Company will
commit $285 million in cash and other assets to the Internet incubator,
including current investments in Caliber Learning Network, Inc.,
OnlineLearning.net, ZapMe! Corp., and eSylvan, the Company's online tutoring
venture. Affiliates of Apollo Management, L.P., including Rare Medium Group,
Inc., a leading Internet professional

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services firm, have committed $100 million in funding for the Internet incubator
company. Also, certain members of Sylvan's management, including Mr. Becker and
Mr. Hoehn-Saric, and other investors at management's discretion will invest
approximately $15 million in the new venture. The Internet incubator company
intends to seek to raise another $100 million from strategic Internet investors
in the near future, bringing total funding to an expected $500 million.

Sylvan's services are delivered through an international network of
educational centers. In 1999, Company revenues were approximately $338.5
million, composed of $90.7 million from the Sylvan Learning Centers segment,
$101.2 million from the Sylvan Contract Educational Services segment, $114.3
million from the Sylvan English Language Instruction segment, and $32.3 million
from the Sylvan International Universities segment. System wide revenues, which
include franchised Learning Center revenues of $228.5 million and franchised WSI
revenues of $71.8 million, totaled $638.8 million in 1999. Note 17 of the 1999
audited financial statements contains additional disclosures regarding the
Company's segments and geographic information.

Sylvan Learning Centers

Sylvan is widely recognized as providing high quality educational services
with consistent, quantifiable results, and has delivered its core educational
service to more than 1.3 million students primarily in grades three through
eight over the past 20 years. The Company's Sylvan Learning Centers segment
provides supplemental instruction in reading and mathematics, featuring an
extensive series of standardized diagnostic tests, individualized instruction, a
student motivational system and continued involvement from both parents and the
child's regular school teacher.

Typically, a parent contacts a Sylvan Learning Center because the parent
believes that his or her child may have insufficient reading or mathematics
skills. Parents learn about Sylvan from the Company's media advertising, from a
referral from another parent or from school personnel. Learning Center
personnel ask the parent to bring the student to the Learning Center to complete
a series of standardized diagnostic tests and to receive educational
consultation. Approximately 42% of phone inquiries result in a visit to a
Learning Center. The Learning Center's Sylvan-trained educators use test results
to diagnose students' weaknesses and to design an individual learning program
for each student. After the initial testing and consultation, the Company
estimates that more than 85% of parents enroll the student in a full course of
study. The program typically requires four to six months to complete and
comprises approximately 36 to 60 hours of instruction. Instruction is generally
given twice a week for one hour per visit. Sylvan requires that all instructors
be certified teachers. The cost of the tests and initial consultation ranges
from $50 to $250, and fees average $40 per hour. The Company estimates that the
typical program costs approximately $2,000.

An individual Learning Center ranges in size from 1,000 to 3,500 square
feet. Instruction is given at U-shaped tables designed to ensure that teachers
work with no more than three students at a time. The student's individualized
one hour lesson includes a five segment mastery approach. There are special
incentives, such as tokens redeemable for novelties and toys, to motivate the
student to achieve the program's objectives and to strengthen the student's
enthusiasm for learning. Personal computers at each Learning Center are used by
the student as a supplemental learning tool. The Learning Center's Director of
Education monitors the progress of each student after each hour of instruction.

Instructors schedule parent conferences after every 12 hours of a student's
program. Throughout a student's course of study, the Learning Center tests the
student using the same standardized diagnostic tests, and the results are shared
with the parents in personal conferences, during which the student's
continuation in a Sylvan program is discussed.

Franchise Operations. As of December 31, 1999, there were a total of 710
Learning Centers in 49 states, 7 Canadian provinces, Spain, Hong Kong and Guam
operated by the Company or its franchisees. As of that date, there were 439
franchisees operating Sylvan Learning Centers. During 1999, 67 franchised
Learning Centers were opened and eight were closed. Additionally, during 1999,
16 franchisee-owned Learning Centers were acquired by the Company. Less than 1%
of franchisees are currently more than three months in arrears in the payment of
franchise

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royalties, and the Company does not believe that the closing of any or all of
the Learning Centers of these franchisees would have a material adverse effect
on the Company because the royalties earned from these franchisees represented
less than one-tenth of one percent of total franchise royalties earned by the
Company in 1999.

The Company licenses franchisees to operate Sylvan Learning Centers in a
specified territory, the size of which depends on the number of school-age
children and average household incomes in the area. Franchisees must obtain the
Company's approval for the location and design of the Learning Center and of all
advertising, and must operate the Learning Center in accordance with the
Company's methods, standards and specifications. Most Learning Centers are
located in suburban areas and have approximately 10 employees, two of which are
typically full-time employees and eight of which are part-time instructors. The
cost to open a typical franchised Learning Center ranges from approximately
$150,000 to $200,000, including the franchise license fee, furniture, equipment
and an initial supply of certain items required under the Company's franchise
agreement.

The Company actively manages its franchise system. The Company requires
franchisees and their employees to attend two weeks of initial training in
Learning Center operations and Sylvan's educational programs. The Company also
offers franchisees continuing training each year. The Company employs field
operations managers that act as "consultants" to provide assistance to
franchisees in technology implementation, business development, marketing,
education and operations. These employees also facilitate regular communications
between franchisees and the Company.

Sylvan operates a quality assurance review program to maintain the quality
of Sylvan Learning Centers. Sylvan's field operations managers confirm
franchisee compliance with the Company's standards, including training
requirements, exclusive use of approved educational materials and programs,
correct administration of testing materials, proper execution of supervisory
procedures, sufficient time spent in parent/teacher conferences, staffing and
Learning Center appearance. Sylvan's field managers counsel franchisees that
fail to meet the Company's quality or financial performance standards and assist
these franchisees in developing a plan to improve their Learning Centers'
performance. When necessary, the Company assists franchisees in selling their
franchises.

The Company believes there is significant potential for additional
franchised Learning Centers both domestically and internationally. A number of
territories with only one Learning Center could support one or more additional
Learning Centers based upon the number of school-age children in the market
area. The Company is actively encouraging existing franchisees in these
territories to open additional Learning Centers. In addition, management has
identified at least 198 territories in North America, primarily in smaller
markets, in which there are no Learning Centers. The Company is actively seeking
franchisees for a number of these territories. Fifty new territories were sold
in 1999.

The Company has sold franchise rights for the operation of Learning Centers
in Hong Kong, China, the United Kingdom, France and Spain. In pricing
international franchise rights, the Company takes into account estimates of the
number of centers that could be opened in an area.

The Company's typical franchise agreement (the "License Agreement") grants
a license to operate a Sylvan Learning Center and to use Sylvan's trademarks
within a specified territory. The franchisee is required to purchase from Sylvan
certain diagnostic and instructional materials, student record forms, parental
information booklets and explanatory and promotional brochures developed by the
Company. Sylvan specifies requirements for other items necessary for operation
of a Learning Center, such as computers, instructional materials and furniture.
The Company currently offers a License Agreement with an initial term of ten
years, subject to unlimited additional ten-year extensions at the franchisee's
option on the same terms and conditions. The initial license fee ranges from
$38,000 to $46,000, depending on factors such as the number of school-age
children in the territory. Royalties are either 8% or 9% of gross revenues of
the Learning Center, and the royalty rate depends upon the demographics of the
territory and is specified in the License Agreement. Advertising spending
requirements range from $1,000 to $3,500 per month, or up to 8% of gross
revenues, whichever is greater. The License Agreement has been revised
periodically, and several franchisees are operating under older agreements with
variations from the above terms. Approximately 8% of franchisees operate under
older agreements with royalties as low as 6% and without any requirement to
contribute to the national advertising fund. The remaining 92% of the
franchisees are required to contribute a minimum of 1.5% of gross revenues to
the national advertising fund. The fund is administered by the SLC National

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Advertising Fund, Inc. ("SNAF"). The Franchise Owners Association ("FOA")
operates the SNAF. The FOA is an association whose members consist of Sylvan
franchise owners. Franchisees must submit monthly financial data to the
Company.

Company-owned Learning Centers. As of December 31, 1999, Sylvan owned and
operated 84 Learning Centers: 6 in the greater Baltimore, MD area, 10 in the
greater Philadelphia, PA area, 9 in the greater Washington, D.C. area, 13 in
South Florida, 5 in Alabama, 6 in the greater Minneapolis, MN area, 7 in Dallas,
TX, 10 in Houston, TX, 5 in the greater Salt Lake, UT area and 13 in the greater
Los Angeles, CA area. The Company's operation of Learning Centers enables it to
test new educational programs, marketing plans and Learning Center management
procedures. Company-owned Learning Centers give the Company a local presence in
key markets, which has been helpful in cross-marketing the Company's other
educational services in these communities. The Company may consider selected
acquisitions of additional Learning Centers now operated by franchisees.

Schulerhilfe. On October 28, 1998, the Company acquired Schulerhilfe,
a major provider of tutoring services in Germany. Schulerhilfe has approximately
196 company-owned centers and approximately 728 franchise locations in Germany,
Italy and Austria. Schulerhilfe is engaged in providing tutoring service to
primary and secondary school students with an operational business model that is
similar to Sylvan Learning Centers. Students typically attend twice per week and
are instructed in small groups of four to six students per session. The typical
session lasts approximately 90 minutes. Students attend for an average of 12
months and pay approximately $115 per month. Per center enrollment averages 500
students per year. Schulerhilfe advertises its services using print, radio and
television advertisements on local and national levels.

Sylvan Contract Educational Services

Title I and state-based programs. The federal government and various state
and local governmental agencies allocate funds to local school districts to
provide supplemental remedial education to academically and economically
disadvantaged students. The main program is the Title I program, administered by
the U.S. Department of Education. Federal law contains minimum student
performance standards for each school district receiving Title I funds. The
Company believes that because of its proven record of achieving measurable
improvement in the reading and mathematics skills of its students nationwide, it
is positioned to provide supplemental educational services to school districts
receiving Title I and similar state funds. As of December 31, 1999, the Company
had contracts to provide supplemental remedial educational services to 112
public schools, including 19 in Compton, California, 10 in Detroit, Michigan, 10
in Atlanta, Georgia, 10 in Cleveland, Ohio, and 9 in Columbus, Ohio.

Using Company personnel, or district personnel trained and supervised by
Sylvan, Sylvan offers virtually the same educational services to students in
schools as is offered at Sylvan Learning Centers. The school designates a
classroom to be the Learning Center for the duration of the contract and
modifies the classroom to resemble a typical Sylvan Learning Center. Sylvan
personnel administer standardized diagnostic tests and, based on the results,
prescribe an individualized learning program for each child. Students typically
receive two hours of instruction per week, which includes the use of personal
computers as in a Sylvan Learning Center. The Company can provide these services
to students after school, on Saturdays, during the summer or as a "pullout"
program during the regular school day, which is the method currently prescribed
by most current contracts. There is a high degree of individual attention, with
student to teacher ratios of no more than three to one. The program is designed
to include a high degree of parental involvement, and teachers make a special
effort to have the parents involved. The Company is in the process of
converting its services offered under contract to the public schools to be a
management services contract requiring the schools to invest in the equipment,
classroom buildout and employment of the teachers. The Company will provide
management oversight, license to use its programs, training of staff and quality
control review. The Company believes that over the next 18 months all of its
public school contracts will be offered on this basis.

Under most of its contracts, the Company has guaranteed that each student
who receives instruction in the Sylvan program and meets prescribed attendance
requirements will achieve some minimum measure of improvement required by the
school districts, as measured by standardized tests. Improvement is measured
using various standardized measures, including normal curve equivalents
("NCE's") a generally accepted statistical measure of student performance. The
typical minimum improvement required is two NCE's per year. If a student does
not achieve the required improvement, the Company will provide 12 hours of
remedial instruction to that student during the following summer or school year
without charge. The Company has not incurred significant expense related to this
guarantee. Under the contracts, the school districts pay the Company a set fee
for all services, materials and equipment. The contracts have terms of one to
three years, with the latest expiring in June 2002. All of the contracts contain
provisions for cancellation by school district officials based on funding
constraints.

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The Company is actively seeking contracts to provide its core educational
program to other school systems, offering to tailor its program to the system's
specific needs, and is in discussions with several other major school districts.
In addition to serving public school students, Sylvan can provide its service to
parochial or private school students through contracts with public school
districts. Public school districts are responsible for administering the Title I
funding for the non-public schools. Because government-funded services to any
parochial school students generally cannot legally be provided in the parochial
school, Sylvan offers the flexibility of conducting the program at a nearby
Learning Center, or providing temporary facilities.

The Canter Group. In January 1998, the Company acquired Canter and
Associates, Inc. and Canter Educational Productions, Inc. (collectively, "The
Canter Group" or "Canter"), a leading provider of training, staff development
and graduate courseware for educators. Canter's educational materials have been
used by more than a million teachers since 1976. Canter has also developed the
materials for a distance-learning Master's degree program for teachers offered
through accredited colleges and universities. Additionally, Canter has college
and university partners that offer Canter-produced distance learning video
courses, for which teachers receive graduate level credit. Canter also develops
and distributes staff development materials and programs utilized by elementary
and secondary schools nationwide. Canter's courses and materials cover a
comprehensive array of topics, including technology, instructional strategies,
teacher motivation, parent involvement, behavior management, student learning
styles, conflict resolution and school safety.

Sylvan English Language Instruction

In December 1996, the Company purchased WSI, a European-based franchisor
and operator of learning centers where English is taught through a combination
of computer-based and live instruction. Typically, the instructional programs
are approximately nine months to one year in duration. WSI uses a proprietary
teaching system composed of multimedia interactive video on CD-ROM, live,
personalized instruction and small group classes. WSI has more than 36 Company-
owned and 231 franchised centers in operation throughout Europe and Latin
America.

WSI has 157 centers in Spain (130 franchised and 27 Company-owned) with the
remainder in France, Germany, Italy, Portugal, Switzerland, Mexico, Chile,
Israel, Colombia, Argentina, Brazil, Ecuador and Venezuela. WSI's international
expansion has been accomplished by selling Master Licensing rights, with each
Master Licensor obtaining franchisees to open centers in its development areas.
In the future, Sylvan plans to continue to expand WSI's presence globally,
through the opening of new Company-owned centers with a focus on the Middle
East, Africa, Europe and the Pacific Rim regions.

On May 6, 1998, the Company acquired all of the outstanding common stock of
Aspect. Aspect is a leading provider of English language training programs for
college students and professionals from non-English speaking countries. Founded
in 1989, Aspect delivers intensive English language programs at 28 schools in 7
countries, (18) in the United States, (2) in Canada, (6) in the United Kingdom,
(1) in Ireland and (1) in Australia. Aspect operates language schools in
Company-owned and leased facilities and on university campuses. Aspect's
curriculum is based on the communicative method augmented with technology
enhanced language learning to optimize student learning. All Aspect schools have
multimedia computer labs and include Internet use for collaborative real world
projects. Student/teacher ratios average 12, ensuring individualized attention.
Aspect students, typically pre-college and college-aged students come from more
than 90 countries around the world. The students attend Aspect programs, which
include intensive English language instruction and immersion in an English
language culture, for an average of 10 weeks at an average cost of $3,200 net of
sales commission. Schools operate year round with weekly student intake.
However, 36% of Aspect enrollments are in the July, August and September period.
Teachers are typically TESL certified with a University degree in TSL, English,
Linguistics, Curriculum & Instruction or other related fields.

Aspect sells its courses as a package including language instruction,
accommodation, and an extensive social program to immerse students in their new
language. Each year over 22,000 students participate in Aspect's program. Aspect
operates 13 sales offices in 12 countries on 3 continents. In addition, students
are recruited from over 85 countries via an extensive network of agents,
providing a uniquely diverse student experience.

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Sylvan International Universities

The Company's newest segment, Sylvan International Universities, commenced
operations in the second quarter of 1999 with the acquisition of a controlling
interest in the Spanish company, Prouniversidad, S. A. Prouniversidad, S. A. was
granted a license to operate UEM, a for-profit private university offering a
wide array of university degrees officially recognized in Spain, including
doctorate degrees. UEM also provides, postgraduate courses and dormitory
services to students. UEM owns, for student training purposes, a Dentistry
Clinic and it is also in the process of opening a Podiatry Clinic.

UEM is located in the outskirts of Madrid, Spain and began operating in
academic year 1995/1996. Prior to this time the university was licensed to CEES
and has operated since the early 1990's. The UEM campus is built on a 3 million
foot plot of land owned by Prouniversidad, S. A. At present, the campus
development consists of three academic buildings, two student dormitory
buildings, sports facilities, and parking areas. There is enough space available
at the campus for future expansion.

The University also contains dormitory buildings located on campus. These
buildings can accommodate 529 students. At December 31, 1999, occupancy at the
dormitory buildings was approximately 98%.

UEM provides 15 different bachelor degrees, and 6 associate degrees.
Additionally, UEM provides 8 different degrees issued by the state-owned
Universidad Complutense de Madrid. The number of students enrolled for academic
year 1999/2000, which began on October 1, 1999, is 6,645 degree students, 64
doctorate students and 110 postgraduate students.

The degrees offered by the University cover the following areas:
. Law
. Economics and Business Administration
. Nursing
. Dentistry
. Translation and interpretation (Foreign languages)
. Journalism and Communication
. Engineering
. Architecture
. Sports and Physical Education
. Environmental Sciences and Optics
. Physiotherapy

Bachelor degrees usually take between four and five years to complete.
Associate degrees typically span three years, and doctorate degrees span two
years. The postgraduate courses span approximately three months. The tuition
fee paid per academic year is approximately $6,000 per student, although the fee
may vary depending on the degree and on the number of academic credits taken.
Quality at UEM is achieved by paying special attention to the following
features, which are considered critical: low student to teacher ratio, close
tutoring of students, and state-of-the-art laboratories and clinics.

Marketing

The Company and its franchisees market Sylvan's Learning Center services to
parents of school-aged children at all grade levels and academic abilities. Far
beyond tutoring, Sylvan Learning Centers' supplemental education utilizes a
diagnostic and prescriptive approach to address the specific needs of each and
every student. A portion of Sylvan's advertising includes commercials on
morning news, on the national networks as well as various cable delivered
programs. Sylvan's advertising emphasizes the benefits of its personalized
educational services through testimonials of actual parents and Sylvan teachers.
It positions Sylvan as the leader in supplemental education and emphasizes
Sylvan's high quality curriculum, personalized attention and positive results:
better grades and improved self-esteem. Franchisees form local cooperatives to
collectively purchase local television and radio advertising and usually
supplement their efforts with local newspaper and direct mail. The

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Company also has additional marketing support for specific programs, including
Reading, Math, Algebra, Geometry, Study Skills, SAT/ACT College Prep, and
Writing.

The Company markets its school-based educational services to local school
districts and state education departments. This marketing effort has been
expanded to seek contracts for both public and non-public schools, where both
are administered by the local public school district.

WSI markets its English language instruction services through the use of
national television and radio advertising programs in Spain as well as through
locally placed advertising by its franchisees and company-owned centers in
various countries. Aspect uses several channels for marketing its products:
overseas sales agents, proprietary sales offices and increasingly, the Internet.
Aspect provides brochures, leaflets and CD-ROM to its large network of overseas
partners for their use in recruiting. Aspect currently works with over 1,000
agents in 89 countries. In addition, Aspect operates its own sales offices in 12
countries, which are also an important source of students. Over the past
several years, students have begun to book language programs directly with
Aspect schools through distribution channels such as the Internet.

Sylvan International Universities markets UEM in Spain through promotion of
the University among private schools. To this end, UEM marketing professionals
visit schools across the country presenting UEM to prospective students and
parents. There are also guided tours of the University for school students. UEM
also carries out a nationwide advertising campaign on television, radio, and
the Internet during the annual enrollment period.

Competition

The Company is aware of only three direct national corporate competitors in
its Sylvan Learning Centers segment: Huntington Learning Centers, Inc., Kumon
Educational Institute and Kaplan Educational Centers. The Company believes these
competitors operate fewer centers than Sylvan and that these firms concentrate
their services within a smaller geographic area. In most areas served by Sylvan
Learning Centers, competition also exists from individual tutors. State and
local education agencies also fund tutoring by individuals, which compete with
the Company's Sylvan Learning Centers segment. Schulerhilfe competition consists
of one other national provider of tutoring services in Germany as well as
individual local tutors.

The Company's Contract Educational Services segment's most significant
competitor remains the public school system itself. Given the unique position of
public education in the United States, the Company believes that educational
reforms implemented directly by school officials will not face the same degree
of public resistance that the Company may face. The Company also competes with
school reform efforts sponsored by private organizations and universities and
with consultants hired by school districts to provide assistance in the
identification of problems and implementation of solutions. The Company is aware
of several entities that currently provide Title I and state-based programs for
students attending parochial and private schools on a contract basis.

The English Language Instruction market is highly fragmented with numerous
public and private sector operators. These include Berlitz/ELS, E.F. (a Swedish
company) and Opening (a Spanish company). Berlitz is the largest of these
companies in this market segment, with annual revenues of approximately $330
million. Aspect's most significant competitors are EF, Kaplan, and Study Group
International.

The university market in Spain is dominated by the public universities,
which have a 95% share of the overall market. Private universities have a market
share of 5%. In the Madrid area, where UEM operates, the main competitors are:
C.E.U, Alfonso X el Sabio, and Universidad Pontificia de Comillas. C.E.U. is
believed to be the largest, with several campuses in the Madrid area and
approximately 10,000 students.

Government Regulation
Franchise. Various state authorities as well as the Federal Trade
Commission (the FTC") regulate the sales of franchises in the United States. The
FTC requires that franchisors make extensive disclosure to prospective
franchisees but does not require registration. A number of states require
registration and prior approval of the

9

franchise-offering document. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of a
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While the Company's franchising
operations have not been materially adversely affected by such existing
regulation, the Company cannot predict the effect of any future legislation or
regulation.

Title I. Title I school districts are responsible for implementing Title I
in carrying out their educational programs. Title I regulations, as well as
provisions of Title I itself, direct Title I school districts to satisfy
obligations including involving parents in their children's education,
evaluating and reporting on student progress, providing equitable services and
other benefits to eligible non-public school students in the district and other
programmatic and fiscal requirements. In contracting with school districts to
provide Title I services, the Company has become and will continue to be,
subject to various Title I requirements and may become responsible to the school
district for carrying out specific functions required by law. For example,
Sylvan has responsibility for soliciting parental involvement, introducing
program content adequate to achieve certain educational gains and maintaining
the confidentiality of student records. The Company's failure to adhere to Title
I requirements or to carry out regulatory responsibilities undertaken by
contract may result in contract termination, financial liability, or other
sanctions.

Accreditation. Aspect language schools are accredited in the U.S. by ACCET
[Accrediting Council for Continuing Education and Training]. In the State of
California Aspect language schools are registered with BPPVE [Bureau of Private,
Post-secondary and Vocational Education], in New York State Aspect is licensed
as a private ESL [English as a Second Language] school through NYSED [New York
State Education Department]. Aspect's U.S. schools are authorized by the INS
[Immigration and Naturalization Service] to issue I-20 forms used by students to
obtain F1 visas to study in the U.S. The Canadian schools are registered with
the Provincial governments, the Toronto school is registered with the Ontario
Ministry of Education and Training, and the Vancouver school is registered with
the British Colombia PPSEC [Private and Post Secondary Education Commission].
United Kingdom, Ireland and Australian schools are accredited through quasi-
governmental agencies.

Private Universities. The Spanish authorities play a supervisory role over
private universities. There are minimum requirements with regard to quality.
Private universities must comply with certain legal requirements. These
requirements specify a prescribed ratio of full time teachers to part time
teachers, a prescribed ratio of PhDs to Bachelors among teachers and a minimum
number of degrees that must be offered. The Company believes UEM complies with
these requirements in all material respects.

Trademarks
The Company has a federal trademark registration for the words "Sylvan
Learning Center" and distinctive logo (a reading child), and various other
trademarks and service marks and has applications pending for a number of other
distinctive phrases. The Company also has obtained foreign registrations of a
number of the same trademarks. The Company's License Agreement grants the
franchisee the right to use the Company's trademarks in connection with
operation of the franchisee's Learning Center. Additionally, the Company has a
federal trademark registration for the words "Wall Street Institute" and
distinctive logo (Statue of Liberty), as well as foreign trademark registrations
and pending applications for the WSI trademark and logo.

Employees
As of December 31, 1999, the Company had approximately 7,437 employees,
4,252 of whom were classified as full-time and 3,185 of whom were classified as
part-time. Of these employees, 1,101 full-time and 401 part-time employees are
employed by the Company's discontinued businesses. Most of the Company's part-
time employees are teachers in school-based programs, Company-owned Learning
Centers and Schulerhilfe centers. None of the Company's employees are
represented by a union and the Company considers its relationship with its
employees to be good.

Effect of Environmental Laws
The Company believes it is in compliance with all environmental laws in all
material respects. Future compliance with environmental laws is not expected to
have a material effect on the business.

10

Item 2. Properties

The Company leases most of its facilities, consisting principally of
administrative office space and center site locations. The Company's
administrative offices consist of four leased facilities in Baltimore, Maryland.

The Company's segments lease various sites primarily in North America and
Europe. The Learning Center segment leases space for 84 sites in the United
States, and 177 Schulerhife sites in Germany; the English Language Instruction
segment leases 84 sites around the world; the Contract Educational Services
segment leases 3 regional offices; and the International Universities segment
leases 2 sites used for the Dentistry and Podiatry clinics.

The Company also owns five buildings in the United Kingdom, one building in
Ireland and five buildings located on the UEM campus consisting of three
academics buildings and two dormitories.

Item 3. Legal Proceedings

The Company is the defendant in a legal proceeding pending in the United
States District Court for the Northern District of Iowa, Civil Action No. C96-
334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit corporation
formerly known as American College Testing Program, Inc. ("ACT"). ACT's claim
arises out of the Company's acquisition of rights to administer testing services
for the National Association of Securities Dealers, Inc. ("NASD"). ACT has
asserted that the Company tortuously interfered with ACT's relations,
contractual and quasi-contractual, with the NASD, that the Company caused ACT to
suffer the loss of its advantageous economic prospects with the NASD and other
ACT clients and that the Company has monopolized and attempted to monopolize the
computer-based testing services market. ACT has claimed unspecified amounts of
compensatory, treble and punitive damages, as well as injunctive relief. If ACT
were awarded significant compensatory or punitive damages, it could materially
adversely affect the Company's results of operations and financial condition. In
February 1998, the Court ruled that ACT may proceed only on three of its five
antitrust theories and otherwise narrowed the scope of ACT's antitrust claims.
In March 1998, the Court denied the Company's motion to dismiss ACT's state law
claims. Formal discovery was completed in 1999. Following discovery, in
response to the Company's motion to dismiss, the Court further narrowed the
scope of the litigation by dismissing all of ACT's tort claims. A trial date of
June 26, 2000, has been set with trial expected to last three weeks. The
Company believes that all of ACT's claims are without merit but is unable to
predict the outcome of the ACT litigation at this time.

The Company is the defendant in an arbitration proceeding pending in Los
Angeles, California initiated on or about March 22, 1999 by James Jinsoo Choi
and Christine Choi. The Chois' claim arose out of the previous relationship Mr.
Choi had as a licensee of Sylvan. Mr. Choi was licensed to operate Sylvan
Learning Centers in Korea pursuant to a license agreement. In June 1998, Sylvan
terminated the license agreement for non-curable defaults. In their complaint,
the Chois allege fraud, negligent misrepresentation, breach of fiduciary duty,
and breach of contract. The Chois have claimed unspecified compensatory and
punitive damages. The arbitration hearing has not yet been scheduled, but the
Company anticipates it will occur during 2000. The Company believes that all of
the Chois' claims are without merit but is unable to predict the outcome of the
Choi arbitration at this time.

At this time the Company is not a party, either as plaintiff or defendant, in
any other material litigation.

11

Item 4. Submission of matters to a vote of security holders

No matters were submitted to be voted on by security holders during the
fourth quarter ended December 31, 1999.

PART II.
-------

Item 5. Market for Registrants' Common
Equity and Related Stockholder Matters

The Company's Common Stock is traded on the NASDAQ National Market. The
Company's trading symbol is SLVN. The high and low trade prices for 1999 and
1998 for the Company's common stock are set out in the following table. These
prices are as reported by NASDAQ, and reflect inter-dealer price quotations,
without retail mark-up, mark down or commission and may not necessarily
represent actual transactions.

1999 High Low
---- ------ ------

1st Quarter $34.63 $24.94
2nd Quarter $29.25 $19.25
3rd Quarter $28.19 $15.25
4th Quarter $19.13 $10.69

1998 High Low
---- ------ ------
1st Quarter $32.33 $21.67
2nd Quarter $35.00 $28.00
3rd Quarter $36.88 $19.88
4th Quarter $32.25 $17.13

No dividends were declared on the Company's common stock during the years
ended December 31, 1999 and 1998, and the Company does not anticipate paying
dividends in the future.

The number of registered shareholders of record as of March 7, 2000 was
462.

During the year ended December 31, 1999, the Company issued 574,813 shares
of its common stock that were not registered under the Securities Act of 1933.

Item 6. Selected Consolidated Financial Data

The selected consolidated financial data for the years ended December 31,
1999, 1998, 1997, 1996, and 1995 have been derived from Sylvan's financial
statements, which have been audited by Ernst & Young LLP. The financial data
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.

The Company consummated significant purchase business combinations in each
of the five years in the period ended December 31, 1999. These business
combinations affect the comparability of the amounts presented. Additionally,
the accompanying financial data has been restated to reflect the net assets of
the disposed operations of PACE and Prometric as net assets of discontinued
operations. The following data should be read in conjunction with Notes 3 and 4
to the Consolidated Financial Statements.

12

1999 (1) (2) 1998 (3) (4) 1997 1996 (5) 1995
------------ ------------ ----------- ---------- ---------
(In thousands, except per share amounts)

Statements of Operations Data:
Revenues $338,496 $247,374 $170,560 $140,014 $113,546

Costs and expenses:
Direct costs 285,967 199,939 148,926 121,291 100,715
General and administrative expense 26,855 15,530 19,693 8,049 6,205
Transaction costs related to pooling-of-interests - 5,000 - - -
Restructuring and asset impairment charges 5,127 3,730 - - 3,316
------------ ------------ ----------- ---------- ---------
Total costs and expenses 317,949 224,199 168,619 129,340 110,236
------------ ------------ ----------- ---------- ---------
Operating income 20,547 23,175 1,941 10,674 3,310
Non-operating income (loss) (15,737) 1,013 31,218 2,044 1,083
Interest expense (4,865) (976) (472) (1,024) (1,380)
------------ ------------ ----------- ---------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle (55) 23,212 32,687 11,694 3,013
Tax benefit (expense) 1,056 (6,706) (10,188) (4,124) 176
------------ ------------ ----------- ---------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle 1,001 16,506 22,499 7,570 3,189
Income from discontinued operations, net of tax 12,302 19,203 5,405 8,184 853
Loss on disposal of discontinued operations, net of tax (26,968) - - - -
------------ ------------ ----------- ---------- ---------
Income (loss) before cumulative effect of change in
accounting principle, net of tax (13,665) 35,709 27,904 15,754 4,042
Cumulative effect of change in accounting principle,
net of tax (1,323) - - - -
------------ ------------ ----------- ---------- ---------
Net income (loss) $(14,988) $ 35,709 $ 27,904 $ 15,754 $ 4,042
============ ============ =========== ========== =========
Earnings per common share, diluted:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.02 $ 0.32 $ 0.50 $ 0.19 $ 0.12
Earnings (loss) per common share, diluted $ (0.28) $ 0.70 $ 0.62 $ 0.40 $ 0.15

Diluted shares 53,157 51,286 44,890 38,963 27,701

Balance Sheet Data:
Cash and cash equivalents $ 20,410 $ 33,170 13,113 11,178 2,283
Available-for-sale securities 10,890 6,166 82,951 16,474 30,735
Net working capital 276,590 15,101 112,874 28,836 39,044
Intangible assets and deferred contract costs 195,813 117,889 24,135 24,653 52
Net assets of discontinued operations 280,287 278,150 134,345 96,968 86,186
Total assets 788,126 626,138 389,975 247,649 152,888
Long-term debt, including current portion 191,164 67,077 74,744 37,101 12,272
Stockholders' equity 474,093 488,833 314,982 153,190 137,622

(1) On April 1, 1999, the Company acquired a controlling interest in the
Universidad Europea de Madrid ("UEM"), a private for-profit university in
exchange for $26,000 in cash. The acquisition was accounted for as a
purchase, and Sylvan's 1999 results of operations include the results of
operations of UEM for the period April 1, 1999 through December 31, 1999.

(2) During the quarter ended December 31, 1999, the Company recognized
restructuring costs of $5,127. Additionally, the Company recognized
significant non-recurring operating charges during the fourth quarter of
1999, which totaled $10,300. These charges were principally related to
asset impairment charges, which resulted from management's focus on
simplification of the business model and a return to the core business
strengths. Losses recorded on disposal of investments in the fourth quarter
of 1999 also resulted in $13,400 of non-recurring charges during the
period. The cumulative effect of these significant, unusual charges was to
reduce income from continuing operations before income taxes and cumulative
effect of change in accounting

13

principle by $28,800 during the fourth quarter of 1999. See Notes 18 and 20
to the audited consolidated financial statements.

(3) Includes certain non-recurring expenses related to the acquisition of
Aspect. These expenses include $5,000 of transaction-related costs, such as
legal, accounting and advisory fees, $1,200 of compensation to former
shareholders of Aspect, who are no longer with the Company and were not
replaced, and $3,700 of costs, classified in the financial statements as
restructuring costs, that relate to the integration of Aspect with Sylvan.
The net effect of the above items was a decrease in pre-tax income from
continuing operations of $9,900 and net income of $8,900, or $0.17 per
diluted share.

(4) On January 1, 1998, the Company acquired Canter for an initial purchase
price of $25,000. Additional consideration of $35,674 has been recorded to
reflect Canter's achievement of certain EBITDA targets. The acquisition was
accounted for as a purchase, and Sylvan's results of operations from
January 1, 1998 include the operations of Canter. Additional variable
amounts of consideration are also payable to the seller if specified levels
of earnings are achieved in 2000.

Effective October 28, 1998, the Company acquired Schulerhilfe, in exchange
for an initial purchase price of $19,100 in cash. Additional consideration
of $10,424 was recorded subsequent to the initial purchase to reflect
achievement of revenue and collection targets in 1999. The results of
operations of Schulerhilfe subsequent to October 28, 1998 are included in
Sylvan's results of operations.

(5) Effective December 1, 1996, Sylvan acquired WSI, in exchange for an initial
purchase price of $21,071. This transaction was accounted for using the
purchase method of accounting, and Sylvan's results of operations from
December 1, 1996 include the operations of Wall Street.

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

Overview

The Company generates revenues from four business segments: Sylvan Learning
Centers, which earns primarily franchise royalties, franchise sales fees and
Company-owned Learning Center revenues; Sylvan Contract Educational Services,
which earns revenues from providing supplemental remedial education services to
public and non-public schools as well as providing teacher training services;
Sylvan English Language Instruction, which earns fees from the operations of WSI
and Aspect; and Sylvan International Universities, which earns tuition and fees
paid by the students of UEM, which was acquired in April 1999.

The following table sets forth the percentage relationships of operating
revenues and direct costs for each division, as well as certain income statement
line items expressed as a percentage of total revenues for the periods indicated
for the year ended December 31:

1999 1998 1997
-------- --------- --------

Revenues:
Sylvan Learning Centers 27% 26% 27%
Sylvan Contract Educational Services 30% 35% 30%
Sylvan English Language Instruction 34% 39% 43%
Sylvan International Universities 9% 0% 0%
-------- --------- ------- -
Total revenues 100% 100% 100%
Direct costs:
Sylvan Learning Centers 20% 18% 23%
Sylvan Contract Educational Services 24% 29% 26%
Sylvan English Language Instruction 31% 33% 38%
Sylvan International Universities 9% 0% 0%
-------- --------- -------
Total direct costs 84% 80% 87%

14

1999 1998 1997
------------ ----------- -----------

General and administrative expenses 8% 6% 12%
Transaction costs related to pooling of interests 0% 2% 0%
Restructuring costs 2% 2% 0%
------------ ----------- -----------
Operating income 6% 9% 1%
Non-operating income (expense) (6%) 0% 18%
------------ ----------- -----------
Income (loss) from continuing operations before taxes and cumulative
effect of change in accounting principle 0% 9% 19%
Tax benefit (expense) 0% (3%) (6%)
------------ ----------- -----------
Income from continuing operations 0% 6% 13%
Discontinued operations:
Income from discontinued operations, net of tax 4% 8% 3%
Loss on disposal of discontinued operations, net of tax (8%) 0% 0%
------------ ----------- -----------
Income (loss) before cumulative effect of change in accounting principle (4%) 14% 16%
Cumulative effect of change in accounting principle, net of tax 0% 0% 0%
------------ ----------- -----------
Net income (loss) (4%) 14% 16%
============ =========== ===========

Results of Operations
The Company has continued to grow rapidly during 1999 in response to the
increasing opportunities in the educational services industry. The core
businesses of Sylvan Learning Centers, Sylvan Contract Educational Services and
Sylvan English Language Instruction have been supplemented with the addition of
Sylvan International Universities. The Company has also moved to address the
increasing importance of technology in learning by focusing efforts on
applications of Internet technology to the education and instruction
marketplaces. In order to fund expansion into Internet applications in
educational and training services and to ensure that management remains focused
on core business strengths in the educational and training services industry,
the Company opted to sell the PACE corporate training business and the Prometric
testing business in 1999 and the first quarter of 2000 respectively. The
operating results of the discontinued businesses have been reported in the
discontinued operations section of the consolidated statement of operations. The
following comparison of operating results focuses primarily on the continuing
operations of the Company.

Comparison of results for the year ended December 31, 1999 to results for the
year ended December 31, 1998.

Revenues. Total revenues from continuing operations increased by $91.1 million,
or 37%, to $338.5 million for the year ended December 31, 1999 from $247.4
million for the same period in 1998. This increase resulted from higher revenues
in all business segments - Sylvan Learning Centers, Sylvan Contract Educational
Services, Sylvan English Language Instruction and the initial operations of
Sylvan International Universities.

Sylvan Learning Centers revenues for 1999 increased by $25.9 million, or
40%, to $90.7 million. Franchise royalties increased by $2.5 million, or 16%, as
a result of the net increase of 43 franchised Centers opened in 1999 and a 12%
increase in same center revenue. Franchise sales fees increased by $1.6 million,
primarily due to the sale of a master franchise agreement for France for $5.0
million in September 1999, the effect of which was partially offset by the sale
of a master franchise agreement for the United Kingdom for $3.25 million in
1998. Revenues from Company-owned Learning Centers increased $7.8 million, or
23%, to $42.2 million during 1999. Same center revenues increased 7%, or $2.2
million, with the remaining revenue increase of $5.6 million generated from 29
new Company-owned centers opened or acquired from franchise owners in 1998 and
1999. The full year impact of the October 1998 acquisition of Schulerhilfe, a
Germany-based tutoring company, resulted in an additional $12.0 million in
revenue for the year ended December 31, 1999. Product sales and other franchise
service revenues generated the remaining revenue increase of $2.0 million for
1999, as compared to 1998. Revenues for Learning Centers represent 27% of the
total continuing revenues of the Company for the year ended December 31, 1999.

15

Sylvan Contract Educational Services revenues increased for 1999 by $15.0
million, or 17%, to $101.3 million. The revenue increase for the year ended
December 31, 1999 was the result of a $3.9 million increase in revenue from
Sylvan at School contracts, a $0.3 million increase in Sylvan at Work contracts,
and a $10.8 million increase in revenue from the Canter teacher instruction
group. The $3.9 million increase in revenue from public and nonpublic schools
for 1999 is the result of $4.5 million in revenue attributable to new contracts
obtained after December 31, 1998, offset by a $0.6 million decrease in revenue
from existing contracts. The revenue increase at Canter was due to increasing
demand for domestic teacher training as well as the sale of a license to apply
the Canter teachers distance learning masters degree program in Mexico for a
licensing fee of $3.5 million. Revenue for Contract Educational Services
represents 30% of total continuing revenues of the Company for the year ended
December 31, 1999.

Sylvan English Language Instruction revenues increased for 1999 by $18.0
million, or 19%, to $114.3. The revenue increase was primarily a result of
adding the operations of several WSI franchise locations acquired after the
first quarter of 1998, which was offset by the disposal of the travel operations
division of Aspect. Revenues at WSI increased $25.1 million in 1999 due to a
combination of acquisitions of Centers in high-growth European countries coupled
with growth in the core areas of the business. Corporate center revenues
increased by $24.0 million in 1999 to $30.8 million, primarily due to the
inclusion of operating results of centers acquired in Italy, Germany and Spain.
Franchising revenues fees increased to $12.6 million in 1999 from $12.3 million
in 1998. The growth of the franchising revenues was reduced by a decrease in
franchise royalties of $0.2 million for 1999 and the impact of the acquisition
of successful franchised centers by WSI in 1999. Revenues from new area
development agreements generated $3.9 million in franchise sales fees in 1999,
which was a decrease from the 1998 franchise sales fees of $5.1 million. Fees
from area development agreements have declined as a result of management's
decision to retain undeveloped territories for Company-operated center
expansion. Product sales revenues increased by $0.4 million to $6.3 million in
1999 due to increased demand for the English language instruction product.
Revenues at Aspect decreased by $7.1 million in 1999, to $61.4 million. The
revenue decrease was a result of management's decision to dispose of Aspect's
travel business, which accounted for $12.5 million in revenue in 1998 and $5.2
in 1999. After factoring in the impact of the travel business disposal, revenues
increased in 1999 by $0.2 million. Revenues in Aspect's core language school
business increased by $3.3 million to $46.3 million in 1999. Revenues for the
English Language Instruction segment represent 34% of total revenues of the
Company for the year ended December 31, 1999.

Sylvan International Universities, the Company's newest division, began
operations in the second quarter of 1999 with the acquisition of a controlling
interest (54%) in the Universidad Europea de Madrid (UEM). Sylvan assumed
operating control of UEM on April 1, 1999, at which time the results of UEM's
operations began to be consolidated with those of the Company. Total revenues
for UEM subsequent to April 1, 1999 were $ 32.3 million, which represent 9% of
total revenues of the Company for the year ended December 31, 1999. Revenues of
UEM are seasonal due to a limited class schedule during July, August and
September.

Direct Costs. Total direct costs of continuing operations increased 42%, to
$317.9 million in 1999 from $224.2 million in 1998, as a result of business
expansion. Direct costs as a percentage of total revenues increased from 90% in
1998 to 94% in 1999. The increase in direct costs as a percentage of total
revenues from continuing operations was a result of restructuring costs in
existing businesses, start-up costs of new business ventures and investments in
technology enhancements.

Sylvan Learning Centers expenses increased $23.3 million to $68.7 million,
or 76% of Learning Centers revenue for 1999, compared to $45.4 million, or 70%
of Learning Centers revenue for 1998. Approximately $7.3 million of the increase
for 1999 related to expenses incurred by Company-owned learning centers due to
the acquisition of franchised learning centers and costs associated with higher
revenues at existing Company-owned centers. Expenses as a percentage of revenues
in Company-owned centers increased for the period as a result of the acquisition
of more franchise centers, which tend to operate at lower margins. Cost
increases of $2.5 million in 1999 related to franchise services support costs as
a result of growth in franchised centers over the prior year. The impact of the
October 1998 acquisition of Schulerhilfe resulted in $10.1 million of increased
costs for 1999. Approximately

16

$3.4 million of the segment's direct cost increase represented non-recurring
costs related to the technology driven impairment of certain educational
programs, and the refocusing of management efforts on core business objectives.

Sylvan Contract Educational Services expenses increased by $9.4 million to
$81.4 million, or 80% of Contract Educational Services revenue for 1999,
compared to $72.0 million, or 83% of Contract Educational Services revenues for
1998. The decrease in expenses as a percentage of revenue for 1999 was primarily
due to the increased volumes at Canter, which has higher operating margins.
Canter operating margins were further enhanced by the sale of a license
agreement to provide Canter's masters degree program in Mexico.

Sylvan English Language Instruction expenses increased by $25.0 million to
$106.4 million, or 93% of English Language Instruction revenues for 1999,
compared to $81.4 million, or 85% of the segments revenues in 1998. The
increase in expenses as a percentage of revenues was primarily due to increased
administrative costs at Aspect in anticipation of future volume increases and a
reduction in high margin WSI area development sales due to Management's
intention to build future value by retaining WSI center locations and acquiring
franchise centers.

Operating expenses at WSI increased $25.5 million to $41.1 million, or 78%
of WSI revenues for 1999, compared to $15.6 million, or 56% in 1998. This
expense increase is primarily due to business growth and the cost of operating
the corporate centers that were acquired in 1999. Approximately $24.1 million of
the increase for 1999 related to expenses incurred in corporate centers due to
the acquisition of franchised centers and costs associated with higher revenues
at existing corporate centers. Expenses as a percentage of revenues in corporate
centers increased for the period as a result of the acquisition of more
franchise centers, which tend to operate at lower margins.

Aspect's operating expenses decreased by $0.4 million to $65.4 million, or
106% of Aspect's revenues in 1999. The expense decrease is primarily due to the
disposal of the travel business, which resulted in a $6.9 million decrease in
1999 expenses. Remaining operating expenses increased $6.5 million, primarily
due to increased operating expenses in the language schools, increased operating
costs in the sales offices and increased overhead as a result of an extensive
investment in senior and middle management in anticipation of substantially
increased volume growth in the future.

Sylvan International Universities expenses were $29.4 million for the nine-
month period ended December 31, 1999. These direct expenses consist primarily
of personnel, marketing and advertising, and facility-related costs of UEM.
These expenses are a larger percentage of the International Universities
revenues for the period from acquisition through December 31, 1999 than the
anticipated annual percentage because of the seasonality of the business.
Classes are not in session for June, July, August and September, however,
certain fixed expenses are incurred year round.

Other Expenses. General and administrative expenses increased by $11.3 million
during 1999, to $26.9 million. The expenses as a percentage of revenues
increased to 8% in 1999. This increase in expenses as a percentage of revenues
is largely due to $3.0 million of non-recurring expenses incurred in 1999
related to business start-up costs, asset impairments, and simplification of the
Sylvan business model. Also included were the general and administrative costs
necessary to provide support for the PACE and Prometric businesses although
their operating results are included in discontinued operations.

Results from continuing operations included $5.1 million in restructuring
costs resulting from strategic changes in the Company's core educational
services business. The restructuring charges were primarily the result of
employee termination costs, school closings and facility exit costs resulting
from management's plan to exit certain activities outside the core business of
providing educational instruction.

In conjunction with the Company's formal restructuring plan, management
also examined existing corporate investments to determine the realizable
investment value. Non-operating losses totaling $13.4 million were incurred in
1999 as a result of decreases in investment values resulting from changing
market conditions for the educational services industry, including an aggregate
loss of $11.4 million related to the sale of the investment in JLC Learning
Corporation as disclosed in Note 6 to the audited consolidated financial
statements.

17

Other non-operating expenses increased $7.2 million, as compared to the
same period in 1998. This net increase was primarily attributable to a $3.1
million decrease in other investment income, a $3.9 million increase in interest
expense related to increased borrowings outstanding during the period, (which
includes $1.8 million of UEM interest expense) and a $0.3 million minority
interest in income of consolidated subsidiary recorded in 1999, which was
associated with UEM.

The Company's effective tax position on continuing operations has been
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges in 1999. Because of these
factors, comparison of the 1999 and 1998 effective tax rates is not meaningful.

Income from Continuing Operations. Income from continuing operations before
cumulative effect of change in accounting principle decreased by $15.5 million,
to $1.0 million for the year ended December 31, 1999. After removing the
effects of restructuring charges of $5.1 million, non-recurring operating
expenses of $10.3 million and losses on investments of $13.4 million, pre-
tax income from continuing operations for the year ended December 31, 1999
increased over 1998 by $5.5 million, or 24.1%, to $28.7 million. This increase
was the result of increased revenues and operating income from the Learning
Centers, Contract Educational Services and International University segments.

Discontinued Operations. At September 30, 1999 the Company approved a formal
plan to dispose of the PACE Group. Losses from PACE operations, net of tax, for
the period ended September 30, 1999 were $1.0 million, and the loss on the
disposal of PACE was approximately $27.0 million, including a tax expense of
approximately $1.1 million. In the first quarter of 2000, the Company sold
Prometric for approximately $775 million in cash. Prometric's net operating
results of $13.3 million and $19.0 million for the years ended December 31, 1999
and 1998, respectively, are reported in the discontinued operations section of
the statement of operations to reflect this sale. The gain on the sale of
Prometric was recognized in the first quarter of 2000 when the sale was
completed.

Cumulative Effect of Accounting Change. On January 1, 1999, the Company adopted
the provisions of AICPA Statement of Position No. 98-5, Reporting the Costs of
Start-up Activities ("SOP 98-5"), which requires start-up costs capitalized
prior to January 1, 1999 to be written-off and any future start-up costs to be
expensed as incurred. The cumulative effect of adopting SOP 98-5 in 1999
decreased net income for the year ended December 31, 1999 by $1.3 million (net
of $0.7 million in income taxes). The amount of the cumulative effect related to
the discontinued operations was $0.6 million (net of $0.3 million in income
taxes).

Comparison of results for the year ended December 31, 1998 to results for the
year ended December 31, 1997.

Revenues. Total revenues increased by $76.8 million, or 45%, to $247.4 million
for the year ended December 31, 1998 from $170.6 million for the same period in
1997. This increase resulted from higher revenues in all business segments -
Sylvan Learning Centers, Sylvan Contract Educational Services, and Sylvan
English Language Instruction.

Sylvan Learning Centers revenue increased by $18.1 million, or 39%, to
$64.8 million for the year ended December 31, 1998, compared to the same period
in 1997. Overall, franchise royalties increased by $2.5 million or 19% for the
year ended December 31, 1998, despite the acquisition of 13 franchised Centers
during 1998. Excluding the effect of the Center acquisitions, franchise
royalties increased 24% in 1998. The increase in royalties was due to a net
increase of 60 new Centers opened during 1998, combined with same center revenue
increases of 18% for the year ended December 31, 1998. Franchise sales fees
increased by $1.2 million, or 27%, to $5.8 million for the year ended December
31, 1998, compared to the same period in 1997. Revenues from Company-owned
Learning Centers increased by $9.3 million , or 37%, to $34.4 million during
1998. The acquisition of 13 centers in 1998 resulted in $8.2 million of
additional revenue in 1998. On a full year basis, same center revenues increased
by $3.5 million, or 16%, in 1998 compared to revenues in 1997. On October 31,
1998, the Company acquired Schulerhilfe, a tutoring company based in Germany.
This acquisition resulted in an additional $2.4 million in revenue in 1998. The
remaining revenue increase in 1998 of $ 2.7 million is principally due to
increased product sales.

18

Sylvan Contract Educational Services revenues increased $35.3 million, or
69%, to $86.3 in 1998 compared to 1997. The cause of $24.8 million of this
revenue increase was the 1998 acquisition of Canter, a leading developer of
training and graduate course materials for educators. Public and non-public
school contracts contributed $11.1 million of the increase which was offset by a
$.6 million decrease at Sylvan at Work. The $11.1 million increase in revenue
from public and non-public schools for the year ended December 31, 1998 is the
result of $17.4 million in revenue from new contracts, offset by a decrease of
$3.7 million in revenue from contracts in existing districts lost or reduced due
to local district budget constraints. This segment's revenue also declined by
$2.6 million as a result of the disposition in late 1997 of an unrelated
business assumed upon the acquisition of Educational Inroads.

Sylvan English Language Instruction revenues increased $23.4 million, or
32%, to $96.3 million in 1998 compared to 1997. The increase in revenues is due
to significant revenue growth of both WSI and Aspect as demand increased for
English language instruction. WSI revenues increased by $7.2 million or 35% in
1998, compared with 1997, as significant growth occurred across all areas of the
business, including opening new centers, launching a new product, and purchasing
a number of centers in Spain. Corporate center revenues increased by $5.7
million in 1998 to $6.9 million primarily due to the acquisition of centers in
Spain during 1998. Product sales increased by $.9 million in 1998 to $5.9
million in response to increased product demand. Royalty revenues increased $1.9
million in 1998 to $4.9 million as a result of the opening of more franchised
centers, however the franchise sales fees decreased $1.3 million during 1998 due
to a focus on opening centers. Aspect's revenues increased by $16.1 million, or
31% to $68.6 million in 1998 compared to 1997. This revenue increase was
primarily driven by an increase in its language schools business of $9.2 million
in 1998. $4.3 million of the 1998 revenue increase is attributed to the
acquisition of IEI, an operator of 10 language schools in the United States.
Travel business revenue grew by $3.6 million to $12.5 million in 1998. The
remaining revenue increase in 1998 of $3.3 million is due to increased revenue
in Aspect's sales offices and its contract to provide English language teachers
to the United Arab Emirates.

Direct Costs. Total direct costs increased 33% to $224.2 million in 1998 from
$168.6 million in 1997. Direct costs as a percentage of total revenues
decreased to 91% in 1998 from 99% in 1997. Both 1998 and 1997 contain certain
non-recurring costs, as further discussed below. Excluding these non-recurring
costs, total direct costs decreased as a percentage of total revenues from 91%
in 1997 to 87% in 1998. This decrease in costs as a percentage of revenues is
primarily due to expanding revenues without a corresponding increase in the
related direct operating expenses.

Sylvan Learning Centers expenses increased $6.2 million to $45.4 million,
or 70% of Learning Centers revenue for 1998, compared to $39.2 million, or 84%
of Learning Centers revenue for the same period in 1997. Included in Sylvan
Learning Centers expenses for the 1997 period is a non-recurring $5.0 million
contribution of the Company's Common Stock to a corporation whose sole purpose
is to develop and fund advertising programs for Sylvan Learning Centers.
Excluding this contribution, Sylvan Learning Centers expenses as a percentage of
revenue would have been 73% in 1997. Approximately $9.8 million of the increase
in recurring expenses was due to direct costs associated with higher revenues at
existing centers and the acquisition of 13 franchised learning centers in 1998.
The company's fourth quarter 1998 acquisition of Schulerhilfe accounted for $2.0
million of increased expenses.

Sylvan Contract Educational Services expenses increased by $26.9 million to
$72.0 million, or 83% of Contract Educational Services revenue for 1998,
compared to $45.1 million or 88% of Sylvan Contract Educational Services revenue
for 1997. The principle reason for this increase in expense was the 1998
acquisition of Canter. The decrease in expenses as a percentage of revenues was
primarily due to revenue growth in excess of additional expenses necessary to
service the contracts.

Sylvan English Language Instruction expenses increased $16.8 million to
$81.4 million, or 85% of English Language revenue for 1998, compared to $64.6
million, or 89% of English Language revenue for the same period in 1997. The
1998 year included $3.4 million of non-recurring charges related to the Aspect
acquisition and compensation of the former owners. Excluding these non-recurring
expenditures, expenses as a percentage of English Language Instruction revenues
decreased to 81% of the total English Language Instruction revenues.

19

Operating expenses at Wall Street Institute increased $5.1 million to $15.6
million or 56% of WSI revenues compared to $10.5 million or 51% in 1997. This
expense increase is primarily due to business growth and the additional costs of
infrastructure to manage the business. Personnel costs and other operating
expenses increased $6.5 million in 1998 as WSI developed the management support
structure to guide the global expansion of the business.

Aspect expenses increased by $17.9 million or 33% to $72.0 million in 1998.
Excluding the non-recurring expenses and restructuring charges incurred in 1998
and 1997 at Aspect expenses increased by $11.7 million, the expenses as a
percentage of revenues decreased from 100% in 1997 to 91% in 1998. Expenses
increased $10.5 million in 1998 in response to the costs of servicing revenue
growth at the language schools and in the travel business. The remaining
expense increase of $1.2 million was a result of increased costs of the sales
offices and the commencement of operations in the United Arab Emirates in 1998.

Other Expenses. General and administrative expenses decreased by $4.2 million
during 1998, compared to 1997. Excluding the non-recurring expenses of $6.5
million incurred in 1997, the percentage of general and administrative expenses
to revenues decreased from 8% in 1997 to 6% in 1998. The primary reason for
this decrease in general and administrative expenses as a percentage of revenues
was the expansion of Company revenues without a corresponding increase in the
general and administrative infrastructure.

In May 1998, the Company acquired Aspect. Associated with this acquisition,
the Company incurred $5.0 million of non-recurring transaction-related costs, as
well as $3.7 million of restructuring charges. The net effect of the $3.7
million restructuring charge, the $5.0 million of transaction-related costs, as
well as the $1.2 million in compensation paid to Aspect's former owners, which
are included in the direct costs for 1998, was a decrease in pre-tax income from
continuing operations of $9.9 million and income from continuing operations of
$8.9 million during the year ended December 31, 1998.

Non-operating income, consisting of investment and other income and equity
in net loss of affiliates decreased from $30.7 million in 1997 to $0.1 million
in 1998. The decrease in principally due to a $28.5 million net termination fee
received from an acquisition breakup in 1997 and an increase in the allocable
losses from Caliber of $1.5 million in 1998.

The Company's effective tax rate decreased from 31.1% during 1997 to 28.9%
during 1998. This reduction is a result of a proportionally greater increase in
income earned in lower-taxed international jurisdictions during 1998.

Income from Continuing Operations. Income from continuing operations decreased
by $6.0 million, or 27%, to $16.5 million for the year ended December 31, 1998.
After removing the effect of the non-recurring expenses in both years and the
effect of the $28.5 million breakup fee received in 1997 the pre-tax income from
continuing operations for the year ended December 31, 1998 increased $15.9
million, or 92% over the same period in 1997. This increase is a result of
increased revenue and margins from all operating divisions.

Income from Discontinued Operations. Operating income from the discontinued
operations of PACE and Prometric increased by $13.8 million to $19.2 million in
1998 as a result of the growth of the computerized testing market.

Future Assessment of Recoverability and Impairment of Goodwill

In connection with various acquisitions, the Company has recorded goodwill.
At December 31, 1999, unamortized goodwill was $191.1 million, which
represents 24% of total assets and 40% of stockholders' equity. Goodwill arises
when an acquirer pays more for a business than the fair value of the tangible
and separately measurable intangible net assets. For financial reporting
purposes, goodwill and all other intangible assets are amortized over the
estimated period benefited. The Company has determined the life for amortizing
goodwill based upon several factors, the most significant of which are the
relative size, historical financial viability and growth trends of the acquired
companies and the relative lengths of time such companies have been in
existence.

20

The Company amortizes goodwill on a straight-line basis over periods of 10 to 25
years based upon the specific acquisition.

Management periodically reviews the Company's carrying value and
recoverability of unamortized goodwill. If the facts and circumstances suggest
that goodwill may be impaired, the carrying value of such goodwill will be
adjusted which will result in an immediate charge against income during the
period of the adjustment and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill
amortization during the period of adjustment and each period thereafter until
fully amortized. Once adjusted, there can be no assurance that there will not be
further adjustments for impairment and recoverability in future periods. Of the
various factors considered by management of the Company in determining whether
goodwill is impaired, the most significant are (i) losses from operations, (ii)
loss of customers, and (iii) industry developments, including the Company's
inability to maintain its market share, development of competitive products or
services, and imposition of additional regulatory requirements.

Liquidity and Capital Resources

During 1999, the Company generated $70.9 million of cash flow from
operations, an increase of $12.8 million compared to 1998. The reported net loss
of $15.0 million for 1999 included significant non-cash elements such as
depreciation and amortization charges of $46.8 million and losses from the sale
of discontinued operations and investments of $40.3 million. Working capital
increases of $7.2 million during the year resulted primarily from overall
business growth. Management believes that uncollectable accounts receivable will
not have a significant effect on future liquidity. Future continuing operations
of the Company will not include the operating results of Prometric, which will
reduce the magnitude of the Company's cash flow from operations.

Cash used in investing activities, excluding securities investment
transactions, was $161.0 million in 1999 and $151.6 million in 1998. The 1999
investment activity was primarily for the acquisition of property and equipment
($61.2 million), the acquisition of WSI and Company-owned Sylvan Learning
Centers ($49.0 million), the acquisition of UEM ($26.0 million), the payment of
contingent consideration for prior period acquisitions ($16.7 million), other
investments and the expenditures for deferred contract costs ($20.9 million).
These investments were made to commence operations of the International
Universities segment, to acquire successful Learning Center and WSI centers and
to invest in furniture, computer equipment and software development for the
Company's general business expansion. In 1999, the Company sold its investment
in JLC Learning Corporation for $15.2 million of cash.

At December 31, 1999 the Company has accrued obligations payable in cash of
$22.5 million related to contingent consideration for the Drake, Schulerhilfe
and Canter acquisitions. The amount due will be paid in 2000.

The Company funded investing activity through funds provided by financing
activities as well as operating cash flows. The Company received net proceeds
of $110.5 million from borrowings during 1999. Proceeds form these borrowings
were applied to repurchase shares of Common Stock ($36.2 million) and fund
investment activities during 1999. Borrowings under the revolving credit
facility are due December 31, 2003. On March 3, 2000, the Company repaid the
entire outstanding balance due on the facility with a portion of the $600
million of net proceeds from the Prometric sale. Additionally, in March 2000,
the Company entered into an amendment to the facility reducing the amount
available for borrowing to $100 million.

The Company anticipates that cash flow from operations, available cash and
existing credit facilities, will be sufficient to meet its operating
requirements, including the expected expansion of its existing business over the
near term. The proceeds of $600 million net of tax and transaction costs from
the disposal of Prometric are expected to be further applied to International
University acquisitions ($100 million), to fund an Internet Educational Services
incubator operation ($220 million) and to repurchase outstanding shares of
Common Stock. The Company continues to examine opportunities in the educational
services industry for potential synergistic acquisitions.

21

On February 24, 2000, Management announced a $100 million investment in the
Company led by Apollo Management L.P., a private investment firm. Joining
Apollo in the investment will be an affiliate of Investor AB, DB (Deutsche Bank)
Capital and SKT, LLC. The investment will be in the form of ten-year
subordinated debentures. The debentures will have a 5% cash coupon, paid
semiannually, and will be convertible into common stock at $15.735 per share.
The transaction is expected to close in the first quarter of 2000.

On March 21, 2000, the Company announced the commencement of a modified
"Dutch Auction" tender offer to purchase up to 9.5 million shares, or
approximately 19%, of its outstanding Common Stock at a single per-share price
within a price range of $15.25 to $17.50 per share. If the tender offer is fully
subscribed, the Company will spend between approximately $145 million and $166
million to purchase the tender shares. The Company, intends to finance the
repurchase with a portion of the proceeds from the Prometric sale.

Restructuring

During the fourth quarter of 1999, the Company completed an analysis of its
operating structure to improve operating efficiency and to enhance shareholder
value. This analysis of the Company's operating structure revealed that the
significant growth the Company had achieved had come at a cost of increased
business complexity, added costs, slowed decision making, and diffused
responsibility and accountability within the Company. As a result of this
analysis, management approved a formal restructuring plan, and the Company
recorded a restructuring charge to operations of approximately $5.1 million.
The restructuring plan was comprised of employee termination and facility exit
costs resulting primarily from the Company's plan to exit certain activities
outside the core business of providing educational services. Facility exit
costs include approximately $3.5 million of costs to close schools and school-
based facilities. $3.0 million of the restructuring costs were paid through
December 31, 1999. The Company expects to complete implementation of the plan
by the end of the second quarter of fiscal 2000.

The restructuring plan adopted by management is consistent with the
Company's strategy of simplifying the Company by focusing on core educational
services businesses and discontinuing involvement in the corporate training and
computerized testing businesses. The restructuring will also streamline the
Company operations to allow management to focus on core business competencies
and expansion into educational opportunities on the Internet. Direct cost
savings from the restructuring plan will be primarily in the form of reduced
employee expense across all divisions and in general and administrative expenses
which will begin in the first quarter of 2000. Other changes in the business
model through entrance into Internet educational services opportunities and the
dynamics of the education marketplace prevent quantification of the impact of
future cost savings, if any, from this restructuring plan.

Discontinued Operations

On September 30, 1999, the Company adopted a formal plan to dispose of
PACE. The sale transaction closed December 31, 1999, whereby the Company
contributed PACE in exchange for an equity investment in Frontline Pace, a
corporate training enterprise.

On March 3, 2000, the Company sold its computer based testing segment,
Prometric, for approximately $775 million in cash.

Management's decision to discontinue business in the corporate training and
computer based testing segments is consistent with the stated goal of refocusing
management's efforts and the Company's resources on the core business of
educational services. The proceeds from the disposal of these businesses will
also provide the necessary seed capital to develop an Internet incubator for
educational service companies that are bringing emerging Internet solutions to
the education and instruction marketplace.

Year 2000 Compliance

The Year 2000 Issue was a result of computer programs written using two
digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic could recognize "00" as 1900

22

rather than 2000. This could have resulted in a system failure or
miscalculations causing disruptions of operations, including, production
difficulties, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

The Company implemented a corporate wide Year 2000 task force to resolve
the potential concerns presented by the Year 2000 issue. The Company
successfully completed all Year 2000 readiness preparation prior to December 31,
1999 and no significant complications have been experienced as a result of Year
2000 issues. During the year ended December 31, 1999 the Company incurred $0.6
million in expenses in continuing operations as well as $3.9 million in expenses
related to discontinued operations in order to prepare for the Year 2000 issue.
All costs were expensed in 1999 and the Company does not foresee incurring any
additional costs subsequent to December 31, 1999.

Euro Conversion

On January 1, 1999, certain countries of the European Union established
fixed conversion rates between their existing currencies and one common
currency, the Euro. The Euro is now traded on currency exchanges and may be used
in business transactions. The Company encountered no problems related to the
initial adoption of the Euro in 1999. Beginning in January 2002, new Euro-
denominated currencies will be issued and the existing currencies will be
withdrawn from circulation. The Company is currently evaluating the systems and
business issues raised by the Euro conversion. These issues include the need to
adapt computer and other business systems and equipment and the competitive
impact of cross-border transparency. At present, Management does not believe
the Euro conversion will have a material impact on the Company's financial
condition or results of operations.

Contingent Matters

In connection with the Company's acquisition of Canter and based on
Canter's earnings in 1999, additional estimated consideration of $9.0 million is
expected to be paid to the seller in cash. As of December 31, 1999, the Company
has recorded this additional consideration as a liability and goodwill, which
will be amortized over the remaining amortization period of 23 years. Additional
variable amounts of contingent consideration are also payable to the seller if
specified levels of earnings are achieved in 2000, payable in equal amounts of
cash and stock. The Company will record the contingent consideration when and
if the contingencies are resolved and the additional consideration is payable.

In connection with the Company's acquisition of Schulerhilfe, the Company
is obligated to pay the sellers an additional estimated $10.4 million of
consideration in 2000. The amount is based on the amount of 1999 franchise fees,
collected by Schulerhilfe on or before January 31, 2000 and the amount due will
be paid in cash. The Company has recorded this additional consideration as a
liability and additional goodwill at December 31, 1999 and the goodwill will be
amortized over the remaining period of 23 years.

Effects of Inflation

Inflation has not had a material effect on Sylvan's revenues and income
from continuing operations in the past three years. Inflation is not expected to
have a material future effect.

All statements contained herein that are not historical facts, including but not
limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, the Company's contingent payment
obligations relating to acquisitions, future capital requirements, potential
acquisitions, the failure to remediate or the cost of remediating Year 2000
Issues and the Company's future development plans 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. Among
the factors that could cause actual results to differ materially are the
following: amount of revenues generated by the Company's tutorial and teacher
training operations; the availability of sufficient capital to finance the
Company's business plan on terms satisfactory to the Company; general business
and economic conditions; and other risk factors described in the Company's
reports filed from time to time with the Commission. The Company wishes to
caution readers not to place

23

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instruments. The Company is exposed to financial market risks, including changes
in foreign currency exchange rates, interest rates and investments in available-
for-sale securities. The Company does not utilize derivative financial
instruments, but exposure to market risks is managed through its regular
operating and financing activities.

Foreign Currency Risk

The Company derives approximately 42% of its revenues from continuing
operations from customers outside of the United States. This business is
transacted through a network of international subsidiaries, generally in the
local currency that is considered the functional currency of that foreign
subsidiary. Expenses are also incurred in foreign currencies to match revenues
earned and minimize the Company's exchange rate exposure to operating margins.
A hypothetical weakening of the U.S. dollar relative to all other currencies
should not materially adversely affect expected 2000 earnings or cash flows. The
Company generally views its investment in the majority of its foreign
subsidiaries as long-term. The functional currencies of these foreign
subsidiaries are principally denominated in Euro-based currencies. The effects
of a change in foreign currency exchange rates on the Company's net investment
in foreign subsidiaries are reflected in accumulated other comprehensive income.
A 10% depreciation in year-end 1999 functional currencies relative to the U.S.
dollar would have resulted in a $9.4 million decrease in consolidated
stockholders' equity and comprehensive income.

Interest Rate Risk

The fair value of the Company's cash and cash equivalents would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due to the short-term nature of the Company's portfolio. The
Company's long-term revolving credit facility bears interest at variable rates,
and the fair value of this instrument is not significantly affected by changes
in market interest rates. At December 31, 1999 debt levels, 100 basis points
increase in interest rates would reduce annual pretax income from continuing
operations by approximately $1.7 million.

Investment Risk

The Company's investment portfolio is primarily exposed to risks arising
from changes in equity prices. The Company is exposed to equity price risks on
equity securities included in its portfolio of investments entered into for the
promotion of business and strategic objectives. These investments are generally
small capitalization stocks in the Internet segment of the educational services
industry. The Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 10% adverse change in equity prices would
result in an approximate $1.1 million decrease in the fair value of the
Company's available-for-sale securities and comprehensive income.

The Company's investment portfolio includes a number of holdings in non-
publicly traded companies in the educational services industry. The Company
values these investments at either cost less impairment (if any) or under the
equity method of accounting. Equity method investors are specifically excluded
from the scope of this disclosure. Non-public investments where the Company
owns less than a 20% stake are subject to fluctuations in market value, but
their current illiquidity reduces the exposure to pure market risk.

All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial position at December 31, 1999. Actual
results may differ materially.

24

Item 8. Financial Statements

The financial statements of the Company are included on pages 32 through 64
of the report as indicated on page 31.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no changes in accountants, disagreements, or other events
requiring reporting under this Item.

25

PART III.
--------

Item 10. Directors and Executive Officers of Sylvan Learning Systems, Inc.

Information required is set forth under the caption "Election of Directors"
in the Proxy Statement relating to the 2000 Annual Meeting of Shareholders,
which will be filed on or before April 30, 2000.

Information required pertaining to compliance with Section 16 (a) of the
Securities and Exchange Act of 1934 is set forth under the caption "Election of
Directors" in the Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which is incorporated by reference.

Item 11. Executive Compensation

Information required is set forth under the caption "Executive
Compensation" in the Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which is incorporated by reference.

Item 12. Security Ownership and Certain Beneficial Owners and Management

Information required is set forth under the caption "Security Ownership" in
the Proxy Statement relating to the 2000 Annual Meeting of Shareholders, which
is incorporated by reference.

Item 13. Certain Relationships and Related Transactions

Information required is set forth under the caption "Certain Transactions"
in the Proxy Statement relating to the 2000 Annual Meeting of Shareholders,
which is incorporated by reference.

PART IV.
--------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

1. Financial Statements

The response to this portion of Item 14 is submitted as a separate section
of this Report.

2. Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are inapplicable or
immaterial and therefore have been omitted.

(b) Reports on Form 8-K:

Form 8-K dated December 13, 1999.

Item 5. Other Events - Shareholder Rights Plan Amendment Notification

Item 6. Exhibits

26

3. Exhibits

(a) Exhibits:

Exhibit
Number Description
- ------ -----------

3.01 Articles of Amendment and Restatement of the Charter.(b)
3.02 Amended and Restated Bylaws dated September 27, 1996.(l)
3.03 Amendment to By-Laws as of December 13, 1999.(p)
4.01 Specimen Common Stock Certificate.(b)
4.02 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated January 26, 1993.(b)
4.03 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated July 14, 1993.(b)
4.04 Amended and Restated Rights Agreement by and between Sylvan Learning
Systems, Inc. and First Union National Bank, Rights Agent, dated as
of December 18, 1999.(p)
5.01 Opinion of Piper & Marbury L.L.P.(a)
10.01 Lease Agreement between Harbor East Parcel G-Office, LLC and Sylvan
Learning Systems, Inc. dated August 24, 1995. (c)
10.02 Master Agreement Between Educational Testing Service and Sylvan
Learning Systems, Inc. for Computer-Based Testing Services at
Sylvan Technology Centers dated September 1, 1993. (Portions of
this document have been omitted pursuant to a request for
confidential treatment.)(b)
10.03 Term Lease Master Agreement between Sylvan Learning Systems and IBM
Credit Corporation dated March 31, 1992.(b)
10.04 1993 Employee Stock Option Plan.(b)
10.05 KEE, Incorporated Non-Qualified Stock Option Plan.(b)
10.06 Sylvan Employee Confidentiality and Non-Disclosure Agreement and
Covenant Not to Compete.(b)
10.07 Form of Franchise Agreement.(b)
10.08 Form of Technology Center Agreement.(b)
10.09 Agreement and Plan of Reorganization dated February 17, 1995 by and
between Registrant and Remedial Education and Diagnostic Services,
Inc. (d)
10.10 Agreement and Plan of Reorganization dated as of March 1, 1995, by
and between Registrant and the PACE Group.(e)
10.11 Agreement and Plan of Reorganization dated as of July 28, 1995, by
and between Registrant and Drake Prometric, L.P.(f)
10.12 Lease Agreement dated August 24, 1995, First Amendment dated May 13,
1996 and Second Amendment dated November 11, 1996 by and between
Registrant and Harbor East, LLC.(k)
10.13 Senior Management Option Plan dated March 29, 1996.(k)

27

10.14 Securities Purchase Agreement by and between Registrant and JLC
Holdings, Inc., Software Systems Corporation and JLC Learning
Corporation dated November 1, 1996.(g)
10.15 Agreement and Plan of Reorganization dated January 28, 1997 by and
between Registrant and Wall Street Institute.(h)
10.16 Agreement and Plan of Reorganization dated May 30, 1997 among
Registrant and I-R, Inc. and Independent Child Study Teams, Inc.(i)
10.17 Sylvan Learning Systems, Inc. Employee Stock Purchase Plan.(j)
10.18 Sylvan Learning Systems, Inc. 1998 Stock Incentive Plan.(l)
10.19 Asset Purchase Agreement by and among Sylvan Learning Systems, Inc.,
Block Testing Services L.P. and Block State Testing Services L.P,
dated as of December 1, 1997.(m)
10.20 Agreement and Plan of Reorganization by and among Sylvan Learning
Systems, Inc., Block Testing Services L.P., National Assessment
Institute, Inc. and NAI Merger Corp, dated as of December 1,
1997.(m)
10.21 Stock Exchange Agreement dated as of April 7, 1998 between Aspect
International Language Schools, B.V., the Stockholders and Sylvan
Learning Systems, Inc.(n)
10.22 Agreement and Plan of Reorganization dated January 28, 1997 by and
between Registrant and ZGS Zentrale Gelsenkirchener SCHULERHILFE J.
Gratze + M. Mohr GbR mbH and SCHULERHILFE Gesellschaft fur
Nachhilfeunterricht mbH.(o)
10.23 Credit Agreement among Sylvan Learning Systems, Inc., Various Banks,
NationsBank, N.A., as Syndication Agent and Bankers Trust Company,
as Lead Arranger and Administrative Agent.(o)
10.24 Third Amendment to Credit Agreement among Sylvan Learning Systems,
Inc., Various Banks, NationsBank, N.A. (now known as Bank of
America, N.A.), as Syndication Agent, and Bankers Trust Company,
as lead Arranger and Administrative Agent (since replaced by Bank
of America, N.A., as successor Administrative Agent).
10.25 Stock Purchase Agreement effective as of January 1, 1998, by and
among Sylvan Learning Systems, Inc., a Maryland corporation,
Marlene Canter, the sole stockholder of Canter & Associates, Inc.
and Canter Educational Productions, Inc.(o)
10.26 Stock Purchase Agreement dated January 26, 2000, by and among Sylvan
Learning Systems, Inc., Prometric Acquisition Corporation and The
Thompson Corporation.(q)
10.27 Acquisition Agreement dated January 26, 2000, by and among Sylvan
I B.V. and Dodd Street Holding B.V.(q)
21.00 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche
23.03 Consent of Smith, Lange & Phillips L.L.P.
27.01 Financial Data Schedule for the year ended December 31, 1997.
27.02 Financial Data Schedule for the year ended December 31, 1998.
27.03 Financial Data Schedule for the year ended December 31, 1999.
99.01 Opinion of Deloitte & Touche(o)
99.02 Opinion of Smith, Lange & Phillips L.L.P.(o)

(a) Incorporated by reference February 26, 1996. from the Exhibits to the
Company's Registration Statement on Form S-1 dated February 26, 1996.
(b) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (Registration No. 33-69558).
(c) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 as amended by a Registration Statement on Form S-
1 (No. 33-97870).
(d) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 27, 1995.
(e) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 5, 1995.
(f) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 21, 1995.
(g) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 1, 1996.
(h) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 28, 1997.
(i) Incorporated by reference to the Company's Current Report on Forms 8-K
and Form 8-K/A dated April 17, 1997 and May 30, 1997.
(j) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-8 dated February 18, 1997.
(k) Incorporated by reference from the Exhibits to the Company's Form 10-K
filed March 31, 1997.
(l) Incorporated by reference from the Exhibits to the Company's 1998 Proxy
Statement filed April 21, 1998.

28

(m) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 dated February 23, 1998.
(n) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 dated August 10, 1998.
(o) Incorporated by reference from the Exhibits to the Company's Form 10-K
filed March 31, 1999.
(p) Incorporated by reference from the Exhibits to the Company's Current
Report on Form 8-K dated December 13, 1999.
(q) Incorporated by reference from the Exhibits to the Company's Current
Report on Form 8-K dated February 2, 2000.

29

SIGNATURES
----------

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
of the undersigned, thereunto duly authorized on March 29, 2000.

SYLVAN LEARNING SYSTEMS, INC.
(Registrant)

By: /s/R. Christopher Hoehn-Saric
-----------------------------------
R. Christopher Hoehn-Saric
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on March 29, 2000.

Signature Capacity
- --------- --------

/s/R. Christopher Hoehn-Saric Director and Chairman of the Board
- -------------------------------
R. Christopher Hoehn-Saric

/s/Douglas L. Becker Director, Secretary and Chief Executive Officer
- -------------------------------
Douglas L. Becker

/s/B. Lee McGee Executive Vice President and Chief Financial Officer
- ----------------
B. Lee McGee

/s/Donald Berlanti Director
- -------------------------------
Donald Berlanti

/s/J. Phillip Samper Director
- -------------------------------
J. Phillip Samper

/s/James H. McGuire Director
- -------------------------------
James H. McGuire

/s/Rick Inatome Director
- -------------------------------
Rick Inatome

/s/R. William Pollock Director
- -------------------------------
R. William Pollock

30

Item 14 (a) (1)

INDEX TO FINANCIAL STATEMENTS

Page
----

The Company:

Report of Independent Auditors....................................................................... 32
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998............................ 33
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........... 35
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998
and 1997........................................................................................... 36
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........... 37
Notes to Consolidated Financial Statements........................................................... 38

31

Report of Independent Auditors

The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.

We have audited the consolidated balance sheets of Sylvan Learning Systems, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the management of Sylvan Learning Systems, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1997 financial statements of Aspect, Inc. and
Anglo World Education Limited and subsidiaries, each wholly-owned subsidiaries.
Those statements reflect total revenues of $35,613,484 for the year ended
December 31, 1997. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to data
included for these subsidiaries, is based solely on the reports of the other
auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in 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 and the reports of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sylvan Learning Systems, Inc. at December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1999.

/s/ Ernst & Young LLP

Baltimore, Maryland
March 17, 2000

32

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)

December 31, December 31,
1999 1998
------------------ -------------------
(Restated Note 1)

Assets
Current assets:
Cash and cash equivalents $ 20,410 $ 33,170
Available-for-sale securities 10,890 6,166

Receivables:
Accounts receivable 53,118 39,039
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,061 2,310
Notes receivable from tuition financing 4,647 2,977
Other notes receivable 16,783 7,472
Other receivables 1,265 1,346
----------------- -----------------
78,874 53,144

Allowance for doubtful accounts (3,407) (2,144)
----------------- -----------------
75,467 51,000

Inventory 6,261 8,647
Deferred income taxes 6,963 1,685
Prepaid expenses and other current assets 11,459 7,892
Net current assets of discontinued operations 280,287 9,779
----------------- -----------------
Total current assets 411,737 118,339

Notes receivable from tuition financing, less current portion 5,330 3,415
Other notes receivable, less current portion 1,879 6,667
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 289 637

Property and equipment:
Land and buildings 73,167 9,917
Furniture, computer equipment and software 74,774 50,827
Leasehold improvements 11,736 8,465
----------------- -----------------
159,677 69,209

Accumulated depreciation (31,957) (22,944)
----------------- -----------------
127,720 46,265
Intangible assets:
Goodwill 201,716 117,146
Other 2,574 2,432
----------------- -----------------
204,290 119,578

Accumulated amortization (12,118) (5,504)
----------------- -----------------
192,172 114,074
Deferred costs, net of accumulated amortization of $984
and $324 at December 31, 1999 and 1998 respectively 3,641 3,815

Investments in and advances to affiliates 13,317 16,532
Other investments 25,933 44,230
Other assets 6,108 3,793
Net noncurrent assets of discontinued operations - 268,371
----------------- -----------------
Total assets $ 788,126 $ 626,138
================= =================

33

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)

December 31, December 31,
1999 1998
---------------- -------------------
(Restated Note 1)

Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 51,917 $ 31,040
Income taxes payable 9,465 11,781
Current portion of long-term debt 14,436 594
Current portion of due to shareholders of
acquired companies 22,474 40,719
Deferred revenue 36,855 19,104
-------------- --------------
Total current liabilities 135,147 103,238

Long-term debt, less current portion 151,204 12,504
Deferred income taxes 12,547 8,303
Due to shareholders of acquired companies,
less current portion - 12,239
Other long-term liabilities 3,050 1,021
-------------- --------------
Total liabilities 301,948 137,305

Minority interest 12,085 -

Stockholders' equity:
Preferred stock, par value $.01 per share-authorized
10,000 shares, no shares issued and
outstanding as of December 31, 1999 and 1998 - -
Common stock, par value $.01 per share-authorized
90,000 shares, issued and outstanding shares of
50,904 as of December 31, 1999 and
50,952 as of December 31, 1998 509 510
Additional paid-in capital 414,567 410,694
Retained earnings 60,762 75,852
Accumulated other comprehensive income (loss) (1,745) 1,777
-------------- --------------
Total stockholders' equity 474,093 488,833
-------------- --------------

Total liabilities and stockholders' equity $ 788,126 $ 626,138
============== ==============

See accompanying notes to financial statements

34

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)

Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
(Restated- (Restated-
Note 1) Note 1)

Revenues $ 338,496 $ 247,374 $ 170,560

Cost and expenses
Direct costs 285,967 199,939 148,926
General and administrative expense 26,855 15,530 19,693
Transaction costs related to pooling-of-interests - 5,000 -
Restructuring charges 5,127 3,730 -
--------- --------- ---------
Total expenses 317,949 224,199 168,619
--------- --------- ---------

Operating income 20,547 23,175 1,941

Other income (expense)
Investment and other income 308 4,513 4,724
Interest expense (4,865) (976) (472)
Equity in net loss of affiliates (2,356) (3,500) (2,006)
Minority interest in income of consolidated subsidiary (319) - -
Loss on sale of investments (13,370) - -
Termination fee, net of direct costs - - 28,500
--------- --------- ---------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle (55) 23,212 32,687

Income tax benefit (expense) 1,056 (6,706) (10,188)
--------- --------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle 1,001 16,506 22,499

Income from discontinued operations, net of income tax expense
of $12,352, $14,876, and $6,231, respectively 12,302 19,203 5,405
Loss on disposal of discontinued operations, including income tax
expense of $1,100 (26,968) - -
--------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle (13,665) 35,709 27,904

Cumulative effect of change in accounting principle, net of income tax
expense of $682 (1,323) - -
--------- --------- ---------

Net income (loss) $ (14,988) $ 35,709 $ 27,904
========= ========= =========

Earnings (loss) per common share, basic:
Income from continuing operations before cumulative effect of
change in accounting principle $0.02 $ 0.34 $ 0.53
Earnings (loss) per common share, basic ($0.29) $ 0.73 $ 0.66

Earnings (loss) per common share, diluted
Income from continuing operations before cumulative effect of
change in accounting principle $0.02 $ 0.32 $ 0.50
Earnings (loss) per common share, diluted ($0.28) $ 0.70 $ 0.62

See accompanying notes to financial statements.

35

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Amounts in thousands)

Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
------ ---------- -------- ------------- -------------

Balance at January 1, 1997 $ 380 $ 169,204 $ 13,366 $ (182) $ 182,768
Options and warrants exercised for purchase of 1,706
shares of common stock, including income tax
benefit of $8,156 17 13,102 13,119
Issuance of 536 shares of common stock in connection with
contingent consideration related to the acquisition
of Drake 5 8,137 8,142
Issuance of 1,072 shares of common stock in connection
with the acquisition of WSI 11 15,309 15,320
Issuance of 404 shares of common stock to Sylvan
Learning Foundation as charitable contribution 4 6,537 6,541
Issuance of 309 shares of common stock to IT Training
Marketing Company as marketing expense 3 6,997 7,000
Issuance of 265 shares of common stock to SLC National
Advertising Fund, Inc. as advertising expense 3 4,997 5,000
Issuance of 3,098 shares of common stock for cash-
net of offering costs of $3,645 31 73,660 73,691
Capital contribution by former shareholders of Educational
Inroads 2,811 2,811
Issuance of 94 shares of common stock in connection
with other acquisitions 1 718 719
Stock options to purchase 317 shares of common stock
granted to non-employees 550 550
Comprehensive income:
Net income for 1997 27,904 27,904
Foreign currency translation adjustment (990) (990)
Unrealized loss on available-for-sale securities 11 11
Total comprehensive income 26,925
Distributions to former shareholders (2,126) (2,126)
------ ---------- -------- ------------- -------------
Balance at December 31, 1997 455 302,022 39,144 (1,161) 340,460
Options and warrants exercised for purchase of 654
shares of common stock, including income tax
benefit of $5,176 7 11,531 11,538
Stock options granted to non-employees 539 539
Issuance of 27 shares of common stock in connection
with the Employee Stock Purchase Plan 527 527
Issuance of 2,570 shares of common stock in connection with
contingent consideration related to the acquisition
of Drake 26 39,179 39,205
Issuance of 964 shares of common stock in connection
with the acquisition of NAI / Block 10 24,990 25,000
Issuance of 345 shares of common stock in connection with
contingent consideration related to the acquisition
of PACE 3 11,305 11,308
Issuance of 864 shares of common stock in connection
with other acquisitions and investments 9 19,301 999 20,309
Capital contribution by former shareholders of Aspect 1,300 1,300
Comprehensive income:
Net income for 1998 35,709 35,709
Foreign currency translation adjustment 2,938 2,938
Total comprehensive income 38,647
------ ---------- -------- ------------- -------------
Balance at December 31, 1998 510 410,694 75,852 1,777 488,833
Options and warrants exercised for purchase of 311
shares of common stock, including income tax
benefit of $1,456 3 4,391 4,394
Stock options granted to non-employees 348 348
Repurchase of 1,730 shares of common stock for payment of
future contingent consideration resulting from business
combinations (17) (36,195) (36,212)
Issuance of 41 shares of common stock in connection
with the Employee Stock Purchase Plan 961 961
Issuance of 510 shares of common stock in connection
with the contingent consideration related to the
acquisition of Canter 5 11,162 11,167
Issuance of 720 shares of common stock in connection with
contingent consideration related to the acquisition
of Drake 7 21,343 21,350
Issuance of 99 shares of common stock in
connection with other acquisitions 1 1,863 (102) 1,762
Comprehensive income (loss):
Net loss for 1999 (14,988) (14,988)
Foreign currency translation adjustments (6,639) (6,639)
Unrealized gains on available-for-sale securities 3,117 3,117
Total comprehensive loss (18,510)
------ ---------- -------- ------------- -------------
Balance at December 31, 1999 $ 509 $ 414,567 $ 60,762 $ (1,745) $ 474,093
====== ========== ======== ============= =============

See accompanying notes to financial statements.

36

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands, except per share data)

Year Ended December 31,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------

Operating activities
Net income (loss) $ (14,988) $ 35,709 $ 27,904
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 25,999 15,599 8,790
Amortization 20,788 16,724 10,071
Non-cash loss from discontinued operations 26,891 - -
Non-cash loss on investments 13,370 - -
Non-cash marketing and advertising - - 11,500
Other noncash items 2,586 672 1,899
Minority interest in income of consolidated
subsidiary 319 - -
Cumulative effect of change in accounting principle 1,323 - -
Equity in net loss of affiliates 2,140 3,504 2,006
Deferred income taxes (317) 1,265 1,834
Changes in operating assets and liabilities:
Receivables (35,109) (22,734) (27,441)
Inventory, prepaid and other current assets (4,018) (8,653) (2,290)
Payables and accrued expenses 30,029 8,475 4,831
Deferred revenue and other current liabilities 1,907 7,565 20,121
------------ ---------- -----------
Net cash provided by operating activities 70,920 58,126 59,225
------------ ---------- -----------
Investing activities
Purchase of available-for-sale securities - (2,502) (92,522)
Proceeds from sale of available-for-sale securities 3,082 79,611 26,045
Investment in and advances to affiliates and
other investments (10,510) (16,618) (13,789)
Purchase of property and equipment, net (61,211) (58,294) (29,048)
Proceeds from sale of investment in JLC Learning Corporation 15,211 - -
Purchase of Universidad Europea de Madrid, including direct costs
of acquisition, net of cash acquired (26,000) - -
Payment of contingent consideration for prior period acquisitions (16,689) (13,532) -
Cash paid for other businesses, net of cash acquired (48,989) (54,512) (6,522)
Expenditures for deferred contract costs (10,367) (2,771) (1,443)
Increase in other assets (2,439) (5,895) (731)
------------ ---------- -----------
Net cash used in investing activities (157,912) (74,513) (118,010)
------------ ---------- -----------
Financing activities
Proceeds from exercise of options and warrants 2,938 6,362 4,964
Repurchases of common stock (36,212) - -
Proceeds from issuance of common stock 961 527 73,691
Proceeds from issuance of long-term debt 207,748 136,435 14,027
Payments on long-term debt and capital lease obligations (97,295) (126,092) (20,250)
Decrease in long-term liabilities (1,268) - -
Distributions and payments to stockholders of
acquired companies - - (1,286)
------------ ---------- -----------
Net cash provided by financing activities 76,872 17,232 71,146
------------ ---------- -----------
Effects of exchange rate changes on cash (2,640) 2,507 (1,263)
------------ ---------- -----------
Net increase (decrease) in cash and cash equivalents (12,760) 3,352 11,098

Cash and cash equivalents at beginning of year 33,170 29,818 18,720
------------ ---------- -----------
Cash and cash equivalents at end of year $ 20,410 $ 33,170 $ 29,818
============ ========== ===========

See accompanying notes to financial statements

37

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 1 - Basis of Presentation and Description of Business

Sylvan Learning Systems, Inc. and subsidiaries ("the Company" or "Sylvan") is an
international provider of educational services. The Company conducts operations
in four separate business segments- Sylvan Learning Centers, Sylvan Contract
Educational Services, Sylvan English Language Instruction, and Sylvan
International Universities. The Sylvan Learning Centers segment designs and
delivers individualized tutorial programs to school age children through
franchised and Company-owned Learning Centers. The Sylvan Contract Educational
Services segment principally provides educational programs to students of public
and non-public school districts through contracts funded by federal Title I and
state-based programs, and professional development services to teachers. The
Sylvan English Language Instruction segment includes the operations of Wall
Street Institute, B.V. ("WSI") a European-based franchiser and operator of
learning centers that teach the English language, and Aspect International
Language Schools, B.V. ("Aspect"). The Company's newest segment, Sylvan
International Universities commenced operation in the second quarter 1999 with
the acquisition of a controlling interest in Universidad Europea de Madrid
("UEM"), a private, for-profit university.

The consolidated financial statements include the accounts of Sylvan Learning
Systems, Inc. and subsidiaries in which it has a majority voting interest and
control. Investments in affiliates where ownership exceeds 20%, but is not in
excess of 50%, and corporate joint ventures are reported using the equity
method. All intercompany accounts and transactions have been eliminated in
consolidation.

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles that require the
Company's management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from those
estimates.

The Company's fiscal year ends on December 31. The accounts of its wholly owned
subsidiary, Aspect, have been consolidated on the basis of a year ending on
September, 30. Such fiscal period corresponds with Aspect's natural business
year.

Certain amounts previously reported have been reclassified to conform with the
1999 presentation.

During fiscal year 1999, the Company sold the PACE Group ("PACE") corporate
training business. Additionally, the Company sold its computer-based testing
division, Sylvan Prometric, in the first quarter 2000. The accompanying
consolidated balance sheets, statements of operations and related notes have
been restated retroactively to reflect PACE and Sylvan Prometric as discontinued
operations for all periods presented.

38

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 2 - Accounting Policies

Cash Equivalents

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

Investments

Available-for-sale securities are carried at fair value, with any unrealized
gains and losses, net of tax, reported in other comprehensive income. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income.

Inventory

Inventory, consisting primarily of computer software and educational,
instructional, and marketing materials and supplies, is stated at the lower of
cost (first-in, first-out) or market value.

Property and Equipment

Property and equipment is stated at cost. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets. Included in
property and equipment are the direct costs of developing or obtaining software
for internal use.

Intangible Assets

Goodwill consists of the cost in excess of fair value of the identifiable net
assets of entities acquired in purchase transactions, and is amortized on a
straight-line basis, over the estimated future periods to be benefited, which
range from 10 to 25 years. At December 31, 1999 and 1998, accumulated
amortization of goodwill was $10,646 and $4,268, respectively.

Deferred Costs

Deferred costs include direct-mail advertising costs for university based
distance learning masters programs. Under these arrangements, the Company incurs
certain direct-mail advertising costs to market its programs in advance of the
program start date. These costs are capitalized and amortized over the estimated
useful life of the programs, which approximate eighteen months.

39

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 2 - Accounting Policies (continued)

Deferred costs also include the cost of internally developing proprietary
products and materials used in the learning centers. These costs are capitalized
and amortized over the estimated useful life of the program, which approximates
five years.

Impairment of Long-Lived Assets

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

Revenue Recognition

Revenue related to single-center and area franchise sales is recognized when all
material services or conditions relating to the sales have been substantially
performed or satisfied by the Company.

For single-center franchise sales, the criteria for substantial performance
include: (1) receipt of an executed franchise license agreement, (2) receipt of
full payment of the franchise fee, (3) completion of requisite training by the
franchisee or center director, and (4) completion of site selection assistance
and site approval. Area franchise sales generally transfer to the licensee the
right to develop and operate centers in a specified territory, primarily in a
foreign country, and the Company's future obligations are insignificant. Area
franchise fees are recognized upon the signing of the license agreement and the
determination that (1) all material services or conditions relating to the sale
have been satisfied and the fee is non-refundable, (2) a minimum payment of 50%
of the fee is required within 90 days of the date of the agreement, and (3) the
Company has the ability to estimate the collectibility of any unpaid amounts.
Franchise sales fees not meeting the recognition criteria are recorded as
deferred revenue if not refundable, or deposits from franchisees if refundable.

Fixed price contracts with school districts receiving funds under the federal
Title I program and state-based programs are accounted for using the percentage-
of-completion method. Income is recognized based on the percentage of contract
completion determined by the total expenses incurred to date as a percentage of
total estimated expenses at the completion of the contract. Total contract
income is estimated as contract revenue less total estimated costs considering
the most recent cost information. Revenues from cost-plus-fee contracts are
recognized on the basis of costs incurred during the period plus the fee earned.

Franchise royalties are reported as revenue as the royalties are earned and
become receivable, unless collection is not reasonably assured. Revenues from
educational services are recognized in the period the services are provided.
Revenue from the sale of educational products is generally recognized when
shipped.

40

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 2 - Accounting Policies (continued)

Tuition and dormitory revenues are recognized over the term that the services
are provided.

Advertising

The Company expenses advertising costs as incurred, except for direct-response
advertising, which is capitalized and amortized over its expected period of
future benefit. Advertising expense for the years ended December 31, 1999, 1998
and 1997 was $25,946, $12,043, and, $7,671 respectively.

Capitalized direct-response advertising consists primarily of the costs to
produce direct-mail order catalogues and brochures that are used to solicit
students of educational programs who have responded directly to the advertising.
The capitalized production costs are amortized over the period of the respective
programs, ranging from one to three years. At December 31, 1999 and 1998,
advertising costs totaling approximately $4,296 and $5,000, respectively, were
reported as assets.

Stock Options Granted to Employees and Non-Employees

The Company records compensation expense for all stock-based compensation plans
using the intrinsic-value-based method and provides pro forma disclosures of net
income (loss) and net earnings (loss) per common share as if the fair value
method had been applied in measuring compensation expense. The Company records
compensation expense for all stock options granted to non-employees in an amount
equal to the estimated fair value at the date of grant, determined using the
Black-Scholes option valuation model. The compensation expense is recognized
ratably over the vesting period.

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 rates for the year. Translation gains or losses
resulting from the changes in exchange rates have been reported as a component
of accumulated other comprehensive income included in stockholder's equity, net
of tax.

Minority Interest

In conjunction with acquiring a 54% majority interest in UEM, the ownership
interest not acquired by the Company became minority interest ownership.
Minority interest in the accompanying consolidated financial statements relates
to such ownership. Operating results including the related taxes are allocated
to the minority owners through the minority interest in income of the
consolidated subsidiary.

41

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 2 - Accounting Policies (continued)

Comprehensive Income

The Company displays the accumulated balance of other comprehensive income or
loss, including unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, in accumulated other
comprehensive income in the statement of stockholders' equity.

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 differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities (i.e. temporary differences) and are
measured at prevailing enacted tax rates that will be in effect when these
differences have been settled or realized.

Accounting Change

On January 1, 1999, the Company adopted the provisions of AICPA Statement of
Position No. 98-5, Reporting the Costs of Start-up Activities ("SOP 98-5"),
which requires start-up costs capitalized prior to January 1, 1999 to be
written-off and any future start-up costs to be expensed as incurred. The
Company previously capitalized pre-contract costs directly associated with
specific anticipated contracts as well as development costs for new educational
programs that were estimated to be recoverable. The cumulative effect of
adopting SOP 98-5 in 1999 decreased net income for the year ended December 31,
1999 by $1,323 (net of $682 in income taxes). The amount of the cumulative
effect related to the discontinued operations was $567 (net of $291 in income
taxes).

Impact of Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. In June 1999, the FASB delayed the effective date of
Statement No. 133 by one year. Statement No. 133 provides standards on
accounting and disclosure for derivative instruments, and requires that all
derivatives be measured at fair value and reported as either assets or
liabilities in the Company's consolidated balance sheet. The Company will be
required to adopt the provisions of Statement No. 133 no later than the
beginning of fiscal year 2001. The Company has not completed its evaluation to
determine the impact of Statement No. 133 on its consolidated financial position
or results or operations.

42

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 3 - Discontinued Operations

The PACE Group

On September 30, 1999, the Company adopted a formal plan to dispose of PACE.
The sale transaction closed on December 31, 1999, and the Company received 10
shares of series C preferred stock and 2,503 shares of common stock of Frontline
Group, Inc., a private investment holding company. The Company's investment in
the stock was recorded at its estimated fair value at December 31, 1999 of
$7,000, based on an independent appraisal, and a resulting loss on disposition
was recorded of approximately $27,000, including income tax expense of
approximately $1,100.

Sylvan Prometric

On March 3, 2000, the Company sold its computer-based testing division, Sylvan
Prometric ("Prometric") for approximately $775,000 in cash. The gain on the
disposition to be recognized in fiscal year 2000 is estimated to be
approximately $320,000 net of income taxes of $143,000. The final gain from sale
after the analysis is complete is not expected to vary significantly. The
Company has estimated the domestic and foreign income taxes resulting from the
sale based on the expected allocation of proceeds to subsidiaries that are a
party to the transaction and the tax laws of the jurisdictions in which these
subsidiaries operate.

Summarized operating information of the Company's discontinued operations are as
follows for the years ended December 31,:

1999 1998 1997
-------- -------- --------

Revenues $232,431 $192,959 $130,451
-------- -------- --------
Income before income taxes 24,472 34,079 11,636
Income tax expense 12,170 14,876 6,231
-------- -------- --------
Net income $ 12,302 $ 19,203 $ 5,405
======== ======== ========

Included in income from discontinued operations for the years ended December 31,
1999, 1998 and 1997 is an allocation of corporate interest expense of $2,159,
$201, and $246, respectively, based upon a percentage of the net equity
investment in discontinued operations to the net equity of the Company including
the discontinued operations.

The accompanying consolidated balance sheets have been restated to reflect the
net assets of PACE and Sylvan Prometric as net assets of discontinued
operations. Net long-lived assets of Prometric as of December 31, 1999 have been
included in the net current asset amount because the sale transaction closed
March 3, 2000. The net assets of discontinued operations include the following
for Prometric as of December 31, 1999 and for PACE and Prometric as of December
31, 1998:

43

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 3 - Discontinued Operations (continued)

1999 1998
-------- ---------

Accounts and notes receivable, net $ 50,598 $ 38,336
Accounts payable and accrued expenses (41,332) (26,137)
Other, net 1,621 (2,420)
Net long-lived assets 269,400 -
-------- --------
Net current assets of discontinued operations $280,287 $ 9,779
======== ========

Goodwill - $169,381
Property and equipment, net - 51,616
Investments in affiliates and other investments - 33,575
Other, net - 13,799
-------- --------
Net non-current assets of discontinued operations - $268,371
======== ========

The Company entered into a management services agreement with the purchasers of
PACE and Prometric whereby the Company will provide systems and personnel for
administrative, accounting and financial functions. The service period of the
PACE agreement will not exceed eighteen months for which the Company will
receive a monthly fee of $14. The Prometric agreement extends at least through
June 1, 2000. After that date, the agreement is cancelable at anytime with sixty
days notice. The Company will receive a monthly fee of approximately $250 for
these services. Additionally, the Company has entered into sublease agreements
with the purchaser of Prometric for leased space at three locations,
approximating 70,000 square feet, for an annual fee of $2,750, adjusted annually
for increases in gross operating rent and related expenses. The subleases extend
from March 3, 2000 through December 2007.

The accompanying consolidated statements of operations have been restated
retroactive to January 1, 1997 to reflect the results of operations for these
entities as discontinued operations.

Note 4 - Acquisitions

Universidad Europea de Madrid

Effective April 1, 1999 the Company acquired a 54% controlling interest in UEM,
a private, for-profit university. The purchase price, including acquisition
costs, was approximately $26,000 in cash, net of cash received. The transaction
was accounted for using the purchase method of accounting and goodwill of
$10,445 was recorded and is being amortized over a period of 25 years. The
results of operations of UEM are included in the accompanying 1999 consolidated
statement of operations from April 1, 1999 through December 31, 1999. In
conjunction with acquiring the majority interest in UEM, the ownership interest
not acquired by the Company became minority interest ownership.

44

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 4 - Acquisitions (continued)

Canter & Associates, Inc. and Canter Educational Productions, Inc.

Effective January 1, 1998, the Company acquired all of the outstanding stock of
Canter & Associates, Inc. and Canter Educational Productions, Inc.
(collectively, "Canter"), commonly controlled companies engaged in the business
of providing materials and training programs for educators, for an initial
purchase price of $25,000 in cash. The acquisition was accounted for using the
purchase method of accounting and goodwill of $24,559 was recorded and is being
amortized over a period of 25 years. The results of operations of Canter for the
periods subsequent to acquisition are included in the accompanying consolidated
statements of operations.

In connection with the Company's acquisition of Canter and based on Canter's
earnings in 1998, additional consideration of $26,674 was paid to the seller in
cash of $15,507, with the remainder paid in shares of restricted common stock
valued at $11,167. As of December 31, 1998, the Company had recorded additional
goodwill from the estimated contingent consideration of $28,558. Goodwill was
reduced by $1,884 in 1999 as a result of the final settlement of the 1998
contingent consideration. Additionally, estimated consideration based on
Canter's 1999 earnings has been recorded as a liability and additional goodwill
of $9,000 at December 31, 1999. This amount is expected to be paid in 2000 and
is being amortized over the remaining amortization period.

Additional variable amounts of contingent consideration are also payable to the
seller if specified levels of earnings are achieved in 2000. The Company will
record the contingent consideration when the contingencies are resolved and the
additional consideration is payable.

Schulerhilfe

Effective October 28, 1998, the Company acquired two entities in Germany
operating as Schulerhilfe for an initial purchase price of $16,554 in cash and
124 shares of restricted common stock valued at $2,528. The acquisition was
accounted for using the purchase method of accounting and goodwill of $19,749
was recorded and is being amortized over a period of 25 years. The results of
operations of Schulerhilfe subsequent to acquisition are included in the
accompanying consolidated statements of operations.

In connection with the Company's acquisition of Schulerhilfe, and based on the
amount of 1999 franchise fees collected, additional consideration is payable to
the seller in cash. As of December 31, 1999, the Company has recorded an
estimate of this consideration as a liability and additional goodwill of
$10,424, which will be amortized over the remaining amortization period of 24
years.

45

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 4 - Acquisitions (continued)

Wall Street Institute Franchises

During 1999, the Company acquired 23 WSI franchise businesses for a combined
cash purchase price of approximately $47,200 and the assumption of approximately
$8,500 of net current liabilities. The acquisitions were accounted for using the
purchase method of accounting, and goodwill of $55,700 was recorded and is being
amortized over 25 years. The acquisitions would not have materially changed
reported 1999, 1998 and 1997 results had they occurred on January 1, 1997.

Pro Forma Results of Operations

The following combined unaudited pro forma results of operations of the Company
give effect to the UEM, Canter and Schulerhilfe acquisitions as though they had
occurred on January 1, 1998 for the years ended December 31:

1999 1998
-------- --------

Revenues $354,786 $309,189
Income from continuing operations before cumulative
effect of change in accounting principle 2,544 20,069
Net income (loss) (13,445) 39,272
Earnings (loss) per common share, diluted:
Continuing operations before cumulative effect of
change in accounting principle $ 0.05 $ 0.39
Net income (loss) $ (0.25) $ 0.77

Aspect

On May 6, 1998, the Company acquired all of the outstanding common stock of
Aspect in exchange for 2,004 shares of Sylvan common stock. The acquisition was
accounted for as a pooling-of-interests, and accordingly, the Company's
consolidated financial statements for all periods presented include the results
of operations, financial position and cash flows of Aspect.

Note 5 - Available-For-Sale Securities

The following is a summary of available-for-sale securities at December 31:

1999 1998
-------- --------

Equity securities $ 8,281 $ -
Cash reserve fund 2,609 3,366
Municipal bonds - 2,800
------- -------
$10,890 $ 6,166
======= =======

46

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 5 - Available-For-Sale Securities (continued)

At December 31, 1999, equity securities represent common stock investments in
public companies with a cost of $5,164 and a fair value, based on quoted market
prices, of $8,281. The adjustment to unrealized holding gains of $3,117 net of
tax is a component of accumulated other comprehensive income (loss), included in
stockholders equity. The cost of the Company's other investments approximates
fair value. The investments are classified as current as the Company views its
available-for-sale securities as available for use in its current operations.

Note 6 - Investments

Investments in Affiliates

At December 31, 1999 and 1998, the Company's investments in and advances to
affiliates consists primarily of its 10% voting interest in Caliber Learning
Network, Inc. ("Caliber"), including related loans. Caliber is a publicly-
traded company formed for the purpose of providing adults throughout the United
States with university-quality continuing education using multimedia technology.

The Company's investment in and advances to Caliber consisted of the following
at December 31:

1999 1998
------- -------
Invested capital $17,348 $14,300
Amounts due from management fee 167 517
------- -------
17,515 14,817
Allocable share of losses from inception (6,740) (4,403)
------- -------
$10,775 $10,414
======= =======

Summarized financial data of Caliber is as follows:

December 31,
------------------------
Balance Sheet data: 1999 1998
------- --------
Current assets $31,765 $37,381
Non-current assets 21,519 24,778
Current liabilities 12,570 9,910
Non-current liabilities 10,250 14,635
Redeemable preferred stock 15,153 -

Year ended December 31,
-------------------------------
Statement of operations data: 1999 1998 1997
-------- -------- --------
Gross revenues $ 26,033 $ 15,415 $ 1,199
Net operating loss (22,150) (28,999) (13,716)
Net loss (22,242) (28,825) (13,571)

47

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 6 - Investments (continued)

From its inception in 1996 through December 31, 1997, Caliber relied almost
entirely on the Company's resources, systems and personnel for administrative,
management, accounting and financial functions. In consideration for these
services, the Company charged Caliber a management fee of $2,880, which was paid
in May 1998 upon the consummation of Caliber's initial public offering.
Although Caliber has developed its own infrastructure, the Company continues to
provide to Caliber certain accounting and administrative services. Caliber paid
an annual management fee of $2,000 in 1999 and 1998 for these services.

Investments in and advances to affiliates includes other investments totaling
$2,542 and $6,118 at December 31, 1999 and 1998, respectively. The Company's
allocable share of losses related to these investments for the years ended
December 31, 1999 and 1998 was $(19) and $(602), respectively. In the fourth
quarter of 1999, the Company determined that one of these investments was
impaired, and recorded a loss of approximately $1,600.

Other Investments

Other investments consist of non-marketable investments in common and preferred
stocks of private companies in which the Company does not exercise significant
influence. These investments are carried at cost unless a decline in estimated
fair value is determined to be permanent. Other investments consisted of the
following at December 31:

1999 1998
------- -------
JLC Learning Corporation $ - $25,700
Chauncey Group International, Ltd. 8,000 8,000
Frontline Group, Inc. 7,000 -
Other 10,933 10,530
------- -------
$25,933 $44,230
======= =======

JLC Learning Corporation ("JLC") is a company that develops educational software
products. On July 14, 1999, JLC redeemed the Company's investment for $15,200 in
cash and a four-year purchase credit for JLC products of approximately $11,700.
In the fourth quarter 1999, the Company determined that the remaining amount of
the purchase credit would not be realized as a result of the inability to use
the credit to purchase products consistent with its customers' needs. The
Company wrote-off the remaining product credit and the 1999 operating results
include an aggregate loss of $11,400 related to the sale of the JLC investment.

48

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 7 - Long-Term Debt

Long-term debt consists of the following at December 31:

1999 1998
-------- -------
Long-term revolving credit facility with banks $122,991 $ 8,000
Mortgages and notes payable bearing interest at rates ranging
from 4.25% to 6.00% 5,479 5,098
Mortgages, notes payable, and lines of credit related to UEM 37,170 -
-------- -------
165,640 13,098
Less: current portion of long-term debt 14,436 594
-------- -------
Total Long-term debt $151,204 $12,504
======== =======

At December 31, 1999, the Company had a revolving credit facility (the
"Facility") with a group of five banks, which allowed the Company to borrow up
to an aggregate of $150,000 at variable rates. Outstanding borrowings under the
Facility are unconditionally guaranteed by a pledge of the capital stock of the
Company's subsidiaries, and are due on December 23, 2003. As of December 31,
1999, $122,991 of borrowings is outstanding under the Facility at variable rates
ranging from 7.06% to 8.50%. Debt covenants of the Facility require the Company
to maintain certain debt-to-earnings and interest coverage ratios. Other
provisions require maintenance of minimum net worth levels and restrict
advances, investments, loans, capital expenditures and dividends.

On March 3, 2000, the Company repaid the entire outstanding balance due on the
Facility with a portion of the proceeds from the sale of Prometric.
Additionally, effective March 2000, the Company entered into an amendment to the
Facility agreement reducing the aggregate amount available to $100,000.

The outstanding borrowings acquired as part of the UEM acquisition are secured
by the underlying property and fixed assets of the university. These borrowings
bear interest at a blended variable rate of approximately 4.75% as of December
31, 1999.

Aggregate maturities of Company borrowings excluding the amount outstanding on
the Facility repaid in March 2000, are as follows: 2000 - $14,436; 2001 -
$5,774; 2002 - $5,478; 2003 - $5,706; 2004 - $5,153 and thereafter $6,102.

49

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 8 - Due to Shareholders of Acquired Companies

Due to shareholders of acquired companies consists of the following at December
31:

1999 1998
-------- --------

Amounts payable to former shareholders of Schulerhilfe in cash $10,424 $ -
Amounts payable to former shareholders of Canter in cash 9,000 16,319
Amounts payable to former shareholders of Canter in 535
shares of common stock - 12,239
Amounts payable to former shareholders of Prometric in cash 3,050 3,050
Amounts payable to former shareholders of Prometric in
720 shares of common stock - 21,350
-------- --------
22,474 52,958
Less: current portion (22,474) (40,719)
-------- --------
$ - $ 12,239
======== ========

Note 9 - Leases

The Company conducts most of its operations from leased facilities. These
facilities include the Company's corporate headquarters and other office
locations, warehouse space, and Company-owned learning centers. The terms of
substantially all of these leases are five years or less, with the exception of
the Company's corporate headquarters, which has a lease term ending in 2007, and
generally contain renewal options. The Company also leases certain equipment
under operating leases of 36 months or less. Future minimum lease payments
related to continuing operations at December 31, 1999, by year and in the
aggregate, under all non-cancelable operating leases are as follows:

Years ending December 31:
2000 $ 18,194
2001 16,916
2002 16,417
2003 15,100
2004 13,531
Thereafter 27,579
--------
$107,737
========

Rent expense included in income from continuing operations under all cancelable
and non-cancelable leases was approximately $15,193, $9,312 and $3,949 for the
years ended December 31, 1999, 1998 and 1997, respectively.

50

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 10 - Contingencies

Loss Contingencies

On November 18, 1996, ACT, Inc. filed suit against the Company alleging that the
Company violated federal antitrust laws and committed various state law torts in
connection with the operations of its computer-based testing operations and in
obtaining a testing services contract from the NASD. The Company believes the
grounds of the lawsuit are without merit and intends to defend the lawsuit
vigorously. Management is unable to predict the ultimate outcome of the
lawsuit, but believes that the ultimate resolution of the matter will not have a
material effect on consolidated financial position.

On November 18, 1998, James Jinsoo and Christine Choi filed suit against the
Company seeking damages and recission under the Development Agreement they had
entered into for Korea in 1995 and which had been terminated by the Company due
to their default under the Development Agreement. The dispute will be decided
by arbitration pursuant to the terms of the Agreement. The Company believes the
grounds of the lawsuit are without merit and intends to defend the lawsuit
vigorously. Management is unable to predict the ultimate outcome of the
lawsuit, but believes that the ultimate resolution of the matter will not have a
material effect on consolidated financial position.

The Company is subject to other 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.

Contingent Payments and Business Combinations

During 1999, the Company issued 510 shares of restricted common stock as partial
payment of contingent consideration due related to the Company's acquisition of
Canter. The shares are restricted through December 31, 2001. At December 31,
2001, the Company is obligated to issue additional shares of common stock if the
market value of the restricted common stock on that date is less than three-
quarters of the market value at the date of issuance ($21.885 per share).

In the normal course of business the Company is party to option agreements with
franchisees that allow, under specified circumstances, the repurchase of
operating franchises at predetermined multiples of operating results. These
options may be at the Company's or the franchisee's discretion based upon the
individual agreement and specific operating criteria. None of these option
agreements would be individually material and operating results of the Company
would not be materially impacted for the current period if the options were
exercised.

51

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 11 - Fair Value of Financial Instruments

The fair value of the Company's financial instruments, which consist primarily
of cash and cash equivalents, accounts and notes receivable, available-for-sale
investments, accounts payable, due to shareholders of acquired companies (cash
portion), and short and long-term debt, approximate their carrying amounts
reported in the consolidated balance sheets.

It is not practical to estimate the fair value of the Company's other
investments because of the lack of quoted market prices of the underlying equity
securities and the inability to determine fair value without incurring excessive
costs. Management does not believe that the value of these investments has been
permanently impaired.

Note 12 - Employee Benefit Plans

Stock Options Plans

The Board of Directors may grant options under five stock option plans to
selected employees, officers and directors of the Company to purchase shares of
the Company's common stock at a price not less than the fair market value of the
stock at the date of the grant. The 1998 Stock Incentive Plan ("1998 Plan") is
the only plan with significant stock option awards available for grant. The
1998 Plan allows for the grant of up to 3,750 shares of common stock in the form
of incentive and non-qualified stock options, stock appreciation rights, stock
awards, phantom stock awards, convertible securities and performance awards that
expire six or ten years after the date of grant. Options outstanding under all
five of the Company's stock option plans have been granted at prices which are
equal to or exceed the market value of the stock on the date of grant and vest
ratably over periods not exceeding six years.

As a result of the sale of Prometric, special vesting provisions were granted to
Prometric employees who have been granted stock options. Each employee's non-
vested stock options were forfeited, except that portion of non-vested stock
options scheduled to vest at the next vesting dates. The options scheduled to
vest at the next vesting date were accelerated to become vested on February 29,
2000. The forfeited shares related to the special vesting provisions totaled
844. The Prometric employees will have until March 3, 2002 to exercise
outstanding options.

52

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 12 - Employee Benefit Plans (continued)

The following table summarizes the stock option activity of the Company for the
years ended December 31:

1999 1998 1997
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-----------------------------------------------------------------------------------

Outstanding at beginning of
year 9,067 $18.24 6,935 $13.74 6,921 $ 8.71
Granted 1,737 17.07 2,989 26.77 1,714 23.73
Exercised (243) 9.93 (659) 9.92 (1,621) 2.92
Forfeited (181) 24.62 (198) 17.03 (79) 11.83
-----------------------------------------------------------------------------------
Outstanding at end of year 10,380 18.13 9,067 $18.24 6,935 $13.74
===================================================================================

Exercisable at end of year 4,402 $14.17 3,584 $10.80 2,691 $ 8.51
===================================================================================

The following table summarizes information about stock options outstanding at
December 31, 1999:

Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------
Weighted Average
Range of Exercise Number of Weighted Average Remaining Number of Weighted Average
Prices Shares Exercise Prices Contractual Life Shares Exercise Prices
- -------------------------------------------------------------------------------------------------------------------------------

$ 3.48 - $6.08 1,145 $ 4.56 1.0 years 1,116 $ 4.52
$ 6.78 - $13.11 1,970 11.49 6.9 years 646 9.22
$13.55 - $19.77 2,798 15.11 4.7 years 1,614 15.06
$21.50 - $31.25 4,467 26.42 7.2 years 1,026 26.40

Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("Statement No. 123"), defines a fair-value-based method of
accounting for an employee stock option. However, it allows an entity to
continue to measure compensation cost for those instruments using the intrinsic-
value-based method of accounting prescribed by APB Opinion No. 25. As permitted
by Statement No. 123, the Company elected to retain the intrinsic-value-based
method of accounting for stock options. Statement No. 123 requires certain
additional disclosures about stock-based compensation arrangements regardless of
the method used to account for them. In accordance with Statement No. 123, the
Black-Scholes option-pricing model is one technique allowed to determine the
fair value of the options. However, the derived fair value estimates cannot be
substantiated by comparison to independent markets.

For the years ended December 31, 1999, 1998 and 1997, pro forma net income and
earnings per share information required by Statement No. 123 has been determined
as if the Company had accounted for its stock options using the fair value
method. The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average

53

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 12 - Employee Benefit Plans (continued)

assumptions for 1999, 1998 and 1997: risk-free interest rate of 5.5%, 6% and 6%
respectively, dividend yield of 0%, volatility factors of the expected market
price of the Company's common stock of .443, .360 and .280, respectively, and an
expected life of granted options from four to six years depending upon the
vesting period.

The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. The weighted average estimated fair values of stock
options granted during fiscal years 1999, 1998, and 1997 were $7.37, $11.26, and
$7.15 respectively.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information for the years ended December 31 is as follows:

1999 1998 1997
--------- ---------- ----------

Pro forma income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (3,162) $ 7,206 $19,899
Pro forma net income (loss) $(21,234) $25,446 $24,477

Pro forma earnings (loss) per share, basic:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.06) $ 0.15 $ 0.47
Net income (loss) $ (0.41) $ 0.52 $ 0.58

Pro forma earnings (loss) per share, diluted:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.06) $ 0.14 $ 0.45
Net income (loss) $ (0.41) $ 0.50 $ 0.55

Defined Contribution Retirement 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 up to 15% of their salary, subject to certain annual
limitations. The Company may at its discretion make matching contributions,
which are allocated to eligible participants. All employees are eligible after
meeting certain service requirements. The Company made discretionary
contributions to this plan of $461, $315 and $248 during the years ended
December 31, 1999, 1998, and 1997, respectively.

54

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 12 - Employee Benefit Plans (continued)

Employee Stock Purchase Plan

During 1998, the Company adopted an employee stock purchase plan that allows
eligible employees to purchase shares of common stock at a 15% discount to the
lower of the fair market value on the first day or the last day of the annual
offering period. Employees may authorize the Company to withhold up to 10% of
their compensation during any offering period, subject to certain limitations.
During fiscal 1999 and 1998, shares totaling 41 and 27 were issued under the
plan at an average price of $23.23 and $19.74, respectively.

Shares Reserved for Future Issuance

The Company as of December 31, 1999 has reserved 1,432 shares of common stock
for future issuance upon the exercise of all outstanding stock options.

Note 13 - Termination Fee

In March 1997, the Company and NEC executed a definitive agreement pursuant to
which the Company was to acquire NEC. In May 1997, NEC accepted the offer of
Harcourt General, Inc. to acquire all of the stock of NEC, which resulted in the
termination of NEC's agreement with the Company and NEC's payment to the Company
of the $30,000 termination fee required by that agreement. The Company also
incurred $1,500 of expenses in connection with the NEC transaction, and reported
the net termination fee of $28,500 in 1997.

Note 14 - Contributions

During 1997, the Company made certain cash expenditures and common stock
contributions resulting in an aggregate expense to the Company of approximately
$11,500. The $11,500, recorded as operating expenses, was attributable to
contributions of (i) common stock valued at $5,000 to SLC National Advertising
Fund, Inc., a nonprofit corporation whose sole purpose is to develop and fund
advertising programs for the Sylvan Learning Centers and (ii) common stock
valued at $6,500 to Sylvan Learning Foundation, a nonprofit foundation formed to
promote various educational pursuits.

55

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 15 - Income Taxes

Significant components of the provision for income taxes on earnings from
continuing operations for the years ended December 31 are as follows:

1999 1998 1997
------- ------ -------
Current:
Federal $ (79) $1,010 $ 3,062
Foreign 2,301 1,005 359
State (1,777) 874 1,015
------- ------ -------
Total current 445 2,889 4,436
Deferred:
Federal (2,154) 1,174 5,329
Foreign 177 1,972 (819)
State 476 671 1,242
------- ------ -------
Total deferred (1,501) 3,817 5,752
------- ------ -------
Total provision (benefit) $(1,056) $6,706 $10,188
======= ====== =======

For the years ended December 31, 1999, 1998 and 1997, foreign income from
continuing operations before income taxes was $7,534, $11,477 and $10,158,
respectively.

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

1999 1998
------- -------
Deferred tax assets:
Deferred revenue $ 1,655 $ 1,003
Allowance for doubtful accounts 401 568
Advertising costs 86 1,945
Equity share of losses of affiliates 4,377 2,115
Non deductible reserves 2,223 (21)
Charitable contribution carryforward 672 1,535
Capital loss carry forward 3,475 -
Other 880 800
------- -------
Total deferred tax assets $13,769 $ 7,945
======= =======
Deferred tax liabilities:
Property and equipment $ 4,776 $ 848
Deferred income 11,713 11,670
Unbilled receivables 1,377 1,136
Amortization of intangible assets 773 48
Other 714 720
------- -------
Total deferred tax liabilities 19,353 14,422
------- -------
Net deferred tax liabilities $(5,584) $(6,477)
======= =======

56

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 15 - Income Taxes (continued)

At December 31, 1999, undistributed earnings of non-U.S. subsidiaries totaled
$26,600. Deferred tax liabilities have not been recognized for these
undistributed earnings because it is management's intention to reinvest such
undistributed earnings outside of the U.S. If all undistributed earnings were
remitted to the U.S., the amount of incremental U.S. federal and foreign income
taxes, net of foreign tax credits, would be approximately $6,500.

The reconciliation of the reported income tax expense to the amount that would
result by applying the U.S. federal statutory tax rates (35% in 1999, 35% in
1998, and 34% in 1997) to income from continuing operations before income taxes
and cumulative effect of change in accounting principle for the years ended
December 31 is as follows:

1999 1998 1997
------- ------- -------

Tax expense at U.S. statutory rate $ (19) $ 8,124 $11,114
Permanent differences 927 (480) 1,644
State income tax expense, net of federal tax effect (1,215) 764 978
Tax effect of foreign income taxed at lower rate (336) (1,746) (3,989)
Utilized tax credits (433) - -
Other 20 44 441
------- ------- -------
$(1,056) $ 6,706 $10,188
======= ======= =======

Note 16 - Earnings Per Share

The following table summarizes the computations of basic and diluted earnings
per share for the years ended December 31:

1999 1998 1997
------------ ------------ ------------

Numerators used in basic and diluted earnings per common share:
Income from continuing operations before cumulative effect
of change in accounting principle $ 1,001 $16,506 $22,499
Income from discontinued operations, net of tax 12,302 19,203 5,405
Loss from disposal of discontinued operations, net of tax (26,968) - -
Cumulative effect of change in accounting principle, net of tax (1,323) - -
------------ ------------ ------------
Net income (loss) $(14,988) $35,709 $27,904
============ ============ ============

Denominator
Weighted average common shares outstanding 51,553 48,962 42,412
Net effect of dilutive stock options - based on treasury
stock method using average market price
Stock method using average market price 1,604 2,324 2,478
------------ ------------ ------------
Weighted average common shares outstanding and common
stock equivalents 53,157 51,286 44,890
============ ============ ============

57

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 16 - Earnings Per Share (continued)

1999 1998 1997
--------------- -------------- --------------

Earnings (loss) per common share, basic:
Income from continuing operations before cumulative effect
of change in accounting principle $ 0.02 $0.34 $0.53
Income from discontinued operations 0.24 0.39 0.13
Loss from disposal of discontinued operations (0.52) - -
Cumulative effect of change in accounting principle (0.03) - -
--------------- -------------- --------------
Earnings (loss) per common share, basic $(0.29) $0.73 $0.66
=============== ============== ==============

Earnings (loss) per common share, diluted:
Income from continuing operations before cumulative effect
of change in accounting principle $ 0.02 $0.32 $0.50
Income from discontinued operations 0.23 0.38 0.12
Loss from disposal of discontinued operations (0.51) - -
Cumulative effect of change in accounting principle (0.02) - -
--------------- -------------- --------------
Earnings (loss) per common share, diluted $(0.28) $0.70 $0.62
=============== ============== ==============

Note 17 - Business and Geographic Segment Information

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

Sylvan Learning Centers provides personalized instructional services to students
of all ages and skill levels, through its network of franchised and Company-
owned learning centers.

Sylvan Contract Educational Services provides educational programs to students
of public and non-public school districts through contracts funded by Federal
Title I and State-based programs, and professional development services to
teachers.

Sylvan English Language Instruction consists of Wall Street Institute and
Aspect. Wall Street Institute is a European franchiser and operator of learning
centers that teach the English language through a combination of computer-based
and live instruction. Aspect is an international provider of intensive English
language instruction to students and professionals worldwide. Prior to 1999,
the Sylvan English Language Instruction business was included in the Sylvan
Prometric segment.

Sylvan International Universities commenced operations in the second quarter
1999 with the acquisition of a controlling interest in UEM. This segment
principally earns tuition and dormitory fees paid by university students.

The Company evaluates performance and allocates resources based on operating
income before corporate general and administrative expenses and income taxes.
There are no significant intercompany sales or transfers.

58

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 17 - Business and Geographic Segment Information (continued)

The following table sets forth information on the Company's reportable segments
for the years ending December 31:

Sylvan English Sylvan
Sylvan Learning Sylvan Contract Language International
1999 Centers Educational Services Instruction Universities
- ---------------------------- ----------------- -------------------- -------------- -------------

Revenues $90,664 $101,263 $114,294 $32,275
Restructuring charges 170 2,537 1,558 447
Segment profit 21,768 17,371 6,270 2,408
Segment assets 71,097 105,273 144,909 69,042
Long-lived assets 5,041 10,582 19,393 80,862

Sylvan English Sylvan
Sylvan Learning Sylvan Contract Language International
1998 Centers Educational Services Instruction Universities
- ---------------------------- ----------------- -------------------- -------------- -------------

Revenues $64,755 $86,293 $96,326 -
Restructuring charges - - 3,730 -
Segment profit 19,339 14,339 5,027 -
Segment assets 56,841 96,438 93,926 -
Long-lived assets 3,823 14,656 18,047 -

Sylvan English Sylvan
Sylvan Learning Sylvan Contract Language International
1997 Centers Educational Services Instruction Universities
- ---------------------------- ----------------- -------------------- -------------- -------------

Revenues $46,629 $50,977 $72,954 -
Segment profit 7,443 5,908 8,283 -
Segment assets 22,309 52,674 59,227 -
Long-lived assets 2,802 8,121 7,922 -

The following tables reconcile the reported information on segment profit and
assets to income (loss) before income taxes and cumulative effect of change in
accounting principle and total assets reported in the statements of operations
and balance sheets for the years ended December 31:

1999 1998 1997
------------------ ------------------ ----------------

Total profit for reportable segments $ 47,817 $ 38,705 $ 21,634
Corporate general and administrative expense (27,270) (15,530) (19,693)
Other income (expense) (20,602) 37 30,746
------------------ ------------------ ----------------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle $ (55) $ 23,212 $ 32,687
================== ================== ================

59

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 17 - Business and Geographic Segment Information (continued)

1999 1998 1997
----------------- ----------------- ----------------

Segment assets $390,321 $247,205 $134,210
Unallocated corporate assets 117,518 100,783 146,177
Net assets of discontinued operations 280,287 278,150 216,392
----------------- ----------------- ----------------
Total assets $788,126 $626,138 $496,779
================= ================= ================

Two of the Company's segments include revenues generated from both Company-owned
and franchised centers. The following table sets forth the components of total
revenues of these segments at December 31:

Sylvan Sylvan
Learning Centers English Language Instruction
---------------------------------------------------- --------------------------------------------
1999 1998 1997 1999 1998 1997
-------------- -------------- -------------- --------------- -------------- -----------

Company-owned centers $53,011 $36,166 $25,028 $ 92,294 $75,448 $53,675
Franchise centers 37,653 28,589 21,601 22,000 20,878 19,279
----------- ----------- ----------- ---------- ----------- ---------
Total revenues $90,664 $64,755 $46,629 $114,294 $96,326 $72,954
=========== =========== =========== ========== =========== =========

Direct costs for these segments relate primarily to the Company-owned centers.
Costs related to the franchised centers are included in the Company's general
segment expenses. It is not practical to quantify these costs separately.

Revenue and long-lived assets information by geographic area for the years
ended December 31 is as follows:

1999 1998 1997
--------------- --------------- -----------------
Revenues

United States $197,166 $187,343 $126,148
Spain 63,515 27,754 20,495
Other foreign countries 77,815 32,277 23,917
--------------- ------------- -----------------
Consolidated total $338,496 $247,374 $170,560
=============== =============== =================

Long-Lived Assets
United States $ 28,252 $ 34,016 $ 20,259
Spain 85,968 4,265 1,601
Other foreign countries 13,500 7,984 4,759
--------------- --------------- -----------------
Consolidated total $127,720 $ 46,265 $ 26,619
=============== =============== =================

Revenues are attributed to countries based on the location of the customer.
Revenues and long-lived assets in individual foreign countries other than Spain
did not exceed 10% of consolidated amounts in any of the years presented.

60

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 18 - Restructuring

During the fourth quarter of 1999, the Company completed an analysis of its
operating structure to improve operating efficiency and to enhance shareholder
value. As a result of this analysis, management approved a formal restructuring
plan in 1999, and the Company recorded a restructuring charge to operations of
approximately $5,100. The restructuring plan was comprised of employee
termination and facility exit costs resulting primarily from the Company's plan
to exit certain activities outside the core business of providing educational
instruction. The Company eliminated 58 professional and administrative
positions as a result of the plan. Facility exit costs include approximately
$3,500 of costs to close schools and school-based facilities. The Company
expects to complete implementation of the plan by the end of the second quarter
of fiscal 2000. The accrued restructuring costs and the amounts charged against
the provision were as follows:

Paid through Balance at
December 31, December 31,
Provisions 1999 1999
------------------ ------------------ -----------------

Employee termination costs $1,585 $ 467 $1,118
School closing costs 3,542 2,500 1,042
------------------ ------------------ -----------------
Total $5,127 $2,967 $2,160
================== ================== =================

In connection with the acquisition of Aspect in 1998, the Company recorded a
$3,730 restructuring charge associated with the merger and integration of the
combined operations. These charges consisted primarily of contract cancellation
costs of $2,600, severance and other employee related costs of $390, and
liabilities of $590 incurred to discontinue certain foreign exchange programs of
Aspect. The contract cancellation costs were payments made to repurchase master
franchise rights under which the Company was in default of contractual
non-competition provisions as a result of the acquisition of Aspect.

Note 19 - Supplemental Cash Flow Information

Interest payments were approximately $5,090, $900 and $800 for the years ended
December 31, 1999, 1998 and 1997, respectively. Income tax payments were
$15,514, $7,654 and $1,703 for the years ended December 31, 1999, 1998, and
1997, respectively.

In connection with the 1999 acquisition of UEM for total consideration of
$26,000, the Company acquired assets with a fair value of $ 95,706 and assumed
liabilities of $ 69,706.

In connection with the 1999 acquisition of WSI franchise businesses, for
aggregate consideration of $47,200, the Company acquired assets with a fair
value of $59,227 and assumed liabilities of $12,027.

In connection with the 1998 acquisitions of Canter and Schulerhilfe for combined
consideration of $44,082, the Company acquired assets with a fair value of
$50,465 and assumed liabilities of $6,383.

61

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 20 - Quarterly Financial Data (Unaudited)

The following financial information reflects all normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement of the
results of the interim periods. All periods' results have been restated to
separately disclose discontinued operations. Summarized operating data is as
follows:

March 31, June 30, September 30, December 31,
-------------- ---------------- ------------------ ---------------
Three months ended
1999

Revenues $69,344 $89,928 $ 82,149 $ 97,075
---------------- ------------ -------------- --------------
Operating income (loss) 4,070 10,533 17,119 (11,175)
--------------- ------------ ------------- --------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 2,832 6,499 11,669 (19,999)
Income (loss) from discontinued operations, net of tax 3,975 4,884 4,263 (820)
Loss on disposal of discontinued operations, net of tax - - (25,082) (1,886)
Cumulative effect of change in accounting principle (1,323) - - -
--------------- ------------ ------------- --------------
Net income (loss) $ 5,484 $11,383 $ (9,150) $(22,705)
=============== ============ ============= ==============

Earnings (loss) per common share, basic:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.06 $ 0.13 $ 0.22 $ (0.39)
Income (loss) from discontinued operations 0.08 0.09 0.08 (0.02)
Loss on disposal of discontinued operations - - (0.48) (0.04)
Cumulative effect of change in accounting principle (0.03) - - -
--------------- ------------ ------------- --------------
Earnings (loss) per common share, basic $ 0.11 $ 0.22 $ (0.18) $ (0.45)
=============== ============ ============= ==============

Earnings (loss) per common share, diluted:
Income (loss) from continuing operations before $ 0.05 $ 0.12 $ 0.22 $ (0.39)
cumulative effect of change in accounting principle
Income (loss) from discontinued operations 0.07 0.09 0.08 (0.02)
Loss on disposal of discontinued operations - - (0.47) (0.04)
Cumulative effect of change in accounting principle (0.02) - - -
------------- ----------- ----------- -----------
Earnings (loss) per common share, diluted $ 0.10 $ 0.21 $ (0.17) $ (0.45)
============= =========== =========== ===========
Shares used in computation:
Basic 51,666 51,841 51,897 50,907
============= =========== =========== ===========
Diluted 53,945 53,574 53,284 50,907
============= =========== =========== ===========

62

Sylvan Learning Systems, Inc. and subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 20 - Quarterly Financial Data (Unaudited) (continued)

During the quarter ended December 31, 1999, the Company recognized restructuring
costs of $5,127. The net effect of the restructuring costs was a decrease in
pre-tax income from continuing operations of $5,127 and after tax income from
continuing operations of $3,132, or $0.06 per diluted share. Additionally, the
Company also recognized significant non-recurring operating charges during the
fourth quarter of 1999, which totaled $10,300. These charges principally
related to asset impairment charges, which resulted from management's focus on
simplification of the business model and a return to the core business
strengths. Losses recorded on disposal of investments in the fourth quarter of
1999 also resulted in $13,400 of non-recurring charges during the period. The
cumulative effect of these significant, unusual charges was to reduce income
from continuing operations by $28,800 during the fourth quarter of 1999.
Additional related non-recurring operating charges of approximately $700 before
taxes were incurred by Aspect prior to December 31, 1999. These charges will be
recorded by the Company in fiscal year 2000, since Aspect is a subsidiary with
a September 30, 1999 fiscal year end.

March 31, June 30, September 30, December 31,
----------- ------------------ ------------------ -----------------
Three months ended
1998

Revenues $50,129 $53,523 $57,327 $86,395
------------- ------------ ------------ ------------
Operating income (loss) 2,142 (5,592) 8,953 17,672
------------- ------------ ------------ ------------
Income (loss) from continuing operations 1,839 (5,521) 7,250 12,938
Income from discontinued operations, net of tax 2,428 4,043 6,052 6,680
------------- ------------ ------------ ------------
Net income (loss) $ 4,267 $(1,478) $13,302 $19,618
============= ============ ============ ============

Earnings (loss) per common share, basic:
Income (loss) from continuing operations $ 0.04 $ (0.11) $ 0.15 $ 0.26
Income from discontinued operations 0.05 0.08 0.12 0.13
------------- ------------ ------------ ------------
Earnings (loss) per common share, basic $ 0.09 $ (0.03) $ 0.27 $ 0.39
============= ============ ============ ============

Earnings (loss) per common share, diluted:
Income (loss) from continuing operations $ 0.04 $ (0.11) $ 0.14 $ 0.24
Income from discontinued operations 0.05 0.08 0.12 0.13
------------- ------------ ------------ ------------
Earnings (loss) per common share, diluted $ 0.09 $ (0.03) $ 0.26 $ 0.37
============= ============ ============ ============

Shares used in computation:
Basic 47,760 48,185 48,535 50,592
============= ============ ============ ============
Diluted 49,926 48,185 50,596 53,334
============= ============ ============ ============

63

Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)

Note 20 - Quarterly Financial Data (Unaudited) (continued)

During the quarter ended June 30, 1998, the Company recognized certain non-
recurring expenses related to the merger with Aspect. These expenses include
$5,000 of transaction-related costs, such as legal, accounting and advisory
fees, and $3,730 of costs, classified in the financial statements as
restructuring costs, that relate to the integration of Aspect with Sylvan. The
net effect of the non-recurring items was a decrease in pre-tax income from
continuing operations of $8,730 and after-tax income from continuing operations
of $7,857, or $0.16 per diluted share.

Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net earnings per share will not
necessarily equal the total for the year.

Note 21 - Subsequent Events

On February 24, 2000, the Company announced plans to launch a $500,000 venture
subsidiary to invest in and incubate companies that bring emerging Internet
technology solutions to the education and training marketplace. The Company will
contribute approximately $285,000 in cash and assets to the new venture and will
retain a controlling interest. Affiliates of Apollo Management L.P., including
Rare Medium Group, Inc., a leading Internet professional services firm, have
committed $100,000 in funding for the Internet incubator company. Also, certain
members of the Company's management, and other investors at management's
discretion will invest approximately $15,000 in the new venture. The Internet
incubator company intends to seek to raise another $100,000 from strategic
Internet investors.

Also on February 24, 2000, the Company announced a $100,000 investment in the
Company led by Apollo Management L.P., a private investment firm. Joining
Apollo in the investment will be an affiliate of Investor AB, DB (Deutsche Bank)
Capital SKT, LLC. The investment will be in the form of ten-year subordinated
debentures. The debentures will have a 5% cash coupon, paid semiannually, and
will be convertible into common stock at $15.735 per share. The transaction is
expected to close in the first quarter of 2000.

64