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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

or

Commission File Number 000-50952

EDUCATE, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Common stock, par value $0.01 per share

(Title of Class)

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  x

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

As of March 1, 2005 42,585,719 shares of the registrant’s common stock were outstanding. The registrant’s common stock was not publicly traded on June 30, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Notice of Annual meeting and Proxy Statement to be filed no later than April 30, 2005 are incorporated by reference into Part III of this Annual Report.

EDUCATE, INC.

INDEX

PART I.

Overview

We believe we are a leading national provider of tutoring and other supplemental education services to pre-kindergarten through twelfth grade, or pre-K-12, students. For over 25 years, we have provided trusted, personalized instruction to our students. We operate through three business segments that served more than 320,000 students in 2004.

Our Sylvan Learning Centers are staffed by trained teachers who deliver high quality education programs that are personalized for each student based upon the results of extensive diagnostic testing. These centers are leading a significant shift in the provision of pre-K-12 supplemental education services, away from the traditional model in which individual tutors provide in-home homework help to students. We seek to instill in each student our “Learning Feels Good” philosophy through a motivational program that inspires students to achieve their objectives, builds self-confidence and strengthens each student’s enthusiasm for learning. Our Sylvan Learning Centers guarantee that each math and reading student will achieve at least one grade level equivalent of improvement within the first 36 hours of instruction.

Based on our market research, we believe that 93% of women within our target demographic recognize the Sylvan brand name. Our long history of successfully providing tutoring services and our substantial investments in advertising and direct marketing on national, regional and local levels have contributed to consumers’ recognition of the Sylvan brand. We have found television advertising, such as our current, award-winning “This Moment Brought to You by Sylvan” advertising campaign, to be especially effective at delivering an emotionally compelling message to consumers. This campaign has won both an ECHO Award from the Direct Marketing Association and an EFFIE from the New York American Marketing Association.

We have experienced significant growth in our business over the last five years with particular strength in growth since the formation of Educate, Inc. on July 1, 2003. We expect that all three of our business segments will continue to benefit from increased national attention on the quality of pre-K-12 education. We believe that parents have become more proactive in seeking education services that supplement their children’s education and are increasingly willing to pay for these services. In addition, over the past ten years, the supplemental education services market has benefited from increased spending in both public and private schools. Further, increased education spending by governmental authorities has enjoyed continued bipartisan support. We believe these market forces have contributed to our substantial growth.

Corporate Information

The Company was formed by an investor group led by affiliates of Apollo Advisors, L.P. (“Apollo”), a private equity investment company and controlling stockholder of the Company, and certain management stockholders on June 30, 2003 to acquire the pre-K-12 educational services business of Laureate Education, Inc. (formerly known as Sylvan Learning Systems, Inc.) (“Laureate”).

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We are a holding company and all of our operations are conducted through our operating subsidiaries. Our principal executive offices are located at 1001 Fleet Street, Baltimore, Maryland 21202. Our telephone number is (410) 843-8000. Our website is www.educate-inc.com. Information on our website is not a part of and is not incorporated by reference into this Annual Report on Form 10-K. Our filings with the SEC are available without charge on our website as soon as reasonably practicable after filing.

Business Segments

Learning Center

Our Learning Center segment develops and delivers trusted, personalized tutoring programs to students in grades pre-K-12 through a network of 849 territories supporting 1,057 franchised and company-owned learning centers in North America operating under the Sylvan brand name and 964 European franchised and company-owned learning centers operating under the Schülerhilfe brand name. As of December 31, 2004, there were 163 company-owned and 894 franchised centers operating in North America, and 226 company-owned centers and 738 franchised centers operating in Germany and Austria. As of December 31, 2004, there were 111 Company-owned territories and 738 franchised territories operating in North America. During 2004, the Learning Center segment generated revenues of $178.8 million, representing 60% of our total revenues.

North American Learning Centers

Our Sylvan Learning Centers network has operated for over 25 years providing supplemental, remedial and enrichment instruction, primarily in reading and mathematics, and to an increasing extent, writing, study skills and test preparation. Our programs feature an extensive series of standardized diagnostic tests, personalized instruction, a student motivational program and ongoing involvement of parents and the students’ regular school teachers. High awareness of the Sylvan brand and our targeted advertising programs motivate parents to inquire about our services on behalf of their children, primarily by telephone or the Internet. Our corporate call center, regional call centers or franchise operators respond to these inquiries and seek to convince parents of the value of our services and to make an appointment for a diagnostic assessment. One of our company-trained educators performs these tests, which include the California Achievement Test, a nationally-recognized diagnostic test, which identifies particular skill gaps of each student. We then use these assessments to create a personalized learning plan for the student.

Our students generally enroll in a 60 to 120 hour program with instruction three to four times per week for one to two hours per visit. Each teacher typically works with up to three students at a U-shaped table designed to facilitate the learning experience. Within this setting, a teacher works with each of the students individually in turn while the other two students work independently on their own programs. Each teacher is trained in using our proprietary learning systems, which address the particular skill gaps identified in the diagnostic testing. Students generally work with multiple teachers throughout their course of instruction. We also incorporate a motivational program using tokens redeemable for novelties and toys to inspire students to achieve their objectives, build self-confidence and strengthen their enthusiasm for learning. We measure and evaluate each student’s progress after every 36 hours of instruction, hold parent conferences after every 12 hours of a student’s program, and schedule periodic updates with the student’s regular school teachers during the program. Our Sylvan Learning Centers guarantee that each math and reading student will achieve at least one grade level equivalent of improvement within the first 36 hours of instruction or the student will receive 12 hours of additional instruction for free.

The cost to a student of an education program is dependent upon his or her individual needs. The program costs approximately $2,300 to $4,500, with the actual amount dependent upon the price per hour for tutoring and the number of hours of tutoring provided. Consumers may pay for the full program upon enrollment or prepay on a monthly basis using cash or a credit or debit card. Many of our customers also use third-party financing programs offered by recommended vendors.

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We also provide tutoring services for the SAT and other standardized tests in our Sylvan Learning Centers using materials developed by our subsidiary, Ivy West Educational Services, Inc. Ivy West instructors also provide one-on-one tutoring and test preparation services to students in their homes through a staff of over 1,000 instructors.

During 2004, our North American Learning Center operations generated revenues of $151.3 million, representing 50% of our total revenues.

Our North American Learning Center operations are comprised of franchised and company-owned territories. Each territory represents a unique geographical area which includes a specified number of pre-K-12 students to support financial viability of operations within the territory. Due to changes in demographics over time and levels of demand, territories often support more than one Sylvan Learning Center.

Franchised Territories. Franchising is a core element of our business strategy. As of December 31, 2004, there were 738 territories which supported franchised Sylvan Learning Centers located in North America, including 811 the United States and 85 in Canada. During 2004, we expanded our franchised network by 32 territories and by 34 centers. In 2004, we generated $44.1 million in revenues from our franchised North American Learning Center operations, representing 15% of our total revenues. We generate income from franchising activities primarily through royalties, which are calculated as a fixed percentage of franchisee cash receipts.

We generate additional licensing fees from the sale of new franchise territories, within which a franchisee is allowed to open learning centers, and from sales of learning materials and other materials to franchisees.

Our franchise agreements grant the franchisee a license to operate Sylvan Learning Centers and to use Sylvan’s trademarks within a specified territory. Our franchise agreements generally have an initial term of ten years, subject to unlimited additional ten-year extensions at the franchisee’s option under the same terms and conditions. The license fees and royalty rates vary depending upon the demographics of the territory. If a franchisee proposes to sell a franchised center, we have the right to acquire the franchised center on the same terms as the proposed buyer.

We actively manage our franchise system to enhance our brand and maintain a consistent, high quality of service. Franchisees must obtain our approval for the location and design of learning centers and for all advertising. Franchisees must also operate their learning centers in accordance with our methods, standards and specifications. We monitor educational quality at our franchised centers through a variety of procedures, including access to pre- and post-diagnostic test data for students of our franchisees. Each franchisee is required to purchase from us certain diagnostic and instructional materials, student record forms, parental information booklets and explanatory and promotional brochures developed by us. We specify requirements for other items necessary for operation of a learning center, such as computers, instructional materials and furniture, and we offer our franchisees the opportunity to purchase these items from preferred vendors. Generally franchisees provide us with periodic business updates and must submit monthly financial and operating data to us. We require franchisees and their employees to attend a one-week initial training program and to pass a certification examination in our learning center operations and educational programs. We also offer franchisees continuing training each year through a number of different methods. We employ franchise business consultants to provide assistance to franchisees in marketing, education and operations, technology implementation and business development. These employees also facilitate regular communications between franchisees and us and assist us in assuring a consistently high quality of service in each Sylvan Learning Center.

Our franchisees are true owner-operators, as evidenced by the fact that 80% of our franchisees own only one or two centers and no franchisee owns more than 15 centers. We believe that this allows franchise owners to remain focused and committed to the success of their centers.

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Company-Owned Territories. As of December 31, 2004, we operated 111 company-owned territories including 163 company-owned Sylvan Learning Centers in 21 markets in North America. During 2004, we increased the number of company-owned territories by 26 and the number of centers by 28. In 2004, our company-owned North American Learning Center operations generated revenues of $107.1 million, representing 36% of our total revenues. Company-owned learning centers enable us to test and refine new educational programs, marketing plans and learning center management procedures before offering these programs and procedures to our franchisees. Our company-owned territories serve as best practice models where significant operational and educational improvements can be developed and implemented quickly. On average, company-owned territories have higher sales than franchised territories primarily due to higher average revenue per student. In 2004, our company-owned territories generated average sales per territory of $994,200 and we received royalties from our franchisees that imply average cash receipts per franchised territory of $564,500.

European Learning Centers

Our European learning center business, which we acquired in 1998, operates under the Schülerhilfe name. Schülerhilfe has provided after school tutoring, consisting primarily of homework support, to primary and secondary students in Germany and Austria for over 30 years. As of December 31, 2004, Schülerhilfe operated 226 company-owned learning centers and 686 franchised centers in Germany, and 52 franchised centers in Austria. Schülerhilfe generates revenue primarily from the operation of company-owned centers and the receipt of monthly fixed fees from franchisees. As in our Sylvan Learning Centers, the aim of Schülerhilfe’s center-based tutoring is for students to improve their grades and develop their self-confidence. Schülerhilfe provides tutoring in a number of subjects, including German, math, English, Latin, French, chemistry, and biology, using the individual child’s own textbooks. After an initial consultation, students visit a Schülerhilfe center after school for at least two 90 minute sessions per week. Students work with teachers on addressing their skill gaps using a combination of school work, homework, and Schülerhilfe curriculum. Sessions are taught in small groups of five or fewer students per teacher. On average, parents pay €120 per month for eight sessions. In 2004, Schülerhilfe generated revenues of $27.5 million, representing 9.2% of our total revenues.

Institutional Services

Since 1993, Catapult Learning, formerly known as Sylvan Education Solutions, has provided supplemental instruction programs primarily in reading and math to students in schools, school districts and private educational entities (primarily parochial schools) across the country. These programs encompass a wide variety of education services that supplement and expand those provided by these institutions. Our services are typically provided on location at the client school or a conveniently located community organization’s facility. These services are funded by federal, state and local governments. While funding for our programs comes from a variety of sources, there are two federal government programs that are significant sources of funds for the services that we offer: Title I of the Elementary and Secondary Education Act (most recently reauthorized as NCLB, No Child Left Behind) and the Individuals with Disabilities Education Act (IDEA). Title I funds are provided by the Federal government to address the needs of educationally and economically disadvantaged students in public and private schools. IDEA funds are provided by the Federal government to address the needs of students identified for special education.

The largest component of our Catapult Learning business is small group instruction to pre-K-12 students who have been identified by their school as requiring these services. Additionally, we offer a variety of supplemental programs and services that cater to the specific needs of our institutional partners, such as summer school programs, early childhood development programs and special education services. The services that we provide to institutions are typically governed by school-year contracts subject to annual renewal that have had and continue to have high rates of repeat business.

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Within our Institutional Services segment, we have developed a new program, Education Station, to provide tutoring services mandated under NCLB requirements. Under this Act, if a school misses its adequate yearly progress goals for three consecutive years, the school’s district must set aside a portion of the Title I funds it receives and must use those funds to support school choice or pay for tutoring for low income students who qualify under NCLB, at the parents’ option. Parents of eligible children who opt for free tutoring choose a provider of tutoring services from a list approved by the state, which must include third-party providers.

In fiscal 2004, our Institutional Services segment generated revenues of $119.0 million, representing 40% of our total revenues. We believe that the increasing willingness of school districts and private schools to utilize third parties to provide supplemental education and specialized support services to the students in their schools, and the increases in Title I spending, the enactment of NCLB and access to IDEA funding and state education funds, provide us with significant opportunities for continued growth.

Online Learning Services

Our eSylvan unit offers live online tutoring programs modeled after those provided in our Sylvan Learning Centers. These online programs use a technologically sophisticated, internet-based application that enables teachers and students to speak and interact on their computer monitors real-time over a dial-up or broadband connection. eSylvan’s programs are provided to students primarily in second through ninth grades. As of December 31, 2004, eSylvan was owned approximately 93% by us, with the remaining 7% interest owned by a majority of our North American franchisees. Under almost all of our license agreements with franchisees, we have the exclusive right to provide online tutoring services to students, subject to payment of a reverse royalty. By providing instructional services at home, eSylvan makes the tutoring process more convenient for both the student and the parent, especially in rural or highly congested areas where access to a learning center is less convenient. eSylvan’s online program generally comprises 40 to 60 hours of instruction, with a price per hour similar to that charged in our Sylvan Learning Centers. The average student attends two one-hour sessions per week. Customers can either pay in advance or elect to have their credit or debit card automatically charged. eSylvan’s academic directors also schedule parent conferences periodically during the program. Each of eSylvan’s teachers must complete a formalized training program prior to his or her initial student session. This ensures that the quality of eSylvan’s services are consistent from teacher to teacher and allows eSylvan to offer the same type of guarantee offered to parents by our Sylvan Learning Centers.

eSylvan’s service offerings are supported by a technological infrastructure developed to provide effective interaction over the Internet for students and teachers and an operational support environment for effective business operation. eSylvan’s learning environment was developed to operate completely over a dial-up modem connection to the Internet. Each student and teacher is supplied with an audio headset, a microphone, and a digital pen and whiteboard system. Students and teachers gain access to our online program by entering our secure web site where information on learning programs is presented. Once registered for a learning program, students interact with teachers in real time through an audio/visual session, where existing technologies permit simultaneous voice and data transmission over the Internet connection. This learning environment permits the teacher to control a tutoring session for up to three students per session. Teachers can present curriculum-associated content on a whiteboard that appears on the student’s computer and that both parties can simultaneously reference and annotate. The whiteboard may also be used without content so that either party in the session can use freeform drawing tools for illustration purposes.

As of December 31, 2004, we had spent approximately $50.1 million to fund the development and operations of our eSylvan business since commencing operations in June 2000, with $4.5 million spent in 2004. eSylvan had approximately 1,400 students enrolled in its online programs as of December 31, 2004, and generated $2.5 million of revenue in 2004. Since its inception, eSylvan has focused its marketing strategy on leveraging our proprietary learning system and the Sylvan brand, and creating various cross-marketing

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opportunities between eSylvan, Sylvan Learning Centers and Catapult Learning. In addition to delivering its tutoring services directly to individual students, eSylvan has conducted pilots to test delivery of these services to Sylvan Learning Center students through the Sylvan Online program and to a limited number of school districts through the Catapult Learning Online program. The initial pilots for delivery of services to Sylvan Learning Center and Catapult Learning have been successful and we are moving to more completely integrate our on-line tutoring technology into Sylvan Learning Center and Catapult Learning.

Industry Overview

We believe the pre-K-12 education services industry is large, growing and fragmented and that the overall size of this industry has significant potential to grow as a result of a number of factors. These factors include favorable demographics, increasing parental dissatisfaction with the quality of public education, an increasingly competitive educational system and the heightened focus on school performance due to the continued failure of many students to achieve basic skills. According to the U.S. Department of Education, enrollment in elementary and secondary schools rose 20% between 1985 and 2004 to more than 54 million students and is expected to rise by an additional two million students between 2005 and 2013. We believe these trends will drive demand in both the public and private sectors for the types of supplemental education services that we provide.

Private Sector Demand. Parental demand for supplemental education services is growing due to parents’ dissatisfaction with the quality of public pre-K-12 education. We believe that the demand for private pre-K-12 tutoring services has grown, and will continue to grow, as children face additional federally-mandated standardized tests throughout their pre-K-12 years, and a growing number of qualified students vie for positions at top colleges. At the same time, the monetary value of a college degree is increasing, as evidenced by U.S. Census Bureau data. In 2001, holders of a bachelor’s degree earned 89% more on average than those with only a high school diploma, as compared with 57% more on average in 1981. In addition, many schools have ended the practice of social promotion and now require students to pass end-of-year exams to advance to the next grade. These high stakes tests create additional pressures on students’ school performance. We believe that all of these factors will increase private sector demand for supplemental education services.

Public Sector Demand. In the 2001-2002 school year, the most recent year for which the U.S. Department of Education has published data, the total K-12 expenditures by U.S. governmental entities for purchased instructional services was approximately $7 billion. The size of that market has increased since the 2000-2001 school year due in part to the adoption of federal legislation. The most recent major federal legislation, NCLB, increased federal funding for supplemental education services by 3% from $12.3 billion in 2004 to $12.7 billion in 2005. NCLB also enacted sweeping changes, such as requiring a school district to set aside funds to support school choice and supplemental educational services, including tutoring provided by third parties, if a school in the district fails to achieve its adequate yearly progress goals for three consecutive years. We believe these changes will drive demand for the types of supplemental education services we provide. In particular, NCLB increased the accountability of public school districts for poor student performance, increased the emphasis on results-based student improvements, instituted penalties for continued poor school performance, and increased the availability of private educational alternatives for low-income students.

NCLB also provides for more alternatives to public schools, and a heightened focus on results and school accountability represent a likely catalyst for increased funding for outsourced services. Funding for outsourced programs and services comes from a variety of sources, including federal, state and local governments. The federal government provides funds through two main programs, Title I of the Elementary and Secondary Education Act and IDEA. Title I funding has grown 3% from $14.4 billion in 2004 to $14.8 billion in 2005, and IDEA funding has grown 6% from 10.0 billion in 2004 to $10.6 billion in 2005.

We have developed a new program, Education Station, to provide tutoring services mandated under NCLB. In the 2003-2004 school year, our NCLB business served approximately 16,700 students, compared to

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approximately 2,900 students in the 2002-2003 school year. Education Station is projected to serve over 24,000 students in the 2004-2005 school year.

Our Equity Sponsor

As of December 31, 2004, affiliates of Apollo Advisors, L.P. (“Apollo”) owned 53% of our outstanding shares of common stock on a fully diluted basis. We refer to Apollo as our “equity sponsor.” Apollo was founded in 1990 and is among the most active private investment firms in the United States in terms of both number of investment transactions completed and aggregate dollars invested. Since its inception, Apollo has managed the investment of an aggregate of approximately $14 billion in equity capital in a wide variety of industries, both domestically and internationally.

Sales and Marketing

Learning Center

Philosophy

We have positioned ourselves as a provider of tutoring services that inspire students to achieve their objectives, build self-confidence and strengthen each student’s enthusiasm for learning by instilling our “Learning Feels Good^™” philosophy. We developed our philosophy through qualitative and quantitative consumer research of women within our target audience. We have used consumer research to identify the most compelling message as well as the benefits and features that are most relevant and believable to our target audience.

Marketing

We believe our investment in advertising is driving a high level of brand awareness and growth in favorable consumer perceptions about our brand. Our marketing strategy relies primarily on direct response marketing. Our marketing materials are designed to generate a response from consumers, usually in the form of a call or e-mail to one of our learning centers. This direct marketing strategy allows us to quantitatively and qualitatively test the effectiveness of various aspects of our marketing campaigns by measuring consumer response and making appropriate modifications to the campaign to improve consumer response. We believe that this empirical approach to marketing allows us to make more effective use of each media vehicle and to improve the return on our marketing investment.

We have found television advertising, such as our current, award-winning “This Moment Brought to You by Sylvan” advertising campaign, to be especially effective at delivering an emotionally compelling message to consumers. Accordingly, we commit a majority of our advertising funds to television advertising. The remaining advertising expenditures are comprised of territory spending mainly on direct mail, print or public and community relations. As part of our quantitative and qualitative analysis, each year we test the performance of our newly developed advertising materials and compare the results to the benchmarks set by the best performing advertising materials in our previous campaigns to determine if the new material will be used throughout the system. In each year since 2001, when we began national quantitative testing of our advertising materials, each year’s new materials have been significantly more effective than the benchmarks set by our prior campaigns.

Our marketing is coordinated across three tiers, the national marketing fund, regional cooperative marketing funds, and local marketing. Substantially all franchised and company-owned centers pay a monthly fee into the national marketing fund, which is jointly managed by representatives of the company and the franchise community, while regional cooperative marketing funds are managed by members of the region, and local funds are managed individually by franchisees or company-owned territory management. These three tiers use a

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combination of marketing channels, including television, print and grassroots public and community relations, such as appearances at public school parent assemblies, local street fairs and festivals, and other community events sponsored by local civic and religious groups. We maintain a consistent and targeted advertising message across each of these tiers and in each of the marketing channels through the centralized development and distribution of all advertising material used, including the materials used by franchisees and company-owned centers in local markets, and through specific recommendations to our franchisees of the appropriate mix of marketing channels.

Institutional Services

Our Institutional Services segment seeks to understand the needs of a particular institution and develops specific programs to address those needs within the scope of available funding. Our institutional services are marketed primarily through direct, personal contact with superintendents of school districts, school principals and other key decision makers at targeted institutions by our relationship managers and sales force. Through these sales efforts, we seek to maintain and expand our relationships with existing institutional customers. This focus on our existing relationship allows us to market additional supplemental services to them, which is less expensive than new client development efforts. Our institutional services are also marketed to new institutional customers by our 14 full time sales people who leverage our track record of success to foster relationships with new institutional customers. In addition, the management of Catapult Learning spends a significant amount of time presenting at numerous conferences and trade shows catering to education professionals to increase its profile in the education community.

We employ a wide variety of consumer marketing strategies to market our Education Station program to parents, including radio, print, direct mail and grassroots public and community relations. In an effort to build the name recognition of our newly-developed Education Station program, we have made, and will continue to make, significant marketing expenditures.

Online Learning Services

Our online services are marketed through online marketing campaigns. eSylvan has established a network of providers of web-based advertising and is constantly working to refine this network to ensure that it is reaching the highest quality audience at the lowest possible cost. As the eSylvan student base is expanded, we believe eSylvan will gain more referrals from current and former students. eSylvan also pursues cross-promotional opportunities with existing and former Sylvan Learning Center and Catapult Learning customers.

Employees

As of December 31, 2004, we had a total of 2,277 full-time and 9,896 part-time U.S. employees, of whom 4,657 were employed in our Learning Center segment; 7,163 were employed in our Institutional Services segment; 219 were employed in our Online Learning Services segment and 134 were employed in corporate services functions. Additionally, we had 654 Schülerhilfe employees of whom 70 were full-time and 584 were part-time. Approximately 100 of those employees are represented by a Works Council. We consider our relationship with the Council to be good. None of our employees is party to any collective bargaining agreement with us and we consider our relationships with all employees to be good.

Competition

While we face competition in each of our business segments, the markets for the Learning Center and Institutional Services segments are very fragmented and penetrations are low. We are aware of only five direct national corporate competitors in our North American Learning Center business: Huntington Learning Centers,

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Inc., Kumon Educational Institutes, The Princeton Review, Kaplan Educational Centers and SCORE! Education Centers. With the exception of Kumon Educational Institutes, which is comprised of a large number of locations mostly operated in facilities primarily used by other organizations, we believe these competitors operate fewer learning centers and provide services within a smaller geographic area than we do. In most areas served by our Learning Center segment, competition also exists from individual tutors and local learning centers. Learning Center competition focuses on education quality, convenient locations and price. Schülerhilfe’s primary competition consists of Studienkries, a slightly-larger national provider of tutoring services in Germany, smaller regional tutoring chains and individual local tutors.

In our Institutional Services business, competition is primarily based on education quality, reputation and price. We compete with individuals that provide tutoring services to institutional customers, state and local education agencies that provide supplemental education services and national providers of supplemental education services, such as Kaplan K12 Services and The Princeton Review. We also compete with state-approved providers of tutoring services with respect to our NCLB supplemental education services. Most providers of NCLB services are individuals and smaller companies that do not have our national presence. In addition, we are aware of several other entities that currently provide Title I and state-based programs on a contract basis for students attending parochial and private schools.

In our Online Learning Services segment, we compete against smaller companies that participate in the online tutoring market. We also compete with individual home tutors who typically serve higher income families. We expect that some existing “bricks and mortar” educational services companies, and others, may begin to develop and distribute their services over the Internet in the near future. We believe that our services differ significantly from those currently offered by these companies. As Internet and broadband services become more widely deployed in the pre-K-12 market, we expect new and as yet unidentified companies to enter the market.

Government Regulation

Franchise Regulation.    Various state authorities as well as the Federal Trade Commission (“FTC”) regulate the sales of franchises in the United States. The FTC requires that franchisors make extensive disclosures to prospective franchisees but does not require registration. A number of states require registration and prior approval of the franchise-offering document. In addition, many 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 our franchising operations have not been materially adversely affected by existing regulation, we cannot assure you that we will not be adversely affected in the future nor can we predict the effect of any future legislation or regulation.

Our international franchise agreements and franchise operations are regulated by various foreign laws, rules and regulations. To date, these laws have not precluded us from selling franchise licenses in any given territory and have not had a material adverse effect on our operations.

Title I.    Title I eligible school districts are responsible for implementing Title I and carrying out their educational programs. Title I regulations, as well as provisions of Title I itself, direct Title I eligible districts to satisfy obligations including, among others, 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 fiscal requirements. In contracting with school districts to provide Title I services, we are, 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, we have responsibility for introducing program content adequate to achieve certain educational gains and maintaining the confidentiality of student records. Our 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.

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Intellectual Property

We have federal trademark registrations for the words “Sylvan,” “Sylvan Learning Center,” and “eSylvan” and distinctive logos, along with various other trademarks, patents and servicemarks and have applications pending for a number of other distinctive phrases, including “Catapult Learning,” “Education Station,” “Progressus,” and “Progressus Therapy, Inc.” We cannot predict whether our trademark and service mark applications will be approved. We cannot assure you that our existing or future trademarks, patents or servicemarks will provide meaningful protection. We also have obtained foreign registrations of Sylvan in over 50 countries. Our License Agreement grants our franchisees the right to use certain of our trademarks and servicemarks in connection with operation of a franchised learning center subject to certain quality control and other provisions.

In our Learning Center segment, there were 111 territories with 163 company-owned Sylvan Learning Centers operating in North America, as of December 31, 2004. All of our company-owned Sylvan Learning Centers are located on premises with short-term leases (typically three years) that generally comprise approximately 3,000 square feet. As of December 31, 2004, we had 738 territories with 896 franchised Sylvan Learning Centers operating in North America. All of our franchised Sylvan Learning Centers are located on premises leased or owned by the individual franchisee. Within our Schülerhilfe operations, there were approximately 226 company-owned centers operating in Germany and 686 franchised locations operating in Germany and 52 franchised locations operating in Austria as of December 31, 2004. All company-owned Schülerhilfe centers are located on leased premises that typically comprise approximately 1,500 square feet. All of Schülerhilfe’s franchised centers are located on premises leased or owned by individual franchisees. No single center is material to our operations.

As of December 31, 2004, our Sylvan Learning Center locations consisted of the following:

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Our Institutional Services segment also has approximately 25 leased regional administrative offices located in strategic points throughout the United States. The leased premises range in size from 1,000 to 11,000 square feet. The leases are generally short-term with many having annual renewals.

We maintain our corporate headquarters at 1001 Fleet Street in Baltimore, Maryland. Our corporate headquarters is used by all of our business segments. At our corporate headquarters, we sublease 57,471 square feet of office space from Laureate. The initial term of the sublease for our headquarters expires on August 30, 2011.

We sublease one other property from Laureate that is used in support of each of our business segments. The property is located at 506 S. Central in Baltimore, Maryland and consists of 25,997 square feet. The sublease for the 506 S. Central property expires on November 30, 2006 and is renewable for three additional periods totaling 13 years at our discretion.

We lease 11,990 square feet of space in Elkridge, Maryland that serves as a call center for our Company-owned Sylvan Learning Centers. The lease expires on December 31, 2005 and is renewable for two additional

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three-year terms at our discretion. Schülerhilfe leases approximately 12,000 square feet of office space in Gelsenkirchen, Germany, which serves as its corporate headquarters.

From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition or results of operation.

No matters were submitted to be voted on by security holders during the fourth quarter ended December 31, 2004.

The following table sets forth certain information regarding our directors and executive officers as of March 15, 2005.

R. Christopher Hoehn-Saric became our Chief Executive Officer in July 2003 and Chairman of our Board of Directors in April 2004. Prior to that time, in February 2000, Mr. Hoehn-Saric assumed the leadership position of Ventures, the incubator subsidiary of our predecessor, Laureate, as Chairman and Chief Executive Officer and served in that capacity until our formation. Beginning in April of 1993, he served as Chairman of the Board of Laureate and as co-Chief Executive Officer of Laureate beginning in December 1995. He also served as Laureate’s President from 1988 to 1993 and has been a member of Laureate’s Board of Directors since 1986.

Peter Cohen became our President and Chief Operating Officer in July 2003. In February 2000, Mr. Cohen assumed the position of President and Chief Operating Officer of Laureate and served in that position until our formation. Mr. Cohen joined Laureate in 1996 as President of the Sylvan Learning Centers division. From 1994 to 1996, Mr. Cohen served as Chief Executive Officer of The Pet Practice, Inc., a national chain of branded pet hospitals.

Kevin E. Shaffer became our Chief Financial Officer in July 2003. Previously, he served as Vice-President of Finance and Corporate Controller of Laureate beginning in June 1999 and served in that capacity until our

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formation. Prior to joining Laureate, Mr. Shaffer was an executive with Ernst & Young LLP, providing audit and consulting services to clients in a variety of industries from 1984 to 1999.

Mary Foster became the President of our Learning Center segment in July 2003. Previously, Ms. Foster joined Laureate in January 2001 as President of its Sylvan Learning Centers division and served in that capacity until our formation. Prior to joining Laureate, Ms. Foster held a senior management position with Riverside Corporation as Senior Vice President of Sales and Marketing from 1999 to 2001. Prior to that, from 1993 to 1998, Ms. Foster was President of Ethel M Chocolates.

Jeffrey Cohen became the President of our Institutional Services segment, formerly known as Sylvan Education Solutions, in July 2003. He previously served in that role with Laureate from August 2001 to July 2003. Prior to joining Laureate, from February 1998 until July 2001, Mr. Cohen was with Prometric, Inc., a provider of computer-based assessment and examination services, serving first as the Vice President of Prometric’s Academic, Professional and Corporate Services Business Unit and later as the Senior Vice President for Business Unit Management. Mr. Cohen also served as a political appointee in the Clinton Administration.

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

Douglas Becker has served as one of our directors since September 2004. Since February 2000, Mr. Becker has been the Chairman and Chief Executive Officer of Laureate. Previously, Mr. Becker served as President and co-Chief Executive Officer of Laureate since April 1993. From February 1991 until April 1993, Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center Division of Laureate. Mr. Becker also serves as a director of Constellation Energy Corporation.

Laurence Berg has served as one of our directors since March 2003 and served as Chairman of our Board of Directors from March 2003 to April 2004. Mr. Berg is a senior partner of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the Apollo Investment Funds, a series of private securities investment funds, where he has worked since 1992. Prior to joining Apollo, Mr. Berg was a member of the Mergers and Acquisition Group at Drexel Burnham Lambert. Mr. Berg is on the Founder’s Circle of the Fulfillment Fund, a youth mentoring and college scholarship charity. Mr. Berg is also a director of Goodman Global Holdings, Hayes Lemmerz International, Inc., Rent-A-Center, Inc., and Resolution Performance Products.

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

Cheryl Gordon Krongard has served as one of our directors since June 2004. Ms. Gordon Krongard is a former partner of Apollo Advisors, L.P., where she worked from 2002 until 2004. Ms. Gordon Krongard was the Chief

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Executive Officer of Rothschild Asset Management from 1995 to 2000. She served as Senior Managing Director for Rothschild North America from 1993 until 2000. Ms. Gordon Krongard is a director of U.S. Airways. She is a Governor of the Iowa State University Board of Governors. Ms. Gordon Krongard is also a member of the Dean’s Advisory Council, Iowa State University College of Business. She is a director and Chairperson of the Investment Committee for the Iowa State University Foundation. She is Trustee of the Mount Sinai Medical Center.

Michael Gross has served as one of our directors since April 2004. Mr. Gross is a senior partner and co-founder of Apollo Advisors, L.P., which, together with its affiliates, acts as managing general partner of the Apollo Investment Funds, a series of private securities investment funds, where he has worked since 1990. Mr. Gross also is Chief Executive Officer and Chairman of Apollo Investment Corporation, a publicly traded closed-end investment company and affiliate of Apollo Advisors, L.P. Mr. Gross currently serves on several boards of directors, including Allied Waste Industries, Inc., Pacer International, Inc., SkyTerra Communications, Inc., Saks, Inc. and United Rentals, Inc. Mr. Gross is a founding member, and serves on the Executive Committee, of the Youth Renewal Fund, is the Chairman of the Board of the Mt. Sinai Children’s Center Foundation, serves on the Board of Trustees of the Trinity School and on the Corporate Advisory Board of the University of Michigan Business School.

David Hornbeck has served as one of our directors since September 2004. From October 2003 to December 31, 2004, Mr. Hornbeck was President and Chief Executive Officer of the International Youth Foundation (“IYF”), a public foundation dedicated to bringing resources and attention to the needs of young people around the world. He remains a member of the Board of Directors, an officer and a full-time employee of IYF. From 2000 to 2003, Mr. Hornbeck was self-employed as a writer and consultant. Previously, Mr. Hornbeck served as Superintendent of the Philadelphia Public Schools for six years and State Superintendent of Schools in Maryland for 12 years. Mr. Hornbeck is Chairman of the Children’s Defense Fund and the Public Education Network.

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

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

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PART II.

Our common stock trades on the NASDAQ National Market under the ticker symbol “EEEE”. The high and low trade prices for 2004 for our common stock are set out in the following table. These prices are as reported by NASDAQ, and reflect inter-day price quotations, without retail mark-up, mark down or commission, and may not necessarily represent actual transactions. The table below sets forth the 2004 high and low trade prices for the our common stock as reported by the NASDAQ National Market:

In June 2004, we declared and paid a cash dividend to our existing stockholders in the amount of $9 million or $0.24 per common share.

We do not anticipate paying dividends in the foreseeable future. Instead, we anticipate that all of our earnings, if any, in the foreseeable future will be used to repay debt, for working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including restrictions in our debt instruments, our future earnings, capital requirements, financial condition, future prospects and the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits. Other than the dividend described in the preceding paragraph, we are currently restricted from declaring or paying cash dividends pursuant to the terms of our operating company’s secured credit facility.

On September 20, 2004, we effected a 1.00 for 1.25 reverse stock split of our common stock. All share and per share amounts have been restated for all periods to give retroactive effect to the reverse stock split.

The number of registered shareholders of record as of February 21, 2005 was 61, including one company acting as holder of record for all investors whose stock is held in street name.

Equity Compensation Plans

The following table details information regarding our existing equity compensations plans as of December 31, 2004:

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You should read the following selected consolidated financial data together with our historical consolidated financial statements and the related notes, the combined financial statements and the related notes of our predecessor, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Items 7 and 8 of this Form 10-K. References to our predecessor refer to the pre-K-12 business we acquired from Laureate.

The statement of operations data of our predecessor for the years ended December 31, 2000 and 2001 and the balance sheet data as of December 31, 2000 and 2001 are derived from our unaudited consolidated financial statements that are not included in this Form 10-K. The combined statement of operations data of our predecessor for the year ended December 31, 2002 and balance sheet data as of December 31, 2002 are derived from financial statements audited by Ernst & Young LLP, independent registered public accounting firm, and are included in Item 8 of this Form 10-K.

The unaudited pro forma consolidated statement of operations data for the year ended December 31, 2003 is derived from our unaudited pro forma consolidated statements of income, which are included in Item 7 of this Form 10-K. These pro forma financial statements give effect to our acquisition of the pre-K-12 business acquired from Laureate on June 30, 2003 as if such transaction occurred on January 1, 2003. Our unaudited consolidated pro forma financial data is based on currently available information and is not necessarily indicative of our financial position or results of operations had our acquisition by Apollo taken place on January 1, 2003, nor are they necessarily indicative of future results.

Our consolidated statement of operations data for the year ended December 31, 2004 and our consolidated balance sheet data as of December 31, 2004 and 2003 have been derived from our audited consolidated financial statements included in Item 8 of this Form 10-K which have been audited by Ernst & Young LLP, whose report is included therein.

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SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except per share and other data)

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The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related noted to those statements included in Item 8 of this Annual Report on Form 10-K.

For the year ended December 31, 2003, the Company has presented unaudited pro forma consolidated financial results which have been derived from the statement of income of our predecessor (“pre-K-12 business of Laureate”) for the six months ended June 30, 2003 and our statement of income for the period June 30, 2003 (date of inception) through December 31, 2003, adjusted to give effect to the acquisition as if it occurred as of January 1, 2003.

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

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

Overview

We are a leading national provider of tutoring and other supplemental education services to pre-kindergarten through twelfth grade, pre-K-12 students. Serving more than 320,000 students in 2004, we operate through three business segments that offer distinct supplemental education services from which we earn revenues. Through our

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Learning Center segment, we deliver diagnostic, prescriptive tutoring programs, principally through a network of 849 territories supporting 1,057 “Sylvan” branded franchised and company-owned learning centers in North America. We also provide tutoring, as well as other supplemental education services and special needs services, to public and private schools through government-funded contracts in our Institutional Services segment under Catapult Learning and other brand names. Our Online Learning Services segment provides tutoring programs modeled after those offered in our Sylvan Learning Centers in a live online environment.

We were formed as a Delaware corporation in March 2003 by affiliates of Apollo Advisors, L.P., to acquire the pre-K-12 education business units of Laureate and Sylvan Ventures, LLC (“Ventures”), one of its subsidiaries. Our acquisition of the pre-K-12 business of Laureate and Ventures was completed on June 30, 2003. The aggregate purchase price was approximately $283 million, consisting of cash, a subordinated note issued to Laureate (which has since been repaid with the proceeds of our new secured credit facility), the surrender of Laureate and Ventures securities held by affiliates of Apollo and a deferred portion of the purchase price of $2.3 million.

On September 20, 2004, the Company sold its ownership interest in Connections Academy, Inc., which operates virtual public and charter schools for K-8 students to an entity controlled by certain of the Company’s investors including its majority shareholder. See the notes to the consolidated financial statements of Educate, Inc. for further information regarding this transaction. As result of the sale, the operations of Connections Academy are classified as discontinued operations.

Simultaneously with the closing of our acquisition by Apollo, our operating company entered into a $130 million secured credit facility with a syndicate of lenders. The secured credit facility consisted of a $110 million term loan facility and a $20 million revolving credit facility.

In April 2004, our operating company entered into a new secured credit facility with a syndicate of lenders. The new secured credit facility consisted of a $170 million term loan facility and a $30 million revolving credit facility. Our operating company borrowed the full $170 million under the term loan facility primarily to repay all amounts outstanding under the subordinated note issued to Laureate in our formation and to refinance borrowings under the old secured credit facility. As of December 31, 2004, we had incurred no borrowings under the revolving credit facility.

Our consolidated financial statements reflect our financial position as of December 31, 2003 and December 31, 2004, and our results of operations and cash flows for the period June 30, 2003 (the date of our inception) to December 31, 2003 and for the year ended December 31, 2004. This Annual Report on Form 10-K also includes the financial statements of our predecessor as of December 31, 2002, and the combined results of its operations and cash flows for the year ended December 31, 2002 and for the six-month period ended June 30, 2003. Educate, Inc. had no operating activity prior to our formation on June 30, 2003. The financial data presented below for periods prior to July 1, 2003 is combined financial data of the pre-K-12 business of Laureate. As used hereafter, “pro forma” or “pro forma consolidated” means that the information presented gives effect to our acquisition of the pre-K-12 business from Laureate on June 30, 2003 as if that transaction had occurred as of January 1, 2003.

For purposes of this management’s discussion and analysis, we compare the combined results of operations of our predecessor for the years ended December 31, 2002 to the unaudited pro forma consolidated results of operations for the year ended December 31, 2003. We also compare our results of operations for the year ended December 31, 2004 to the unaudited pro forma consolidated results of operations for the year ended December 31, 2003. Our pro forma consolidated results of operations for the year ended December 31, 2003 are not comparable in certain respects to the results of operations of our predecessor for the year ended December 31, 2002 as a result of our application of purchase accounting to the assets and liabilities that we acquired. Our

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operations and our predecessor’s operations were substantially the same during these periods, except for the effects on depreciation, amortization and interest expense resulting from our acquisition of the pre-K-12 business of Laureate and our financing of our formation. Our depreciation and amortization expense will differ from the amounts reported by our predecessor because we recorded our property and equipment and intangible assets at fair value upon the acquisition of our business from our predecessor. In addition, we financed the acquisition of our business by borrowing $167.3 million, whereas our predecessor had insignificant amounts of debt. You should read our “Unaudited Pro Forma Consolidated Statement of Income – Year Ended December 31, 2003” included elsewhere in this Annual Report on Form 10-K for additional information on the effects of our acquisition of the business from our predecessor on our operating results.

Some of the information contained in this section and elsewhere in this Annual Report on Form 10-K includes forward-looking statements. Our historical and expected financial performance is influenced by several important trends.

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In order to properly motivate our employees, we have continued the practice of granting options to our key employees. At the time of our formation, we granted options to purchase 3.4 million shares of our common stock to members of our management team and other key employees. During 2004, we granted 604,000 shares of restricted common stock and options to acquire in the aggregate an additional 374,000 shares of common stock at prices less than the estimated fair value of our common stock. Therefore, during 2004 we incurred $8.5 million in non-cash stock compensation expense related to options and restricted stock shares that vested immediately upon issuance. We granted these shares of restricted common stock and options in recognition of the service of members of our management team leading up to the offering. Additionally, in the normal course of business we issued options to employees that will vest over a period of years. The options that vest over time are currently being expensed over the related vesting period which resulted in $.5 million in non-cash stock compensation in 2004. See Notes 9 and 13 to our consolidated financial statements, included elsewhere in this Annual Report on Form 10-K. We intend to make future grants of stock and stock options to our key employees.

Components of Revenues and Expenses

Revenues.    We operate through three business segments that offer distinct supplemental education services from which we earn revenues. Our Learning Center segment earns revenues principally by tutoring students in

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our company-owned learning centers and from franchise services fees. Our franchise services revenue consists principally of monthly franchise royalty fees, and also includes licensing fees for the sales of franchise territories, and sales of learning programs and related materials to franchised learning territories. Our Institutional Services segment earns revenue principally from school-year contracts to provide supplemental remedial services to public and non-public schools. Our Online Learning segment earns revenue from the delivery of supplemental education services to students through the Internet. Our revenue recognition policies are discussed more fully in the section below entitled “Critical Accounting Policies and Estimates” and in Note 1 to our consolidated financial statements included elsewhere in this 10-K. In order to provide a more meaningful basis for comparison of same territory growth for our customers in company-owned and franchised territories, we also analyze territory cash receipt growth of our company-owned Sylvan Learning Centers, which is calculated based upon the receipt of payment rather than delivery of services. Accordingly, it is more comparable to growth in franchised same territory royalties, which are based on franchisee cash receipts. We focus primarily on same territory growth as this is the metric that best measures our success in reaching our customers in a specific geographical territory, particularly in light of our emphasis on providing convenient services to our customers which often requires increasing the locations of service delivery and expanding beyond the traditional learning center concept to provide specific instruction in temporary and shared use locations.

Instructional and Franchise Operations Costs.    Our instructional and franchise operations costs include company-owned territory operating costs, principally comprised of labor costs for instructors and center management personnel, facility rent expense and instructional materials and supplies. We also include in this caption the costs of managing our extensive network of franchised territories, which consists principally of labor costs. Instructional costs associated with our Institutional Services and Online Learning Services segments also consist primarily of labor costs to provide our services.

Marketing and Advertising.    We incur significant marketing and advertising costs to market our services to our customers in each segment. These costs are expensed when incurred.

Depreciation and Amortization.    Depreciation and amortization are the expenses we record each period from depreciating our property and equipment over estimated useful lives that range from two to ten years. We also amortize certain intangible assets that we acquired over periods not exceeding five years. Goodwill we recorded upon the acquisition of businesses is not amortized in accordance with accounting principles generally accepted in the United States.

General and Administrative Expenses.    Our general and administrative expenses are general management and related administrative costs that we incur to manage our segments. These costs consist of labor costs associated with our executive, accounting, human resource, legal and information technology staffs. Also included in general and administrative expenses are professional fees, insurance and rent associated with our centralized management functions. We do not allocate our general and administrative expenses to our segments when determining segment profit.

Non-Cash Stock Compensation Expense.    Non-cash stock compensation expense consists of the expense we record in each period for stock-based compensation granted to employees and directors. We calculate the aggregate non-cash stock compensation expense as the difference between the estimated fair value of our common stock at the date of grant and the amount the employees and directors are required to pay for the common stock. We recognize the aggregate amount of expense ratably over the vesting period, or the period the employee or director earns the common stock.

Interest Expense.    Interest expense consists principally of interest expense related to the debt that we incurred after we acquired our predecessor. Our predecessor did not incur significant interest expense as it financed its activities from cash flows from operations and capital contributions from Laureate.

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Other Financing Costs.    Other financing costs consist of previously deferred financing costs associated with obtaining debt financing that have been charged to expense upon the refinancing of the related debt or the determination that the debt financing will not be consummated.

Income Tax Expense.    We incur income tax expense related to our consolidated domestic operations and our operations in Europe that are taxed principally in Germany. Our predecessor operated the business comprising the Online Learning Services segment through a subsidiary that filed separate income tax returns. This subsidiary of our predecessor incurred significant operating losses that did not result in recorded income tax benefits for our predecessor because their realization was not reasonably assured. Consequently, the historical results of operations for our predecessor reflects unusually high effective income tax rates. See the notes to the combined financial statements of our predecessor for additional information regarding the computation of our predecessor’s income tax expense.

Loss From Discontinued Operations.    In September 2004, the Company sold its ownership interest in Connections Academy, Inc. to an ownership group including certain of our existing stockholders. Following this sale, we have no ongoing involvement with Connections Academy, other than a customary short-term transition services agreement. Accordingly, we have classified the operating results of Connections Academy as a separate component of our consolidated operating results in our financial statements and the financial statements of our predecessor for all periods presented. See Note 2 to our consolidated financial statements for additional information about Connections Academy and our accounting policies in connection with the sale of this subsidiary.

Seasonality and Other Quarterly Fluctuations

Like other companies that provide tutoring and other supplemental education services, we are subject to seasonality in our revenue streams that can affect our results of operations. This seasonality arises from a number of factors, primarily driven by the timing of school semester cycles. Our quarterly results also have been affected by our license agreements with franchisees that require the payment of royalties to us based on a percentage of their cash receipts, a significant portion of which consist of prepayments by customers for services to be provided by our franchises more than a month in the future.

First Quarter.    In our Learning Center segment, we experience increased enrollments as a result of the initiation of advertising and increased parental focus on their children’s performance associated with the receipt

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of academic results from the first part of the school year. Our royalties increase as our franchisees begin to receive advance payment for services to be provided in the summer time period. In our Institutional Services segment, we deliver services under NCLB and other programs during this quarter.

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

Third Quarter.    The third quarter marks the peak delivery of services in our Learning Center segment. We recognize revenue as we deliver these services in our company-owned territories. However, with respect to our franchised territories, our royalties decline as the cash receipts our franchisees receive from their customers decline from peak second quarter levels. Due to summer vacation, we do not provide many services in our Institutional Services segment during this period, which results in the lowest segment revenue for the year. However, we gain significant visibility for the upcoming year because the majority of our institutional contracts are renewed during the third quarter.

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

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

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

Unaudited Pro Forma Consolidated Statement of Income—Year Ended December 31, 2003

On June 30, 2003, we acquired substantially all of the pre-K-12 business of Laureate, our predecessor. The accompanying unaudited pro forma consolidated statement of income for the year ended December 31, 2003 is derived from our consolidated statement of income for the period from June 30, 2003 (date of inception) through December 31, 2003 and the unaudited combined statement of income of predecessor for the six months ended June 30, 2003, adjusted to give effect to the acquisition as if it occurred as of January 1, 2003. The pro forma adjustments are described below and have been determined in accordance with the regulations of the Securities and Exchange Commission for the presentation of pro forma financial information following a business combination. These adjustments are based upon available information and certain assumptions that management believes are reasonable. The unaudited pro forma consolidated statement of income does not purport to represent what the results of operations would actually have been had the acquisition in fact occurred on such date or to project the results of operations for any future date or period. The unaudited pro forma consolidated statement of income should be read in conjunction with the Company’s historical consolidated financial statements and the historical financial statements of the Company’s predecessor included in Item 8 of this Annual Report on Form 10-K.

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Unaudited Pro Forma Consolidated Statements of Income

Year Ended December 31, 2003

(Dollar amounts in thousands, except per share data)

Summary of Pro Forma Adjustments

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Results of Operations

Comparison of results for the year ended December 31, 2004 to the pro forma results for the year ended December 31, 2003.