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

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 ý No o.

The registrant had ~~39,860,405~~40,328,468 shares of Common Stock outstanding as of ~~May 2,~~August 5, 2002.

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar and share amounts in thousands, except per share data)

				March 31, 2002			December 31, 2001					June 30, 2002			December 31, 2001
				(Unaudited)								(Unaudited)
Assets	Assets									Assets
Current assets:	Current assets:									Current assets:
	Cash and cash equivalents			$	114,316		$	102,194		Cash and cash equivalents		$	140,799		$	102,194
	Available-for-sale securities				47,884			60,091		Available-for-sale securities			35,370			60,091
	Receivables:
Receivables:										Receivables:
		Accounts receivable			87,640			70,925		Accounts receivable			76,856			70,925
		Costs and estimated earnings in excess of billings on uncompleted contracts			274			1,586		Costs and estimated earnings in excess of billings on uncompleted contracts			—			1,586
		Notes receivable from tuition financing			6,172			7,545		Notes receivable from tuition financing			5,071			7,545
		Other notes receivable			24,891			18,185		Other notes receivable			29,555			18,185
		Other receivables			4,704			3,725		Other receivables			2,971			3,725

					123,681			101,966					114,453			101,966
			Allowance for doubtful accounts		(15,666	)		(11,415	)		Allowance for doubtful accounts		(16,544	)		(11,415	)

					108,015			90,551					97,909			90,551
	Inventory				7,349			7,344		Inventory			7,340			7,344
	Deferred income taxes				3,889			3,810		Deferred income taxes			3,819			3,810
	Prepaid expenses and other current assets				27,974			23,679		Prepaid expenses and other current assets			27,424			23,679

Total current assets	Total current assets				309,427			287,669		Total current assets			312,661			287,669
Notes receivable from tuition financing, less current portion	Notes receivable from tuition financing, less current portion				7,079			8,636		Notes receivable from tuition financing, less current portion			5,804			8,636
Other notes receivable, less current portion	Other notes receivable, less current portion				12,552			11,601		Other notes receivable, less current portion			12,434			11,601
Property and equipment:	Property and equipment:									Property and equipment:
	Land				14,328			14,552		Land			17,061			14,552
	Buildings				89,563			88,190		Buildings			101,180			88,190
	Construction-in-progress				15,210			8,897		Construction-in-progress			17,339			8,897
	Furniture, computer equipment and software				123,110			115,140		Furniture, computer equipment and software			120,953			115,140
	Leasehold improvements				37,052			34,876		Leasehold improvements			37,052			34,876

					279,263			261,655					293,585			261,655
	Accumulated depreciation				(66,542	)		(60,147	)	Accumulated depreciation			(70,406	)		(60,147	)

					212,721			201,508					223,179			201,508
Intangible assets:	Intangible assets:									Intangible assets:
	Goodwill				333,517			285,784		Goodwill			265,169			285,784
	Other intangible assets, net of accumulated amortization of $1,839 and $1,507, respectively				9,503			6,893		Other intangible assets, net of accumulated amortization of $2,540 and $1,507, at June 30, 2002 and December 31, 2001, respectively			5,888			6,893

					343,020			292,677					271,057			292,677
Investments in and advances to affiliates	Investments in and advances to affiliates				8,728			40,387		Investments in and advances to affiliates			8,929			40,387
Other investments	Other investments				27,323			27,326		Other investments			19,602			27,326
Deferred income taxes	Deferred income taxes				14,133			13,823		Deferred income taxes			19,027			13,823
Deferred costs, net of accumulated amortization of $3,694 and $3,322 at March 31, 2002 and December 31, 2001, respectively					8,429			7,943
Deferred costs, net of accumulated amortization of $4,204 and $3,322 at June 30, 2002 and December 31, 2001, respectively										Deferred costs, net of accumulated amortization of $4,204 and $3,322 at June 30, 2002 and December 31, 2001, respectively			6,254			7,943
Other assets	Other assets				21,012			17,621		Other assets			24,000			17,621

Total assets	Total assets			$	964,424		$	909,191		Total assets		$	902,947		$	909,191

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

(Dollar and share amounts in thousands, except per share data)

		March 31, 2002			December 31, 2001				June 30, 2002			December 31, 2001
		(Unaudited)							(Unaudited)
Liabilities and stockholders' equity	Liabilities and stockholders' equity							Liabilities and stockholders' equity
Current liabilities:	Current liabilities:							Current liabilities:
	Accounts payable	$	17,272		$	15,696		Accounts payable	$	16,169		$	15,696
	Accrued expenses		54,541			49,386		Accrued expenses		69,594			49,386
	Income taxes payable		27,471			29,754		Income taxes payable		19,408			29,754
	Current portion of long-term debt		15,448			6,449		Current portion of long-term debt		16,513			6,449
	Due to shareholders of acquired companies		5,207			3,657		Due to shareholders of acquired companies		3,729			3,657
	Deferred revenue		81,432			54,578		Deferred revenue		69,445			54,578
	Other current liabilities		620			8,154		Other current liabilities		2,144			8,154

Total current liabilities	Total current liabilities		201,991			167,674		Total current liabilities		197,002			167,674
Long-term debt, less current portion	Long-term debt, less current portion		124,056			124,474		Long-term debt, less current portion		124,148			124,474
Other long-term liabilities	Other long-term liabilities		15,298			14,207		Other long-term liabilities		15,070			14,207

Total liabilities	Total liabilities		341,345			306,355		Total liabilities		336,220			306,355
Minority interest	Minority interest		62,808			56,981		Minority interest		68,206			56,981
Stockholders' equity:	Stockholders' equity:							Stockholders' equity:
	Preferred stock, par value $0.01 per share — authorized 10,000 shares, no shares issued and outstanding as of March 31, 2002 and December 31, 2001		—			—		Preferred stock, par value $0.01 per share—authorized 10,000 shares, no shares issued and outstanding as of June 30, 2002 and December 31, 2001		—			—
	Common stock, par value $0.01 per share — authorized 90,000 shares, issued and outstanding shares of 39,803 as of March 31, 2002 and 38,742 as of December 31, 2001		398			387		Common stock, par value $0.01 per share—authorized 90,000 shares, issued and outstanding shares of 40,321 as of June 30, 2002 and 38,742 as of December 31, 2001		403			387
	Additional paid-in capital		248,571			229,386		Additional paid-in capital		257,387			229,386
	Retained earnings		342,370			342,786		Retained earnings		261,144			342,786
	Accumulated other comprehensive loss		(31,068	)		(26,704	)	Accumulated other comprehensive loss		(20,413	)		(26,704	)

Total stockholders' equity	Total stockholders' equity		560,271			545,855		Total stockholders' equity		498,521			545,855

Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	964,424		$	909,191		Total liabilities and stockholders' equity	$	902,947		$	909,191

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollar and share amounts in thousands, except per share data)

		Three months ended March 31,							Three months ended June 30,
		2002			2001				2002			2001
		(Unaudited)							(Unaudited)
Revenues	Revenues							Revenues
	Core operating segments	$	134,428		$	116,219		Core operating segments	$	153,921		$	126,246
	Sylvan Ventures		3,941			30		Sylvan Ventures		5,501			33

Total revenues	Total revenues		138,369			116,249		Total revenues		159,422			126,279

Costs and expenses	Costs and expenses							Costs and expenses
Direct costs:	Direct costs:							Direct costs:
	Core operating segments		119,191			104,012		Core operating segments		126,067			102,342
	Sylvan Ventures		7,515			3,516		Sylvan Ventures		10,876			3,644
General and administrative expenses:	General and administrative expenses:							General and administrative expenses:
	Core operating segments		5,109			5,986		Core operating segments		5,712			5,901
	Sylvan Ventures		2,646			2,091		Sylvan Ventures		2,173			3,231
Loss on impairment of assets held for sale								Loss on impairment of assets held for sale		17,244			—

Total costs and expenses	Total costs and expenses		134,461			115,605		Total costs and expenses		162,072			115,118

Operating income			3,908			644
Operating income (loss)								Operating income (loss)		(2,650	)		11,161
Other income (expense)	Other income (expense)							Other income (expense)
Investment and other income	Investment and other income		1,128			3,327		Investment and other income		1,172			1,817
Interest expense	Interest expense		(2,003	)		(2,064	)	Interest expense		(2,376	)		(2,405	)
Sylvan Ventures investment losses			—			(400	)
Sylvan Ventures investment income (losses)								Sylvan Ventures investment income (losses)		273			(238	)
Loss on investment								Loss on investment		—			(14,231	)
Equity in net loss of affiliates:	Equity in net loss of affiliates:							Equity in net loss of affiliates:
	Sylvan Ventures		(1,810	)		(19,786	)	Sylvan Ventures		(1,856	)		(15,588	)
	Other		(97	)		(126	)	Other		61			(137	)

			(1,907	)		(19,912	)			(1,795	)		(15,725	)
Minority interest in consolidated subsidiaries:	Minority interest in consolidated subsidiaries:							Minority interest in consolidated subsidiaries:
	Sylvan Ventures		396			1,291		Sylvan Ventures		832			1,805
	Other		(1,343	)		(1,420	)	Other		(2,123	)		(2,600	)

			(947	)		(129	)			(1,291	)		(795	)

Income (loss) before income taxes			179			(18,534	)
Income tax benefit (expense)			(595	)		6,950
Loss before income taxes								Loss before income taxes		(6,667	)		(20,416	)
Income tax benefit								Income tax benefit		1,584			6,982

Net loss	Net loss	$	(416	)	$	(11,584	)	Net loss	$	(5,083	)	$	(13,434	)

Loss per common share, basic and diluted	Loss per common share, basic and diluted	$	(0.01	)	$	(0.31	)	Loss per common share, basic and diluted	$	(0.13	)	$	(0.35	)

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollar and share amounts in thousands, except per share data)

SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

				Three months ended March 31,									Six months ended June 30,
				2002			2001						2002			2001
				(Unaudited)									(Unaudited)
Operating activities	Operating activities									Operating activities
Net loss	Net loss			$	(416	)	$	(11,584	)	Net loss			$	(81,642	)	$	(25,018	)
										Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
											Cumulative pre-tax effect of change in accounting principle			83,843			—
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:										Depreciation			13,625			12,081
		Depreciation			6,380			5,603			Amortization			911			6,395
		Amortization			426			3,703			Loss on impairment of assets held for sale			17,244			—
		Deferred income taxes			(344	)		(41	)		Deferred income taxes			1,946			(190	)
		Loss on investments			—			400			Loss (gain) on investments			(273	)		14,869
		Equity in net loss of affiliates			1,907			19,912			Equity in net loss of affiliates			3,703			35,637
		Minority interest in income of consolidated subsidiaries			947			129			Minority interest in income of consolidated subsidiaries			2,238			924
		Other non-cash items			(246	)		657			Other non-cash items			(458	)		835
		Changes in operating assets and liabilities:									Changes in operating assets and liabilities:
			Receivables		(14,829	)		422				Receivables		(12,337	)		13,526
			Tuition loans, net		2,555			(2,533	)			Tuition loans, net		4,107			(3,784	)
			Inventory, prepaid and other current assets		(5,625	)		(4,043	)			Inventory, prepaid expenses and other current assets		(5,365	)		(2,165	)
			Payables and accrued expenses		6,455			97				Payables and accrued expenses		17,429			167
			Income taxes payable		(1,295	)		(102,738	)			Income taxes payable		(13,669	)		(112,440	)
			Deferred revenue and other current liabilities		17,514			13,780				Deferred revenue and other current liabilities		8,323			(8,878	)

Net cash provided by (used in) operating activities	Net cash provided by (used in) operating activities				13,429			(76,236	)	Net cash provided by (used in) operating activities				39,625			(68,041	)

Investing activities	Investing activities									Investing activities
Purchase of available-for-sale securities	Purchase of available-for-sale securities				(1,912	)		(23,494	)	Purchase of available-for-sale securities				(10,537	)		(108,045	)
Proceeds from sale or maturity of available-for-sale securities	Proceeds from sale or maturity of available-for-sale securities				13,950			103,098		Proceeds from sale or maturity of available-for-sale securities				35,419			219,759
Investment in and advances to affiliates and other investments	Investment in and advances to affiliates and other investments				(831	)		(32,203	)	Investment in and advances to affiliates and other investments				5,143			(36,576	)
Purchase of property and equipment	Purchase of property and equipment				(13,487	)		(13,301	)	Purchase of property and equipment				(25,932	)		(28,292	)
Cash paid for acquired businesses, net of cash received	Cash paid for acquired businesses, net of cash received				(10,207	)		(2,630	)	Cash paid for acquired businesses, net of cash received				(21,840	)		(3,005	)
Payment of contingent consideration for prior period acquisitions	Payment of contingent consideration for prior period acquisitions				—			(13,145	)	Payment of contingent consideration for prior period acquisitions				—			(25,145	)
Expenditures for deferred contract costs	Expenditures for deferred contract costs				(890	)		(4,395	)	Expenditures for deferred contract costs				(1,039	)		(2,085	)
Increase in other assets	Increase in other assets				(4,336	)		(520	)	Increase in other assets				(2,824	)		(730	)

Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities				(17,713	)		13,410		Net cash provided by (used in) investing activities				(21,610	)		15,881

Financing activities	Financing activities									Financing activities
Proceeds from exercise of options and warrants					8,628			3,806
Proceeds from exercise of options										Proceeds from exercise of options				14,501			6,958
Proceeds from issuance of debt	Proceeds from issuance of debt				12,991			747		Proceeds from issuance of debt				12,979			9,600
Payments on debt	Payments on debt				(1,280	)		(7,452	)	Payments on debt				(3,527	)		(9,412	)
Cash received from minority members of Sylvan Ventures	Cash received from minority members of Sylvan Ventures				7,588			16,114		Cash received from minority members of Sylvan Ventures				10,326			21,899
Cash distributed to minority members of Sylvan Ventures	Cash distributed to minority members of Sylvan Ventures				(12,000	)		—		Cash distributed to minority members of Sylvan Ventures				(12,000	)		—
Decrease in other long-term liabilities					713			572
Increase (decrease) in other long-term liabilities and other financing activities										Increase (decrease) in other long-term liabilities and other financing activities				(1,269	)		699

Net cash provided by financing activities	Net cash provided by financing activities				16,640			13,787		Net cash provided by financing activities				21,010			29,744

Effect of exchange rate changes on cash	Effect of exchange rate changes on cash				(234	)		(1,145	)	Effect of exchange rate changes on cash				(420	)		(1,823	)

Net increase (decrease) in cash and cash equivalents	Net increase (decrease) in cash and cash equivalents				12,122			(50,184	)	Net increase (decrease) in cash and cash equivalents				38,605			(24,239	)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period				102,194			116,490		Cash and cash equivalents at beginning of period				102,194			116,490

Cash and cash equivalents at end of period	Cash and cash equivalents at end of period			$	114,316		$	66,306		Cash and cash equivalents at end of period			$	140,799		$	92,251

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

~~March 31,~~June 30, 2002

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month ~~period~~and six month periods ended ~~March 31,~~June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The traditional semester programs in the education industry, with a summer break, result in large seasonality in the operating results of Sylvan Learning Systems, Inc. (the "Company"). The consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001.

Core operating segments include the operating results of the following business segments: K-12 Education Services, Online Higher Education, International Universities and English Language ~~Instruction.~~Instruction-Spain. Sylvan Ventures revenues and direct costs include the operating results of its consolidated investments (refer to Note 56 for further information). Sylvan Ventures general and administrative expenses include the costs incurred to oversee its investments, ~~and~~ to build its investment ~~portfolio.~~portfolio and costs included in the start-up phase of consolidated businesses prior to the generation of operating revenues.

Certain amounts previously reported for 2001 have been reclassified to conform with the 2002 presentation.

In June 2001, the Financial Accounting Standards Board issued Statement No. 142,Goodwill and Other Intangible Assets, which establishes financial accounting and reporting standards for acquired goodwill and other intangible assets. Under Statement No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are subject to annual impairment tests in accordance with the new standard. Other intangible assets that have finite lives will continue to be amortized over their useful lives. The Company adopted Statement No. 142 effective January 1, 2002. Refer to Note 45 for further information.

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

In June 2002, the Company adopted a plan to sell the portion of its English Language Instruction segment that is located in Spain ("WSI Spain"). As a result of the pending sale and an estimate of the likely sale proceeds, the Company recognized an impairment charge of $17,244 related to WSI Spain. The impairment charge is included in loss on impairment of assets held for sale in the consolidated statements of operations. Additionally, the Company realigned its English Language Instruction segment to include only the operations of WSI Spain. The remaining English Language Instruction businesses are now included in the International Universities segment to reflect the combination of business management and the interrelationship of the Wall Street Institute operations and the university programs. See Note 13.

Effective January 1, 2002, the Company acquired substantially all of the net operating assets of three Sylvan Learning Centers franchise businesses, comprising 30 centers, for cash of $11,000 and 144

shares of Sylvan common stock with a fair market value of $3,000. The initial purchase price totaled approximately $14,096, including acquisition costs of $96. The purchase price was allocated to acquired assets totaling $15,046 and assumed liabilities of $950. The preliminary allocation of the purchase price included in the current period is subject to revision based on the final determination of fair values. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs. In connection with the acquisition of the franchises, variable amounts of contingent consideration, up to a maximum of an additional $8,000, are also payable to the sellers if specified levels of operating results are achieved in 2002, 2003, 2004 and 2005. Upon the resolution of these contingent payments, the Company will record as goodwill any additional consideration owed to the sellers. The results of operations of the acquired franchises are included in the accompanying financial statements commencing on January 1, 2002.

On February 1, 2002, Sylvan Ventures exercised its option to acquire an additional 10% ownership of common stock in Walden E-Learning, Inc. ("Walden") for $8,000, increasing its ownership percentage in Walden to 51%. Prior to the exercise of its option, Sylvan Ventures had acquired a 41% stake in Walden for $32,800 in February 2001. The transactions have been accounted for as a step acquisition with a total purchase price of $39,892, after subtracting previously recorded equity in net losses. The purchase price was allocated to acquired assets totaling $44,007 and assumed liabilities of $4,115. The preliminary allocation of the purchase price included in the current period is subject to revision based on the final determination of fair values. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs. The results of operations of Walden are ~~included~~consolidated in the accompanying financial statements commencing on February 1, 2002.

On March 1, 2002, the Company acquired for cash all of the outstanding common stock of Hedleton ~~B.V.~~Holding, N.V., which owns all of the capital stock of ~~Escuel~~Escuela Superior De Alta Gestion De Hotel, S.A. ("Marbella"), a private for-profit university located in Marbella, Spain. Marbella was previously a franchise of Swiss Hotel Association Hotel Management School Les Roches ("Les Roches"), which was acquired by the Company in 2000. The results of operations of Marbella are included with Les Roches in the International Universities segment. The purchase price for the outstanding common stock totaled approximately $6,458, including acquisition costs of $141. The purchase price was allocated to acquired assets totaling $9,043 and assumed liabilities of $2,585. The

preliminary allocation of the purchase price included in the current period is subject to revision based on the final determination of fair values. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs. The results of operations of Marbella are included in the accompanying financial statements commencing on March 1, 2002.

Effective May 1, 2002, the Company acquired an additional 20% ownership interest in Desarrollo del Conocimiento S.A. ("Decon"), a consolidated holding company that controls and operates the Universidad de Las Americas ("UDLA"), for cash of approximately $6,500, increasing its total ownership in Decon to 80%. The purchase price of the additional interest was accounted for as a step acquisition and was allocated to acquired assets of $6,500. The preliminary allocation of this additional purchase price included in the current period is subject to revision based on the final determination of fair values.

Statement No. 142 requires that goodwill be tested for impairment at the reporting unit level at the time of its adoption and at least annually thereafter, utilizing a two-step methodology. The initial step ~~requires~~required the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. IfWhen the fair value ~~exceeds~~of the reporting unit exceeded the carrying value, no impairment loss iswas recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit might be impaired. The amount, if any, of the impairment would then be measured in the second step of the impairment test. The second step ~~requires~~required the Company to determine the implied fair value of goodwill. IfWhen the carrying value of the reporting unit goodwill ~~exceeds~~exceeded the implied fair value of that goodwill, an impairment loss ~~will be~~was recognized in an amount equal to that excess, not ~~to exceed~~exceeding the carrying value of the goodwill. The ~~Company expects to complete~~fair values of reporting units and the ~~transition~~related implied fair values of their respective goodwill were determined using discounted cash flows.

As a result of testing goodwill for impairment ~~test required under~~in accordance with Statement No. 142, ~~by June 30,~~as of January 1, 2002, the Company recorded a non-cash charge of $76,143, net of income tax benefit of $7,700, which is included as a cumulative effect of a change in accounting principle in the consolidated statements of operations. The impairment charge relates solely to the Wall Street Institute business and ~~has not yet determined~~consists of the ~~amount~~write-down of ~~any potential impairment.~~goodwill related to the distressed operations in Spain ($22,551—included in the English Language Instruction—Spain segment) and amounts originally paid for operations in other countries ($53,592—included in the International Universities segment).

In addition to requiring annual impairment tests, Statement No. 142 established that goodwill will no longer be amortized. Prior to January 1, 2002, the Company amortized goodwill over periods ranging from 15 to 35 years. The following results of operations of the Company give effect to the ~~adoption~~non-amortization provisions of Statement No. 142 assuming adoption as of January 1, 2001:

The following table displays the intangible assets that continue to be subject to amortization and ~~intangible assets~~goodwill not subject to amortization as of ~~March 31,~~June 30, 2002:

	Amortizing Intangible Assets			Goodwill			Amortizing Intangible Assets			Goodwill
Gross carrying amount	$	11,342		$	364,877		$	8,428		$	265,169
Accumulated amortization		(1,839	)		(31,360	)		(2,540	)		—

Net carrying amount	$	9,503		$	333,517		$	5,888		$	265,169

The estimated amortization expense for intangible assets for each of the five years subsequent to December 31, 2001 is as follows: 2002—$~~1,749;~~1,845; 2003—$~~1,707;~~1,802; 2004—$~~1,502;~~1,560; 2005—$~~651~~646; and 2006—$~~417.~~412.

eSylvan, Inc. ("eSylvan") was formed to distribute the Company's learning center tutoring product to students at home via computer. During 2001, eSylvan issued common stock representing a minority ownership interest to franchisees of Sylvan Learning Centers to more fully leverage the relationship between center-based and online tutoring. Sylvan Ventures made two preferred stock purchases during 2002 for $9,400, which increased the Sylvan Ventures ownership share to 92%. The minority interest ownership of the franchisees represents 8% of the voting ownership interest at ~~March 31,~~June 30, 2002.

Walden E-Learning, Inc. ("Walden") is an online university offering Ph.D. and other graduate-level degree programs in education, management and the social and behavioral sciences. InEffective February 1, 2002, Sylvan Ventures exercised its option to acquire an additional 10% of Walden, increasing its voting ownership to 51%. As ~~of February 1, 2002~~a result, Sylvan Ventures changed its method of accounting for its investment in Walden from the equity method to the consolidation method.

EdVerify, Inc. ("EdVerify") is a business to business digital service provider that specializes in verifying the higher education enrollment and degree attainment of job candidates and credit requestors. Effective June 1, 2002, Sylvan Ventures acquired an additional 35% ownership in EdVerify for $2,507, increasing its voting ownership to 68%. As a result, Sylvan Ventures changed it method of accounting for its investment in Ed Verify from the equity method to the consolidation method.

Connections Academy was formed by Sylvan Ventures to provide online charter schooling to the K-12 market. Connections Academy will begin providing virtual schooling to students in the fall of 2002. Sylvan Ventures owns 100% of Connections Academy and reports the start-up costs of this entity in the general and administrative expenses of Sylvan Ventures until revenues are earned.

The Company's investment in and advances to affiliates consist of investments in and loans to companies in the initial or early stages of development. These companies are frequently illiquid or experiencing cash flow deficits from operations. Further, investments are generally unsecured and subordinated to the claims of other creditors. Accordingly, the Company's investments in and advances to affiliates are subject to a high degree of investment and credit risk. The Company has made estimates of the recoverability of loans and advances to its affiliates, and due to the inherent uncertainty of the operations of these affiliates, it is possible that these estimates may change in the

Investments in and advances to affiliates consist principally of investments in common stock and preferred stock, as follows as of ~~March 31,~~June 30, 2002 and December 31, 2001, respectively:

	March 31, 2002		Ownership Interest		December 31, 2001		Ownership Interest	June 30, 2002		Ownership Interest		December 31, 2001		Ownership Interest
Walden E-Learning, Inc.	$	—	—		$	31,909	41%	$	—	—		$	31,909	41	%
Chancery Software Limited		6,483	42	%		6,774	42%		6,405	42	%		6,774	42	%
iLearning, Inc.		1,572	27	%		461	27%		1,876	40	%		461	27	%
EdVerify, Inc.		106	42	%		679	42%		—	—			679	42	%
Other		567	—			564	—		648	—			564	—

Total	$	8,728			$	40,387		$	8,929			$	40,387

At ~~March 31,~~June 30, 2002, the difference between the carrying amount of equity method investments and the amount of underlying equity in net assets of these investments was ~~$6,012.~~$6,211. Under the provisions of Statement No. 142, the goodwill related to equity method investments is no longer amortized beginning in January 2002. Prior to 2002, the goodwill was amortized primarily over a three-year period as a component of the Company's allocable share of income or loss. For the ~~quarter~~three month and six month periods ended ~~March 31,~~June 30, 2001, equity in net loss of affiliates ~~includes~~included amortization of ~~$2,805.~~$2,174 and $4,979, respectively.

Each period in the tables below includes summarized financial data of those affiliates accounted for using the equity method in which Sylvan Ventures had an interest at the end of the respective period and includes results of operations data of the ~~affiliate~~affiliates for the entire ~~quarter.~~period.

	Three months ended March 31,
	2002		2001
Net sales	$	5,359		$	10,623
Gross profit		3,018			6,753
Net loss		(4,868	)		(28,988	)

	Three months ended June 30,		Six months ended June 30,
	2002		2001		2002		2001
Net sales	$	5,774		$	16,022		$	11,133		$	26,645
Gross profit		4,724			11,725			7,742			18,478
Net loss		(3,259	)		(31,423	)		(8,127	)		(60,502	)

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 estimate fair value is determined to be permanent. Other investments consisted of the following:

During the three month period ending June 30, 2002, the Company sold its investment in Chauncey Group International, Ltd for cost plus accrued interest, yielding cash proceeds of $9,750. Additionally, Sylvan Ventures recorded a gain of $273 upon the exchange of its investment in HigherMarkets for 402 common shares of SciQuest.

During the three month period ending June 30, 2001, the Company recorded a loss on investment of $14,231. This charge consisted of the reserve for notes receivable and advances to Caliber Learning Network, Inc. ("Caliber") of $7,497 as well as the accrual of a $6,734 estimated liability relating to the Company's guarantee of certain non-cancelable Caliber lease obligations and other Caliber related liabilities incurred by the Company. Due to the uncertainties surrounding the bankruptcy proceedings and the ultimate settlement of Caliber's lease and other liabilities, it is reasonably possible that the Company's loss estimate may change prior to finalization.

Due to shareholders of acquired companies consists of the following amounts payable in cash:

In connection with certain acquisitions, variable amounts of contingent consideration are payable to the seller based upon specified terms. All existing contingent consideration agreements are predicated upon improved operating profitability of the acquired entities and utilize multiples consistent with those used to calculate the initial purchase price. The Company will record the contingent consideration when the contingencies are resolved and the additional consideration is payable.

Variable amounts of contingent consideration are payable to the seller of Les Roches if specified levels of earnings are achieved in 2002. Variable amounts of contingent consideration are payable to the seller of UDLA in 2006 and 2007 if specified levels of earnings are achieved in 2004, 2005 and 2006. Additional purchase consideration of $500 is due to the sellers of UVM in 2003 if 2002 earnings exceed certain specified amounts. Variable amounts of contingent consideration, up to a maximum of $8,000, are also payable to the sellers of ~~the~~certain Sylvan Learning Centers franchises repurchased by the Company if specified levels of operating results are achieved in 2002, 2003, 2004 and 2005. ~~All existing contingent~~In August 2002, the Company entered into negotiations to finalize the amounts due as additional consideration ~~agreements are predicated upon improved operating profitability~~for the acquisition of these Sylvan Learning Center franchises and to acquire other franchise rights from the ~~acquired entity~~sellers in the United Kingdom and ~~utilize multiples consistent with those used to calculate the initial purchase price.~~France. The Company expects an agreement to be reached whereby it will ~~record~~agree to payments totaling approximately $16,000 in connection with the ~~contingent consideration when the contingencies are resolved and the additional consideration is payable.~~acquisition of these Sylvan Learning Center operations.

The Company has entered into agreements with certain franchisees of Sylvan Learning Centers and Wall Street Institute that allow the franchisees to require the Company to repurchase the centers at a predetermined multiple of operating results upon the achievement of specified operating thresholds. ~~When the~~The Company ~~can assess the likelihood of this repurchase right being exercised and the amount of the related commitment to purchase the center, such obligation will be disclosed.~~does not believe that these commitments, if ultimately triggered by future events, would materially impact its liquidity.

The tax provisions for the ~~three~~six month periods ended ~~March 31,~~June 30, 2002 and 2001 were based on the estimated effective tax rates applicable for the full years, after giving effect to significant items related specifically to the interim periods, including the reported results of Sylvan Ventures' investments accounted for using the equity method. The Company's income tax provisions for all periods consist of federal, state, and foreign income taxes. The Company's effective tax rate was ~~332%~~15% for the ~~three~~six months ended ~~March 31, 2002.~~June 30, 2002, excluding the cumulative effect of the change in accounting principle. Due to the volatility of Sylvan Ventures' income and losses, the Company's consolidated effective tax rate may fluctuate from quarter to quarter. However, on a full year basis the Company estimates that the effective 2002 income tax rate for the Company, prior to the cumulative effect of the change in accounting principle and excluding Sylvan Ventures, ~~and~~will be 30%. The Company estimates that the 2002 effective income tax rate for Sylvan Ventures ~~for the year ending December 31, 2002~~ will be ~~34% and 27%, respectively.~~24%. Fluctuations in the magnitude and timing of the tax impact of Sylvan Ventures' financial results may cause the Company's consolidated effective income tax rate to vary substantially from the statutory rate.

The forecasted income tax rate for the Company excluding Sylvan Ventures has decreased from the income tax rate forecasted in the previous quarter due to the tax benefits associated with the impairment charge recorded in connection with the pending sale of WSI Spain. The forecasted income tax rate for Sylvan Ventures has decreased from the income tax rate forecasted in the previous quarter due to the decrease in forecasted losses and the associated tax benefits. The impact of these changes in the estimated effective income tax rates was not material.

At ~~March 31,~~June 30, 2002, undistributed earnings of non-U.S. subsidiaries totaled approximately ~~$108,900.~~$118,400. 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 income taxes, net of foreign tax credits, would be approximately ~~$34,700.~~$34,540.

		Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity				Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at December 31, 2001	Balance at December 31, 2001	$	387	$	229,386	$	342,786		$	(26,704	)	$	545,855		Balance at December 31, 2001	$	387	$	229,386	$	342,786		$	(26,704	)	$	545,855
Options exercised for purchase of 577 shares of common stock, including income tax benefit of $1,597			6		10,219								10,225
Options exercised for purchase of 1,095 shares of common stock, including income tax benefit of $4,253															Options exercised for purchase of 1,095 shares of common stock, including income tax benefit of $4,253		11		18,744								18,755
Issuance of 23 shares of common stock in connection with the employee stock purchase plan	Issuance of 23 shares of common stock in connection with the employee stock purchase plan				376								376		Issuance of 23 shares of common stock in connection with the employee stock purchase plan				376								376
Issuance of 318 shares of common stock in connection with the conversion of debentures	Issuance of 318 shares of common stock in connection with the conversion of debentures		3		4,997								5,000		Issuance of 318 shares of common stock in connection with the conversion of debentures		3		4,997								5,000
Issuance of 144 shares of common stock in connection with acquisitions	Issuance of 144 shares of common stock in connection with acquisitions		2		3,545								3,547		Issuance of 144 shares of common stock in connection with acquisitions		2		2,999								3,001
Options granted to non-employees															Options granted to non-employees				206								206
Other equity activity	Other equity activity				48								48		Other equity activity				679								679
Comprehensive loss:	Comprehensive loss:														Comprehensive loss:
	Net loss for the three months ended March 31, 2002						(416	)					(416	)	Net loss for the six months ended June 30, 2002						(81,642	)					(81,642	)
	Foreign currency translation adjustment									(4,208	)		(4,208	)	Foreign currency translation adjustment									6,267			6,267
	Unrealized loss on available- for-sale securities									(156	)		(156	)	Unrealized loss on available-for-sale securities									7			7
															Minimum pension liability adjustment									17			17

Total comprehensive loss	Total comprehensive loss												(4,780	)	Total comprehensive loss												(75,351	)

Balance at March 31, 2002		$	398	$	248,571	$	342,370		$	(31,068	)	$	560,271
Balance at June 30, 2002															Balance at June 30, 2002	$	403	$	257,387	$	261,144		$	(20,413	)	$	498,521

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

	Three months ended March 31,						Three months ended June 30,						Six months ended June 30,
	2002			2001			2002			2001			2002			2001
Net loss	$	(416	)	$	(11,584	)	$	(5,083	)	$	(13,434	)	$	(81,642	)	$	(25,018	)
Foreign currency translation adjustment		(4,208	)		(10,298	)		10,475			(4,423	)		6,267			(14,721	)
Unrealized gain (loss) on available-for-sale securities		(156	)		23			163			(227	)		7			(204	)
Minimum pension liability adjustment								17			—			17			—

Comprehensive loss	$	(4,780	)	$	(21,859	)
Comprehensive income (loss)							$	5,572		$	(18,084	)	$	(75,351	)	$	(39,943	)

The following table summarizes the computations of basic and diluted loss per common share:

		Three months ended March 31,							Three months ended June 30,						Six months ended June 30,
		2002			2001				2002			2001			2002			2001
Numerator used in basic and diluted loss per common share:	Numerator used in basic and diluted loss per common share:	$	(416	)	$	(11,584	)	Numerator used in basic and diluted loss per common share:
Loss before cumulative effect of change in accounting principle								Loss before cumulative effect of change in accounting principle	$	(5,083	)	$	(13,434	)	$	(5,499	)	$	(25,018	)
Cumulative effect of change in accounting principle								Cumulative effect of change in accounting principle		—			—			(76,143	)		—

Net loss								Net loss	$	(5,083	)	$	(13,434	)	$	(81,642	)	$	(25,018	)

Denominator:	Denominator:							Denominator:
	Weighted average common shares outstanding		39,421			37,441		Weighted average common shares outstanding		40,110			37,877			39,767			37,665
	Net effect of dilutive stock options based on treasury stock method using average market price		—			—		Net effect of dilutive stock options based on treasury stock method using average market price		—			—			—			—
	Effect of convertible debentures		—			—		Effect of convertible debentures		—			—			—			—

	Weighted average common shares outstanding and additional dilution from common stock equivalents		39,421			37,441		Weighted average common shares outstanding and additional dilution from common stock equivalents		40,110			37,877			39,767			37,665

Loss per common share, basic and diluted		$	(0.01	)	$	(0.31	)
Loss per common share, basic and diluted:								Loss per common share, basic and diluted:
Loss before cumulative effect of change in accounting principle								Loss before cumulative effect of change in accounting principle	$	(0.13	)	$	(0.35	)	$	(0.14	)	$	(0.66	)
Cumulative effect of change in accounting principle								Cumulative effect of change in accounting principle		—			—			(1.91	)		—

Net loss								Net loss	$	(0.13	)	$	(0.35	)	$	(2.05	)	$	(0.66	)

Stock options and the convertible debentures were not dilutive for the three month and six month periods ended ~~March 31,~~June 30, 2002 and 2001 as the Company reported a net loss.

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 National Association of Securities Dealers ("NASD"). The trial court ~~has~~ granted the Company's motion for summary judgment and ACT, Inc. ~~has~~ filed its appeal of the decision to the U.S. Court of Appeals for the Eighth Circuit. ~~Oral arguments were heard by~~On July 11, 2002, the U.S. Court of Appeals for the Eighth Circuit ~~in February~~affirmed the decision of the trial court on all counts. The decision of the Eighth Circuit became final on August 1, 2002. The only available appeal to ACT is to the U.S. Supreme Court. Management is unable to predict the ultimate outcome of ~~the~~any appeal, but believes that the ultimate resolution of the matter will not have a material effect on the Company's 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.

The ~~increase~~Company realigned its English Language Instruction segment to include only the operations of WSI Spain. The remaining English Language Instruction business is now included in the International

Universities segment. All segment information has been reclassified to conform to the new presentation.

Segment operating profit (loss) is calculated as net operating profit (loss) for operating segments. Segment profit for Sylvan Ventures is calculated as the sum of their revenues, operating costs, general and administrative expenses, net investment income (loss) and equity in net loss of affiliates. Similar to its relationship with other university partners, Canter and Associates (which is included in the Online Higher Education segment) and Walden (which is included in the Sylvan Ventures segment) have entered into a formal agreement in which Canter markets and distributes its teacher training courses through a graduate degree program at Walden University for a percentage of the gross tuition fees, determined at fair value rates, associated with this program. For the quarter and the six month period ended June 30, 2002, consolidated earned tuition fees from this program totaled $1,145 and $1,387, respectively. The following table reconciles the reported information on segment profit (loss) to income (loss) before income taxes reported in the consolidated statements of operations:

	Three months ended June 30,		Six months ended June 30,
	2002		2001		2002		2001
Total profit (loss) for reportable segments	$	1,479		$	1,236		$	8,687		$	(12,320	)
Corporate general and administrative expense		(5,712	)		(5,901	)		(10,821	)		(11,887	)
Other expense and minority interest, net		(2,434	)		(15,751	)		(4,354	)		(14,743	)

Loss before income taxes and cumulative effect of change in accounting principle	$	(6,667	)	$	(20,416	)	$	(6,488	)	$	(38,950	)

The decrease in goodwill at ~~March 31,~~June 30, 2002 is primarily due to the impairment of certain Wall Street Institute amounts, partially offset by the acquisition of Sylvan Learning Centers franchises in the K-12 Education Services segment, the acquisition of Marbella in the International Universities segment, and the acquisition of additional Walden ownership interest which resulted in its consolidation in the Sylvan Ventures segment.

Segment profit (loss) is calculated as net operating profit (loss) for operating segments. Segment profit for Sylvan Ventures is calculated as the sum of the revenues, operating costs, net investment income (loss) and equity in net loss of affiliates. There are no significant inter-company sales or transfers. The following table reconciles the reported information on segment profit (loss) to income (loss) before income taxes reported in the consolidated statements of operations:

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained herein include forward-looking statements. 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. These factors may include, without limitation: the Company's ability to continue to make acquisitions and to successfully integrate and operate acquired businesses; changes in student enrollment; the development and expansion of our franchise system and the effect of new technology applications in the educational services industry; failure to maintain or renew required regulatory approval, accreditation or state authorizations; the Company's ability to effectively manage business growth; possible increased competition from other educational service providers; the effect on the business and results of operations of fluctuations in the value of foreign currencies; and the many risks associated with the operation of an increasingly global business, including complicated legal structures, foreign currency, legal, tax and economic risks and the risk of changes in the business climate in the markets where the Company operates. 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.

Sylvan Learning Systems, Inc. (the "Company" or "Sylvan") is a leading international provider of educational services to families and schools. The Company provides lifelong educational services through five separate business segments. The K-12 Education Services segment includes: Sylvan Learning Centers, which designs and delivers individualized tutorial programs to school-aged children through franchised and Company-owned learning centers; Schülerhilfe, a major provider of tutoring services in Germany; and Sylvan Education Solutions, which principally provides educational programs

to students of public and non-public school districts through contracts funded by Title I and state-based programs. The Online Higher Education segment provides professional development and graduate degree programs to teachers through Canter and Associates and Sylvan Teacher Institute. The International Universities segment owns or maintains controlling interests in five private universities located in Spain, Switzerland, Mexico, Chile and ~~France. The English Language Instruction segment consists of~~France and also includes the non-Spain operations of Wall Street Institute ("WSI"), a European-based franchiser and operator of learning centers that teach the English language in the post-secondary market. The English Language Instruction-Spain segment consists of the operations of WSI located in Spain, which represent the business held for sale. The Sylvan Ventures segment invests in and develops companies that are creating emerging technology solutions for the education marketplace, and ~~includes~~consolidates the operations of eSylvan, Inc. ~~and~~, Walden E-Learning, Inc. ("Walden"), and EdVerify, Inc. which are majority-owned subsidiaries.

Revenues generated by Sylvan's five business segments are described as follows: K-12 Education Services primarily earns franchise royalties, franchise sales fees, Company-owned learning center revenues and contract-based revenues from providing supplemental remedial education services to public and non-public schools; Online Higher Education primarily earns revenues from providing

teacher training products and ~~online~~distance-learning instructional services; International Universities earns tuition and related fees paid by the students of Universidad Europea de Madrid ("UEM"), Swiss Hotel Association Hotel Management School Les Roches ("Les Roches"), Universidad del Valle de Mexico ("UVM"), Universidad de Las Americas ("UDLA") and École Supérieure du Commerce Extérieur ("ESCE");, as well as franchise royalties, Company-owned center revenues and franchise sales fees related to WSI operations outside of Spain; English Language ~~Instruction primarily~~Instruction-Spain earns franchise royalties, Company-owned center revenues and franchise sales ~~fees;~~fees related to the WSI business in Spain; and Sylvan Ventures primarily earns tuition and related fees ~~for~~from the students of Walden and eSylvan.

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

			Three months ended March 31,						Three months ended June 30,				Six months ended June 30,
			2002		2001				2002		2001		2002		2001
Revenues:	Revenues:						Revenues:
	K-12 Education Services		38	%	43	%	K-12 Education Services		38	%	41	%	38	%	42	%
	Online Higher Education		4	%	4	%	Online Higher Education		10	%	10	%	8	%	8	%
	International Universities		45	%	42	%	International Universities		46	%	45	%	49	%	46	%
	English Language Instruction		10	%	11	%	English Language Instruction—Spain		2	%	4	%	2	%	4	%
	Sylvan Ventures		3	%	—		Sylvan Ventures		4	%	—		3	%	—

		Total revenues	100	%	100	%		Total revenues	100	%	100	%	100	%	100	%
Direct costs:	Direct costs:						Direct costs:
	K-12 Education Services		31	%	35	%	K-12 Education Services		28	%	31	%	30	%	33	%
	Online Higher Education		5	%	6	%	Online Higher Education		7	%	7	%	6	%	6	%
	International Universities		40	%	38	%	International Universities		41	%	40	%	43	%	42	%
	English Language Instruction		10	%	10	%	English Language Instruction—Spain		3	%	3	%	3	%	4	%
	Sylvan Ventures		5	%	3	%	Sylvan Ventures		7	%	3	%	6	%	3	%

		Total direct costs	91	%	92	%		Total direct costs	86	%	84	%	88	%	88	%
General and administrative expenses:	General and administrative expenses:						General and administrative expenses:
	Core operating segments		4	%	5	%	Core operating segments		4	%	5	%	4	%	5	%
	Sylvan Ventures		2	%	2	%	Sylvan Ventures		1	%	2	%	2	%	2	%
Loss on impairment of assets held for sale							Loss on impairment of assets held for sale		11	%	—		6	%	—

Operating income			3	%	1	%
Non-operating expense (including equity in net loss of Ventures affiliates)			(3	)%	(16	)%
Operating income (loss)							Operating income (loss)		(2	%)	9	%	—		5	%
Non-operating expense (including equity in net loss of Ventures affiliates) net loss of Ventures affiliates)							Non-operating expense (including equity in net loss of Ventures affiliates) net loss of Ventures affiliates)		(2	%)	(25	%)	(2	%)	(21	%)

Income (loss) before income taxes			—		(15	)%
Income tax benefit (expense)			—		5	%
Loss before income taxes and cumulative effect of change in accounting principle							Loss before income taxes and cumulative effect of change in accounting principle		(4	%)	(16	%)	(2	%)	(16	%)
Income tax benefit							Income tax benefit		1	%	6	%	—		6	%

Loss before cumulative effect of change in accounting principle							Loss before cumulative effect of change in accounting principle		(3	%)	(10	%)	(2	%)	(10	%)
Cumulative effect of change in accounting principle							Cumulative effect of change in accounting principle		—		—		(25	%)	—

Net loss	Net loss		—		(10	)%	Net loss		(3	%)	(10	%)	(27	%)	(10	%)

Comparison of results for the three months ended ~~March 31,~~June 30, 2002 to results for the three months ended ~~March 31,~~June 30, 2001.

Revenues. Total revenues increased by ~~$22.1~~$33.1 million, or ~~19%~~26%, to ~~$138.4~~$159.4 million for the three months ended ~~March 31,~~June 30, 2002 (the "2002 fiscal quarter") from ~~$116.2~~$126.3 million for the three months ended ~~March 31,~~June 30, 2001 (the "2001 fiscal quarter"). This revenue increase was primarily driven by increases in tuition and enrollment at universities in the International Universities segment, ~~as well as~~ acquisitions of learning centers and same center revenue growth in the K-12 Education Services ~~and English Language Instruction segments.~~segment.

K-12 Education Services revenue increased by ~~$3.5~~$8.7 million, or 7%17%, to ~~$53.0~~$60.6 million for the 2002 fiscal quarter compared to the 2001 fiscal quarter. Franchise royalties increased by ~~$0.7~~$1.5 million, or ~~12%~~22%, in 2002 as a result of a net increase of 4415 new learning centers opened after ~~March 31,~~June 30, 2001 and ~~an 11%~~a 22% increase in same center revenue. Same center revenue growth was driven by the success of

national advertising programs and increased length of stay. Revenues from Company-owned learning centers increased ~~$4.2~~$7.0 million, or ~~33%~~47%, to ~~$17.0~~$22.1 million during the 2002 fiscal quarter. Same center revenues increased 6%17%, or ~~$0.8~~$2.5 million, with the remaining revenue increase of ~~$3.4~~$4.5 million generated from 30 Company-owned centers acquired from franchise owners and 32 new centers opened during the past year. International revenues, primarily Schülerhilfe, increased by ~~$0.2~~$0.7 million, or 3%16%, in the 2002 fiscal quarter compared to the 2001 fiscal quarter. The remaining revenue increase of $0.3 million for the 2002 fiscal quarter compared to the 2001 fiscal quarter relates to other franchise services and Ivy West. Contract-based revenues decreased by ~~$1.7~~$0.8 million, or 8%4%, to ~~$19.9~~$20.2 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter due to a lower number of public school ~~contracts and a decrease in other funding.~~contracts. Operating revenue for K-12 Education Services represents 38% of total revenues of the Company for the 2002 fiscal quarter.

Online Higher Education revenue increased by ~~$0.4~~$3.4 million, or 8%26%, to ~~$5.6~~$16.7 million for the 2002 fiscal quarter compared to the 2001 fiscal quarter. Canter ~~teacher-training~~teacher training revenue increased by ~~$0.7~~$3.7 million, or ~~16%~~29%, to ~~$5.3~~$16.4 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter. The Canter revenue increase is due to ~~increased~~greater product demand, particularly the distance learning masters programs, which saw enrollments ~~in Canter's online course offerings.~~for the summer 2002 semester increase by 23% to 10,800 students. Sylvan Teacher Institute revenue decreased by $0.3 million, or ~~57%~~55%, to ~~$0.2~~$0.3 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter. The decrease is due to a planned decrease in professional development workshops performed in the 2002 fiscal quarter compared to the 2001 fiscal quarter. Operating revenue for Online Higher Education represents 4%10% of the total revenues of the Company for the 2002 fiscal quarter.

International Universities revenue for the 2002 fiscal quarter increased by ~~$12.9~~$17.0 million, or ~~26%~~30%, to ~~$61.6~~$73.3 million compared to the 2001 fiscal quarter. ~~Approximately 86% of this~~This revenue increase ~~is due to~~was driven by increased tuition and enrollments at each of the universities, inparticularly at UDLA, which increased its enrollment by 50% compared to the ~~International Universities segment.~~2001 fiscal quarter. Additionally, revenue increased by ~~$1.4~~$1.5 million due to the acquisition of a controlling interest in ESCE, which occurred in the fourth quarter of 2001 and, ~~is,~~ therefore, did not ~~included in~~contribute to revenue for the 2001 fiscal quarter. Non-Spain WSI revenues increased $2.1 million, primarily due to the acquisition of centers in Portugal in the third quarter of 2001. Operating revenue for International Universities represents ~~45%~~46% of total revenues of the Company for the 2002 fiscal quarter.

English Language ~~Instruction~~Instruction—Spain revenue ~~increased~~decreased by ~~$1.4~~$1.5 million, or ~~11%~~30%, to ~~$14.2~~$3.3 million for the 2002 fiscal quarter compared to the 2001 fiscal quarter. This revenue ~~increase~~decrease was ~~almost entirely~~ the result of ~~increased~~decreased tuition revenues ~~generated~~in existing Company-owned centers, as well as decreased royalties and didactic material sales to franchises due to oversaturation by ~~acquisitions of centers~~English language instruction providers in ~~Italy, Portugal, Argentina, Brazil and Spain, along with improved sales volumes of didactic materials to franchised centers.~~Spain. Operating revenue for English Language ~~Instruction~~Instruction—Spain represents ~~10%~~2% of total revenues of the Company for the 2002 fiscal quarter.

Sylvan Ventures revenue increased to ~~$3.9~~$5.5 million for the 2002 fiscal quarter. The ~~revenue~~ increase is a result of revenues generated from Walden ~~revenues for the months of February and March 2002~~($4.8 million) and eSylvan ~~revenues throughout~~($0.7 million) for the 2002 fiscal quarter. Prior to February 2002, Walden was accounted for under the equity method. Operating revenues for Sylvan Ventures represents 3%4% of total revenues of the Company for the 2002 fiscal quarter.

Direct Costs. Total direct costs of revenues increased ~~$19.2~~$31.0 million, or ~~18%~~29%, to ~~$126.7~~$137.0 million for the 2002 fiscal quarter from ~~$107.5~~$106.0 million for the 2001 fiscal quarter. Excluding the impact of goodwill amortization in the 2001 fiscal quarter of $2.5 million, direct costs increased ~~$22.4~~$33.5 million, or ~~21%~~32%, for the 2002 fiscal quarter. Direct costs as a percentage of total revenues were ~~91%~~86% in the 2002 fiscal quarter compared to ~~92%~~84% in the 2001 fiscal quarter. Excluding the impact of goodwill amortization, direct costs as a percentage of revenues were 82% in the 2001 fiscal quarter.

K-12 Education Services expenses increased ~~$2.6~~$6.2 million to ~~$43.3~~$45.7 million, or ~~82%~~75% of K-12 Education Services revenue for the 2002 fiscal quarter, compared to ~~$40.7~~$39.5 million, or ~~82%~~76% of K-12 Education Services revenue for the 2001 fiscal quarter. Approximately ~~$2.8~~$5.0 million of the 2002 fiscal quarter

increase relates to expenses incurred in Company-owned learning centers due to the acquisition of 30 franchised learning centers and costs associated with higher revenues at existing Company-owned centers. International expenses, ~~increased $0.3 million,~~ primarily related to ~~international development~~Schülerhilfe, increased $0.6 million. Franchise support costs increased $1.9 million in the ~~United Kingdom and France.~~2002 fiscal quarter compared to the 2001 fiscal quarter. These expense increases were partially offset by a decrease in ~~franchise support costs~~contract-based expenses of ~~$0.2~~$0.8 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter, ~~as well as a decrease in contract-based expenses of $1.3 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter,~~which was consistent with the decrease in revenue over the same period.

Online Higher Education expenses increased by ~~$0.5~~$1.9 million to ~~$7.1~~$10.8 million, or ~~126%~~64% of Online Higher Education revenue for the 2002 fiscal quarter, compared to ~~$6.5~~$8.9 million, or ~~127%~~67% of Online Higher Education revenue for the 2001 quarter. The decrease in expenses as a percentage of revenue for the 2002 fiscal quarter is primarily due to the adoption of Statement No. 142 in 2002, which discontinued the amortization of goodwill. The amortization of goodwill related to the Canter acquisition was $0.8 million in the 2001 fiscal quarter or 6% of Online Higher Education revenue for the 2001 fiscal quarter. ~~Expenses exceed~~This decrease in expenses as a percentage of revenue was partially offset by an increase in ~~the 2002 and 2001 fiscal quarters~~expenses as a percentage of revenue due to the ~~seasonality of Canter's Master's Degree program. A considerable portion~~inclusion of the ~~revenue for this program is recognized in the second and fourth quarters~~operating results of ~~the fiscal year in conjunction with the shipment of materials. The increase in expenses~~OnlineLearning.net in the 2002 fiscal ~~quarter~~quarter. The acquisition of OnlineLearning.net, effective July 1, 2001, resulted ~~primarily from increased marketing and development expenses related to~~in lower margin revenue in the ~~growth of the online higher education market.~~fiscal 2002 quarter.

International Universities expenses increased by ~~$10.0~~$15.0 million to ~~$54.6~~$64.9 million, or ~~89%~~88% of International Universities revenue for the 2002 fiscal quarter, compared to ~~$44.6~~$49.9 million, or ~~91%~~89% of International Universities revenue for the 2001 fiscal quarter. The increase in expenses reflects i) a higher volume of operating ~~activity~~activities at the universities compared to the 2001 fiscal quarter; ii) the acquisition of ESCE, which occurred in the ~~International Universities segment. The decrease~~fourth quarter of 2001; iii) an increase in overhead costs, including staffing expenses, as a ~~percentage~~result of ~~revenue is~~the increase in the business, iv) an increase in marketing campaign expenses related to efforts associated with recruiting new students, primarily ~~due to operating efficiencies achieved throughout the International Universities segment, particularly~~ at UEM and ~~UVM, as well as~~v) an increase in ~~administrative overhead costs.~~expenses at WSI primarily associated with the acquisition of centers in Portugal. The timing of summer semester breaks results in significant seasonal fluctuations in operating results based primarily on the geographical location of the individual university. Revenues and direct instructional expenses are recorded during the period that classes are in session; however, certain basic operating and marketing expenses continue during the semester break, which distorts comparisons of expenses as a percentage of revenues.

English Language ~~Instruction~~Instruction—Spain expenses increased by ~~$2.2~~$0.7 million to ~~$14.3~~$4.8 million ~~or 101% of English Language Instruction revenue~~ for the 2002 fiscal quarter compared to ~~$12.2~~$4.1 million ~~or 95% of English Language Instruction revenue~~ for the 2001 fiscal quarter. Excluding the impact of goodwill amortization of $0.9 million in the 2001 fiscal quarter, English Language ~~Instruction~~Instruction—Spain expenses increased by ~~$3.2~~$1.6 million. ~~The~~This increase in operating expenses ~~as a percentage of revenue for the 2002 fiscal quarter~~ is primarily the result of ~~reduced operating margin efficiency in Argentina~~increased marketing and ~~the negative impact of operating results~~advertising costs necessary to compete for enrollments in the ~~saturated market~~oversaturated marketplace, expenses related to the takeover of certain previously franchised centers and expenses incurred to support the franchise network in ~~Spain.~~the difficult Spain market.

Sylvan Ventures operating expenses increased to ~~$7.5~~$10.9 million in the 2002 fiscal quarter from ~~$3.5~~$3.6 million in the 2001 fiscal quarter as a result of the consolidation of Walden ~~direct costs for the months of February~~ and ~~March 2002 and the expansion of eSylvan~~EdVerify direct costs for the 2002 fiscal quarter. Operating expenses are comprised of the expenses of the revenue generating consolidated investments in eSylvan ($3.9 million), Walden ($6.6 million), and Edverify ($0.4 million). Prior to February 2002 and June 2002 respectively, Walden ~~was~~and EdVerify were accounted for under the equity method. eSylvan's direct costs increased by $0.3 million in comparison to the 2001 fiscal quarter due to expansion of services and operations.

Other Expenses. ~~General~~Core operating segment general and administrative expenses decreased by ~~$0.9~~$0.2 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter. The decrease is primarily due to increased leveraging of centralized costs and cost control efforts. ~~General~~Core operating segment general and administrative expenses decreased to 4% of ~~total~~core operating segment revenues in the 2002 fiscal quarter, compared to 5% of revenues in the 2001 fiscal quarter, due to strong revenue expansion combined with cost controls.

Sylvan Ventures management costs ~~increased~~decreased by ~~$0.6~~$1.0 million to ~~$2.6~~$2.2 million for the 2002 fiscal quarter compared to ~~$2.0~~$3.2 million for the 2001 fiscal quarter. The ~~increase in management costs~~decrease is due to a ~~new start up project~~significant reduction in the costs to research, value, and manage the investment portfolio of $2.3 million, offset by expenses incurred in the start-up of Connections Academy of $1.1 million for the 2002 fiscal quarter. Start-up costs are expensed and reported in general and administrative expenses until revenues are generated by the business.

English Language Instruction—Spain - Loss on impairment of assets held for sale of $17.2 million represents the write off of assets related to WSI Spain due to the Company's decision to dispose of the business unit, and the lack of material value expected to be received upon sale. The asset write-offs include franchise receivables, fixed assets and working capital amounts that ~~was funded with $1.4 million, which offset~~the Company expects to transfer to a ~~$0.8 million decrease in other management costs.~~buyer upon sale.

Sylvan Ventures equity in net losses of affiliates decreased ~~by $18.0 million~~ to ~~$1.8~~$1.9 million for the 2002 fiscal quarter compared to ~~$19.8~~$15.6 million for the 2001 fiscal quarter. These losses relate to Sylvan Ventures' share of operating losses generated by the early stage enterprises in the investment portfolio not under Sylvan Ventures' control. This decrease was primarily due to Sylvan Ventures change in strategy to focus mainly on managing its current investments compared to heavy investing in the acquisition of new early stage ~~enterprises. These losses relate to Sylvan Ventures' share~~enterprises, as well as the consolidation of ~~operating losses generated by the early stage enterprises in the investment portfolio.~~Walden and EdVerify. The reduction in the number of early stage enterprises slowed the losses absorbed by Sylvan Ventures, as these companies initially generate significant losses. Additionally, a number of the ~~investments~~enterprises in which Sylvan Ventures invested in throughout 2000 and 2001 are further along in their business life cycle, and thus are generating ~~less~~smaller losses than in their earlier stages in the 2001 fiscal quarter. The adoption of FAS 142 ~~in the 2002 fiscal quarter~~ also resulted in Sylvan Ventures no longer amortizing goodwill associated with equity method investments. ~~Rather, each investment is now analyzed for impairment on an annual basis.~~ The amortization of goodwill related to the Sylvan Ventures equity investments in the 2001 fiscal quarter was ~~$2.8~~$2.2 million. Minority interests' share of Sylvan Ventures losses totaled ~~$0.4~~$0.8 million and ~~$1.3~~$1.8 million for the 2002 and 2001 fiscal quarters, respectively.

Other non-operating items ~~decreased~~improved by ~~$2.0~~$14.3 million for the 2002 fiscal quarter compared to the 2001 fiscal quarter, primarily due to ~~a decrease~~the $14.2 million loss on the Caliber investment which was incurred in ~~interest income of $2.0 million resulting from lower investment balances and a reduced interest rate environment.~~the 2001 fiscal quarter.

The Company's effective tax rate was ~~332%~~24% for the 2002 fiscal quarter. This reported effective income tax rate differs from the U.S. federal statutory tax rate due to the impact of state income taxes, minority interests, foreign income taxed at lower rates and the inability to utilize tax benefits from certain investment losses of Sylvan Ventures. Due to the volatility of Sylvan Ventures' income and losses, the Company's consolidated effective tax rate may fluctuate from quarter to quarter. However, on a full year basis the Company estimates that the 2002 effective income tax rate for the Company, prior to the cumulative effect of the change in accounting principle and excluding Sylvan Ventures, will be 30%. The Company estimates that the 2002 effective income tax rate for Sylvan Ventures will be 24%. The forecasted income tax rate for the Company excluding Sylvan Ventures ~~and~~has decreased from the income tax rate forecasted in the previous quarter due to the tax benefits associated with the impairment charge recorded in connection with the pending sale of WSI Spain. The forecasted income tax rate for Sylvan ~~Ventures' operations,~~Ventures has decreased from the income tax rate forecasted in the previous quarter due to the decrease in forecasted losses and the associated tax benefit.

Comparison of results for the six months ended June 30, 2002 to results for the six months ended June 30, 2001.

Revenues. Total revenues increased by $55.3 million, or 23%, to $297.8 million for the six months ended June 30, 2002 (the "2002 fiscal six month period") from $242.5 million for the six months ended June 30, 2002 (the "2001 fiscal six month period"). This revenue increase was primarily driven by increases in tuition and enrollment at universities in the International Universities segment, as well as acquisitions of learning centers and same center revenue growth in the K-12 Education Services segment.

K-12 Education Services revenue increased by $12.2 million, or 12%, to $113.5 million for the 2002 fiscal six month period compared to the 2001 fiscal six month period. Franchise royalties increased by $2.2 million, or 17%, as a result of a net increase of 15 new learning centers opened after June 30, 2001 and a 16% increase in same center revenue. Same center revenue growth was driven by the success of national advertising programs and increased length of stay. Revenues from Company-owned learning centers increased $11.2 million, or 40%, to $39.0 million during the 2002 fiscal six month period. Same center revenues increased 11%, or $3.1 million, with the remaining revenue increase of $8.1 million generated from 30 Company-owned centers acquired from franchise owners and 2 new centers opened during the past year. International revenues, primarily Schülerhilfe, increased by $0.8 million, or 10%, in the 2002 fiscal six month period compared to the 2001 fiscal six month period. The remaining revenue increase of $0.5 million for the 2002 fiscal six month period compared to the 2001 fiscal six month period relates to other franchise services and Ivy West. Contract-based revenues decreased by $2.5 million, or 6%, to $40.0 million in the 2002 fiscal six month compared to the 2001 fiscal six month period due to a lower number of public school contracts. Operating revenue for K-12 Education Services represents 38% of total revenues of the Company for the 2002 fiscal six month period.

Online Higher Education revenue increased by $3.9 million, or 21%, to $22.3 million for the 2002 fiscal six month period compared to the 2001 fiscal six month period. Canter teacher-training revenue increased by $4.5 million, or 26%, to $21.8 million during the 2002 fiscal six month period compared to the 2001 fiscal six month period. Canter's revenue increase is due to greater demand for its products, particularly the distance learning masters programs, which saw enrollments for the Summer 2002 semester increase by 23% to 10,800 students. Sylvan Teacher Institute revenue decreased by $0.6 million, or 56%, to $0.5 million in the 2002 fiscal six month period compared to the 2001 fiscal six month period. The decrease is due to the planned decrease in professional development workshops performed in the 2002 fiscal six month period compared to the 2001 fiscal six month period. Operating revenue for Online Higher Education represents 8% of total revenues of the Company for the 2002 fiscal six month period.

International Universities revenue for the 2002 fiscal six month period increased by $33.2 million, or 30%, to $145.6 million compared to the 2001 fiscal six month period. This increase is primarily due to an increase in overall enrollment of 18%. Additionally, revenue increased by $3.0 million due to the acquisition of a controlling interest in ESCE, which occurred in the fourth quarter of 2001 and, therefore, did not contribute to revenue for the 2001 fiscal six month period. Non-Spain WSI revenues increased $5.4 million, primarily due to the acquisition of centers in Portugal in the third quarter of 2001. Operating revenue for International Universities represents 49% of total revenues of the Company for the 2002 fiscal six month period.

English Language Instruction—Spain revenue decreased by $3.4 million, or 33%, to $7.0 million for the 2002 fiscal six month period compared to the 2001 fiscal six month period. This revenue decrease was the result of decreased tuition revenues in existing Company-owned centers, as well as decreased royalties and didactic material sales to franchises due to oversaturation by English language instruction

providers in Spain. Operating revenue for English Language Instruction—Spain represents 2% of total revenues of the Company for the 2002 fiscal six month period.

Sylvan Ventures revenue increased to $9.4 million for the 2002 fiscal six month period from $0.1 million for the 2001 fiscal six month period. The increase is a result of revenues generated from Walden ($8.2 million) for the months of February through June 2002 and eSylvan ($1.2 million) revenues throughout the 2002 fiscal six month period. Prior to February 2002, Walden was accounted for under the equity method. Operating revenues for Sylvan Ventures represents 3% of total revenues of the Company for the 2002 fiscal six month period.

Direct Costs. Total direct costs of revenues increased $50.1 million, or 23%, to $263.6 million for the 2002 fiscal six month period from $213.5 million for the 2001 fiscal six month period. Excluding the impact of goodwill amortization in the 2001 fiscal six month period of $5.8 million, direct costs increased $55.9 million, or 27%, for the 2002 fiscal six month period. Direct costs as a percentage of total revenues remained constant at 88% in the 2002 and 2001 fiscal six month periods. Excluding the impact of goodwill amortization, direct costs as a percentage of revenues were 86% in the 2001 fiscal six month period.

K-12 Education Services expenses increased $8.7 million to $88.9 million, or 78% of K-12 Education Services revenue for the 2002 fiscal six month period, compared to $80.2 million, or 79% of K-12 Education Services revenue for the 2001 fiscal six month period. Approximately $8.7 million of the 2002 fiscal six month period increase relates to expenses incurred in Company-owned learning centers due to the acquisition of 30 franchised learning centers and costs associated with higher revenues at existing Company-owned centers. International expenses, primarily related to Schülerhilfe, increased $1.1 million. Franchise support costs increased $1.7 million in the 2002 fiscal six month period compared to the 2001 fiscal six month period. These expense increases were partially offset by a decrease in contract-based expenses of $2.2 million in the 2002 fiscal six month period compared to the 2001 fiscal six month period, primarily due to improved cost controls on existing business and declines in the contract-based revenues.

Online Higher Education expenses increased by $2.4 million to $17.8 million, or 80% of Online Higher Education revenue for the 2002 fiscal six month period, compared to $15.4 million, or 84% of Online Higher Education revenue for the 2001 fiscal six month period. The decrease in expenses as a percentage of revenue for the 2002 fiscal six month period is primarily due to the adoption of Statement No. 142 in 2002, which discontinued the amortization of goodwill. The amortization of goodwill related to the Canter acquisition was $1.5 million in the 2001 fiscal six month period or 7% of Online Higher Education revenue for the 2001 fiscal six month period. This decrease in expenses as a percentage of revenue was partially offset by an increase in expenses as a percentage of revenue due to the inclusion of operating results of OnlineLearning.net in the 2002 fiscal six month period. The acquisition of OnlineLearning.net, effective July 1, 2001, resulted in lower margin revenue in the fiscal 2002 six month period.

International Universities expenses increased by $27.1 million to $129.2 million, or 89% of International Universities revenue for the 2002 fiscal six month period, compared to $102.1 million, or 91% of International Universities revenue for the 2001 fiscal six month period. The increase in expenses reflects i) a higher volume of operating activities at the universities compared to the 2001 fiscal six month period, ii) the acquisition of ESCE, which occurred in the fourth quarter of 2001, iii) an increase in overhead costs, including staffing expenses, as a result of the increase in the business and iv) an increase in expenses at WSI primarily associated with the acquisition of centers in Portugal. The decrease in expenses as a percentage of revenue is primarily due to operating efficiencies achieved throughout the International Universities segment, particularly at UEM and UVM, as well as in administrative overhead costs relative to the higher revenue levels. The timing of summer semester breaks results in significant seasonal fluctuations in operating results based primarily on the

geographical location of the individual university. Revenues and direct instructional expenses are recorded during the period that classes are in session; however, certain basic operating and marketing expenses continue during the semester break, which distorts comparisons of expenses as a percentage of revenues.

English Language Instruction—Spain expenses increased by $0.7 million to $9.3 million for the 2002 fiscal six month period compared to $8.6 million for the 2001 fiscal six month period. Excluding the impact of goodwill amortization of $2.0 million in the 2001 fiscal six month period, English Language Instruction—Spain expenses increased by $2.7 million. The increase in expenses for the 2002 fiscal six month period is primarily the result of increased marketing and advertising costs necessary to compete for enrollments in the oversaturated marketplace, expenses related to the takeover of certain previously franchised centers and expenses incurred to support the franchise network in the difficult Spain market.

�� Sylvan Ventures expenses increased to $18.4 million in the 2002 fiscal six month period from $7.2 million in the 2001 fiscal six month period as a result of the consolidation of Walden and EdVerify direct costs. Operating expenses are comprised of the expenses of revenue generating consolidated investments in eSylvan ($7.7 million), Walden ($10.3 million) and EdVerify ($0.4 million). Prior to February 2002 and June 2002 respectively, Walden and EdVerify were accounted for under the equity method. eSylvan's direct costs increased by $0.6 million in comparison to the 2001 fiscal six month period due to expansion of services and operations.

Other Expenses. Core operating segment general and administrative expenses decreased by $1.0 million in the 2002 fiscal six month period compared to the 2001 fiscal six month period. The decrease is primarily due to increased leveraging of centralized costs and cost control efforts. Core operating segment general and administrative expenses decreased to 4% of core operating segment revenues in the 2002 fiscal six month period, compared to 5% of revenues in the 2001 fiscal six month period, due to strong revenue expansion combined with cost controls.

Sylvan Ventures management costs decreased by $0.5 million to $4.8 million for the 2002 fiscal six month period compared to $5.3 million for the 2001 fiscal six month period. The decrease is due to a $3.1 million reduction in the costs to research, value and manage the investment portfolio offset by expenses incurred in the start-up of Connections Academy of $2.6 million for the 2002 fiscal six month period. Start-up costs are expensed and reported in general and administrative expenses until revenues are generated by the business.

English Language Instruction—Spain - Loss on impairment of assets held for sale of $17.2 million represents the write off of assets related to WSI Spain due to the Company's decision to dispose of the business unit, and the lack of material value expected to be received upon sale. The asset write-offs include franchise receivables, fixed assets and working capital amounts that the Company expects to transfer to a buyer upon sale.

Sylvan Ventures equity in net losses of affiliates decreased to $3.7 million for the 2002 fiscal six month period from $35.4 million for the 2001 fiscal six month period. These losses relate to Sylvan Ventures' share of operating losses generated by the early stage enterprises in the investment portfolio not under Sylvan Ventures' control. This decrease was primarily due to Sylvan Ventures change in strategy to focus mainly on managing its current investments compared to heavy investing in the acquisition of new early stage enterprises, as well as the consolidation of Walden and EdVerify. The reduction in the number of early stage enterprises slowed the losses absorbed by Sylvan Ventures, as these companies initially generate significant losses. Additionally, a number of the enterprises in which Sylvan Ventures invested throughout 2000 and 2001 are further along in their business life cycle, and thus are generating less losses than in their earlier stages in the 2001 fiscal six month period. The adoption of FAS 142 also resulted in Sylvan Ventures no longer amortizing goodwill associated with equity method investments. The amortization of goodwill related to the Sylvan Ventures equity investments in the 2001 fiscal six month period was $5.0 million. Minority interests' share of Sylvan

Ventures losses totaled $1.2 million and $3.1 million for the 2002 and 2001 fiscal six month periods, respectively.

Other non-operating items improved by $12.3 million for the 2002 fiscal six month period compared to the 2001 fiscal six month period due to the $14.2 million loss on the Caliber investment which was incurred in the 2001 fiscal six month period, partially offset by a decrease in interest income of $2.3 million resulting from lower investment balances and a reduced interest rate environment.

The Company's effective tax rate was 15% for the 2002 fiscal six month period, excluding the cumulative effect of change in accounting principle. This reported effective income tax rate differs from the U.S. federal statutory tax rate due to the impact of state income taxes, minority interests, foreign income taxed at lower rates and the inability to utilize tax benefits from certain investment losses of Sylvan Ventures. Due to the volatility of Sylvan Ventures' income and losses, the Company's consolidated effective tax rate may fluctuate from quarter to quarter. However, on a full year ~~ending December 31,~~basis the Company estimates that the 2002 effective income tax rate for the Company, prior to the cumulative effect of the change in accounting principle and excluding Sylvan Ventures, will be ~~34%~~30%. The Company estimates that the 2002 effective income tax rate for Sylvan Ventures will be 24%. The forecasted income tax rate for the Company excluding Sylvan Ventures has decreased from the income tax rate forecasted in the previous quarter due to the tax benefits associated with the impairment charge recorded in connection with the pending sale of WSI Spain. The forecasted income tax rate for Sylvan Ventures has decreased from the income tax rate forecasted in previous quarter due to the decrease in forecasted losses and ~~27%, respectively.~~the associated tax benefits.

Cumulative Effect of Change in Accounting Principle. As a result of adopting Statement No. 142 as of January 1, 2002 and performing the required transitional impairment tests, the Company recorded a non-cash charge of $76.1 million, net of income tax benefit of $7.7 million, which is included in cumulative effect of a change in accounting principle in the consolidated statements of operations. The impairment charge relates solely to the English Language Instruction business and consists of the write-down of goodwill related to the distressed operations in Spain and amounts originally paid for franchise rights and corporate center operations in other countries.

Cash provided by operations was ~~$13.4~~$39.6 million for the 2002 fiscal ~~quarter compared~~six month period, net of $13.8 million cash used in operations related to Sylvan Ventures. This compares to cash used in operations of ~~$76.2~~$68.0 million for the 2001 fiscal ~~quarter.~~six month period, of which $20.5 million related to Sylvan Ventures. The reported net loss of ~~$0.4~~$81.6 million was offset by significant non-cash items, such as the pre-tax cumulative effect of change of accounting principle of $83.8 million, loss on impairment of assets of $17.2 million, depreciation and amortization charges ~~($6.8 million),~~of $14.5 million, equity in net loss of affiliates, primarily of Sylvan Ventures ~~($1.9 million)~~of $3.7 million and minority interest ~~($0.9 million).~~of $2.2 million. Cash ~~was also generated by~~used in working capital activity ~~totaling $4.8~~totaled $1.5 million in the 2002 fiscal ~~quarter.~~six month period of which $0.4 million related to Sylvan Ventures. In the 2001 fiscal ~~quarter,~~six month period, working capital related decreases in liquidity of ~~$95.0~~$113.6 million consisted primarily of income tax payments resulting from the first quarter 2000 sale of ~~Prometric.~~Prometric and $8.9 million related to Sylvan Ventures.

Cash used byin investing activities was ~~$17.7~~$21.6 million for the 2002 fiscal ~~quarter compared~~six month period, net of $7.5 million cash provided by investing activities related to Sylvan Ventures. This compares to cash provided by investing activities of ~~$13.4~~$15.9 million for the 2001 fiscal ~~quarter.~~six month period, net of $38.3 million cash used in investing activities related to Sylvan Ventures. The 2002 investment activity

was primarily the result of purchases of property and equipment ~~($13.5 million),~~of $25.9 million, and net cash paid for acquired businesses ~~($10.2 million) and increases in other assets and expenditures for deferred costs ($5.2 million),~~of $21.8 million, partially offset by net proceeds from the sale of available-for-sale securities ~~($12.0 million).~~of $24.9 million. The 2001 fiscal ~~quarter~~six month period investment activity primarily consisted of net proceeds from the sale of available-for-sale securities ~~($79.6 million),~~of $111.7 million, partially offset by increases in investments in and advances to affiliates ~~($32.2 million),~~of $36.6 million, purchases of property ~~plant~~ and equipment ~~($13.3 million),~~of $28.3 million, and ~~the payment~~payments for acquisitions of ~~contingent consideration for a prior acquisition ($13.1 million).~~$28.2 million. At ~~March 31,~~June 30, 2002, the Company has accrued obligations payable in cash of ~~$5.6~~$4.2 million related to contingent consideration for certain prior acquisitions. ~~The~~These amounts are expected to be paid later in 2002.

Cash provided by financing activities was ~~$16.6~~$21.0 million in the 2002 fiscal ~~quarter compared~~six month period, net of $1.8 million cash used in financing activities related to Sylvan Ventures, excluding intercompany funding. This compares to cash provided by financing activities of ~~$13.8~~$29.7 million in the 2001 fiscal ~~quarter.~~six month period, of which $19.4 million related to Sylvan Ventures, excluding intercompany funding. The 2002 financing activity

related primarily to cash received from the exercise of options ~~($8.6 million)~~of $14.5 million, and ~~net~~ proceeds from the issuance of debt ~~($11.7 million),~~of $13.0 million, partially offset by payments of long-term debt of $3.5 million, costs incurred in connection with potential International Universities public offering of $1.7 million, and net payments to the minority interest partners in Sylvan Ventures ~~($4.4 million).~~of $1.7 million. Cash provided by financing activities ~~of $13.8 million~~ in the 2001 fiscal ~~quarter~~six month period related primarily to cash received from the minority interest partners in Sylvan Ventures ~~($16.1 million)~~of $21.9 million and proceeds from the exercise of options ~~($3.8 million), partially offset by net payments~~ of ~~long-term debt ($6.7 million).~~$7.0 million.

The Company's Board of Directors has approved a stock repurchase program pursuant to which the Company, from time to time and at management's discretion, may purchase up to an aggregate of 3.5 million shares of Sylvan Learning Systems common stock on the open market. In 2000, the Company repurchased 13.2 million shares through two separate self-tender offerings at an average price of approximately $15.17.

The Company anticipates that cash flow from operations, available cash and existing credit facilities will be sufficient to meet its operating requirements, including expansion of its existing business, funding International University acquisitions, payment of contingent consideration and funding of Sylvan Ventures investments and operating costs. Sylvan Ventures has outstanding commitments to provide additional funding of approximately ~~$15.0~~$9.0 million to certain portfolio companies. The Company continues to examine opportunities in the educational services industry for potential synergistic acquisitions.

other franchise rights from the ~~acquired entity~~sellers in the United Kingdom and ~~utilize multiples consistent with those used to calculate the initial purchase price.~~France. The Company expects an agreement to be reached whereby it will ~~record~~agree to payments totaling approximately $16.0 million in connection with the ~~contingent consideration when the contingencies are resolved and the additional consideration is payable.~~acquisition of these Sylvan Learning Center operations.

The Company has entered into agreements with certain franchisees of Sylvan Learning Centers and Wall Street Institute that allow the franchisees to require the Company to repurchase the centers in the future at a predetermined multiple of operating results upon the achievement of specified operating thresholds. ~~When the~~The Company ~~can assess the likelihood of this repurchase right being exercised and the amount of the related commitment to purchase the center, the amount of the obligation will be disclosed.~~does not believe that these commitments, if ultimately triggered by future events, would materially effect its liquidity.

The Company experiences seasonality in results of operations primarily as a result of changes in the level of student enrollments and the timing of semester cycles, particularly in the International Universities segment. Timing of semester breaks at the International Universities results in the strongest operating performance being achieved in the second and fourth quarters of the year. Other factors that impact the seasonality of operating results include: timing of contracts funded under Title I, timing of summer vacations, timing of franchise license fees and the timing of Sylvan Ventures' development costs. Revenues and profits in any period will not necessarily be indicative of results in subsequent periods.

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from the changes in the price of financial instruments. The Company is exposed to financial market risks, including changes in foreign currency exchange rates, interest rates, equity prices and investment values. The Company occasionally uses derivative financial instruments to protect against adverse currency movements related to significant foreign acquisitions. Exposure to market risks related to operating activities is managed through the Company's regular operating and financing activities.

The Company derives approximately ~~58%~~54% of its revenues from customers outside 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 the foreign currencies to match revenues earned and minimize the Company's exchange rate exposure to operating margins. A hypothetical 10% adverse change in average annual foreign currency exchange rates would have decreased operating income and cash flows for the 2002 fiscal ~~quarter~~six month period by ~~$0.8~~$2.0 million. The Company generally views its investment in most of its foreign subsidiaries as long-term. The effects of a change in foreign currency exchange rates on the Company's net investment in foreign subsidiaries are reflected in other comprehensive income (loss). A 10% depreciation in functional currencies relative to the U.S. dollar would have resulted in a decrease in the Company's net investment in foreign subsidiaries of approximately ~~$30.3~~$24.1 million at ~~March 31,~~June 30, 2002.

The Company holds its cash and cash equivalents in high quality, short-term, fixed income securities. Consequently, 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. The Company's convertible debentures bear interest at 5%, which currently

approximates the market rate. A 100 basis point decrease in interest rates would have reduced net interest income for the 2002 fiscal ~~quarter~~six month period by ~~$0.3~~$0.7 million.

The fair value of the Company's convertible debentures is sensitive to fluctuations in the price of the Company's common stock into which the debentures are convertible. Changes in equity prices would result in changes in the fair value of the Company's convertible debentures due to the difference between the current market price of the debentures and the market price at the date of issuance of the debentures. A 10% increase in the 2002 fiscal ~~quarter~~six month period end market price of the convertible debentures would result in an increase of approximately ~~$17.1~~$12.0 million in the net fair value of the debentures.

The Company is exposed to equity price risks on equity securities included in the portfolio of investments entered into for the promotion of business and strategic objectives. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. A 10% adverse change in equity prices would not materially impact the fair value of the Company's marketable securities or other comprehensive income (loss).

The Company's investment portfolio contains debt securities that mature within one year. A hypothetical 10% adverse change in the fair value of the debt securities would not materially adversely ~~effect~~impact earnings or cash flows because of the Company's ability to hold the debt securities until maturity.

In addition to the debt securities, the Company has an investment portfolio that consists of direct investment positions in education technology companies through Sylvan Ventures, as well as short-term investments in available-for-sale debt and equity securities. The Company's investment portfolio is exposed to risks arising from changes in these investment values.

The Company's investment portfolio includes a number of holdings of non-publicly traded companies in the educational services industry. The Company accounts for these investments using either the cost method (cost less impairment, if any) or the equity method of accounting. Equity method investments are specifically excluded from the scope of this disclosure. Non-public investments where the Company owns less than a 20% interest are subject to fluctuations in market value, but their current illiquidity reduces the exposure to pure market risk while increasing the risk that the Company may not be able to liquidate these investments in a timely manner for their estimated value.

All the potential impacts noted above are based on sensitivity analysis performed on the Company's financial position at ~~March 31,~~June 30, 2002. Actual results may differ materially.

Proposal No. 1. The stockholders approved election of all of the nominees to the board of directors. The tabulation of votes on this proposal is as follows:

Nominee	For	Withheld
R. Christopher Hoehn-Saric	27,457,489	8,432,643
John A. Miller	35,501,101	389,031
David A. Wilson	35,737,383	152,749

Proposal No. 2. The stockholders ratified the selection of Ernst & Young, LLP as the Company's independent auditors. The tabulation of votes on this proposal is as follows:

The Registrant has filed with the Securities and Exchange Commission the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

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

Maryland (State or other jurisdiction of incorporation or organization)		52-1492296 (I.R.S. Employer Identification No.)
1001 Fleet Street, Baltimore, Maryland (Address of principal executive offices)		21202 (Zip Code)

				~~Page No.~~
PART I.—FINANCIAL INFORMATION
	Item 1.		Financial Statements (Unaudited)

		Consolidated Balance Sheets—~~March 31,~~June 30, 2002 and December 31, 2001
	3
		Consolidated Statements of Operations—Three months ended ~~March 31,~~June 30, 2002 and ~~March 31,~~June 30, 2001
		4	Consolidated Statements of Operations—Six months ended June 30, 2002 and June 30, 2001
			Consolidated Statements of Cash Flows—~~Three~~Six months ended ~~March 31,~~June 30, 2002 and ~~March 31,~~June 30, 2001
	5
		Notes to Consolidated Financial Statements—~~March 31,~~June 30, 2002		6
	Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 3.		Quantitative and Qualitative Disclosure of Market Risk		21
PART II.—OTHER INFORMATION
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits and Reports on Form 8-K
	23
SIGNATURE				24

	Net Loss			Loss Per Share (Basic and Diluted)
As reported March 31, 2001	$	(11,584	)	$	(0.31	)
Effect of goodwill amortization		3,896			0.10

Adjusted March 31, 2001	$	(7,688	)	$	(0.21	)

	Three months ended June 30, 2001						Six months ended June 30, 2001
	Net Loss			Loss Per Share (Basic and Diluted)			Net Loss			Loss Per Share (Basic and Diluted)
As reported	$	(13,434	)	$	(0.35	)	$	(25,018	)	$	(0.66	)
Effect of goodwill amortization		3,091			0.08			6,987			0.19

Adjusted	$	(10,343	)	$	(0.27	)	$	(18,031	)	$	(0.47	)

	March 31, 2002		December 31, 2001
Current assets	$	7,139	$	23,176
Other assets		9,542		17,988
Current liabilities		14,696		19,916
Long-term and other liabilities		17,150		17,004
Redeemable convertible preferred stock		51,906		66,878

	June 30, 2002		December 31, 2001
Current assets	$	7,750	$	23,176
Other assets		8,185		17,988
Current liabilities		10,902		19,916
Long-term and other liabilities		16,868		17,004
Redeemable convertible preferred stock		51,906		66,878

	June 30, 2002		December 31, 2001
Core Operating Segments:
Chauncey Group International, Ltd.	$	—	$	8,000
Frontline Group, Inc.		7,000		7,000
Other		5,006		5,000
Sylvan Ventures Segment:
ClubMom.com, Inc.		7,596		7,326

Total	$	19,602	$	27,326

	March 31, 2002			December 31, 2001
Amounts payable to former shareholders of Drake Prometric	$	3,050		$	3,050
Amounts payable to former shareholders of Les Roches		1,014			1,029
Amounts payable to former shareholders of Marbella		1,559			—

		5,623			4,079
Less: long-term portion (included in other long-term liabilities)		(416	)		(422	)

Total current portion	$	5,207		$	3,657

		Three months ended March 31,
		2002			2001
Operating revenues:
	K-12 Education Services	$	52,973		$	49,453
	Online Higher Education		5,585			5,159
	International Universities		61,632			48,743
	English Language Instruction		14,238			12,864
	Sylvan Ventures		3,941			30

		$	138,369		$	116,249

Segment profit (loss):
	K-12 Education Services	$	9,719		$	8,750
	Online Higher Education		(1,470	)		(1,385	)
	International Universities		7,076			4,154
	English Language Instruction		(88	)		688
	Sylvan Ventures		(8,030	)		(25,763	)

		$	7,207		$	(13,556	)

		Core Operating Segments			Sylvan Ventures			Consolidated
Operating activities
Net loss		$	(66,180	)	$	(15,462	)	$	(81,642	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Cumulative pre-tax effect of change in accounting principle		83,843			—			83,843
	Depreciation and amortization		13,194			1,342			14,536
	Loss on impairment of assets held for sale		17,244			—			17,244
	Other non-cash items		6,437			719			7,156
	Changes in working capital		(1,147	)		(365	)		(1,512	)

Net cash provided by (used in) operating activities			53,391			(13,766	)		39,625

Investing activities
Investments in affiliates and other investments			7,913			(2,770	)		5,143
Cash paid for acquired businesses, net of cash received			(23,091	)		1,251			(21,840	)
Other investing activities			(13,915	)		9,002			(4,913	)

Net cash provided by (used in) investing activities			(29,093	)		7,483			(21,610	)

Financing activities
Net cash distributed to minority members of Sylvan Ventures			—			(1,674	)		(1,674	)
Intercompany funding			(28,949	)		28,949			—
Other financing activities			22,851			(167	)		22,684

Net cash provided by (used in) financing activities			(6,098	)		27,108			21,010

Effect of exchange rate changes on cash			(420	)		—			(420	)

Net increase in cash and cash equivalents			17,780			20,825			38,605
Cash and cash equivalents at beginning of period			101,877			317			102,194

Cash and cash equivalents at end of period		$	119,657		$	21,142		$	140,799

For Approval		34,540,210
Against Approval		1,295,962
Abstain		53,960
Total Shares Voted		35,890,132

		(a)		Exhibits
				None
		(b)		Reports on Form 8-K
				The Company did not file any reports on Form 8-K during the six month period ended June 30, 2002.

	SYLVAN LEARNING SYSTEMS, INC.

Date: ~~May 10,~~August 14, 2002	~~By:~~	/s/ SEAN R. CREAMER Sean R. Creamer,Senior Vice President and Chief Financial Officer