<PAGE>
                                                                   EXHIBIT 10.38

                                              EMPLOYMENT AGREEMENT dated and
                                     effective as of August 26, 2002 (the
                                     "Commencement Date"), by and among LPA
                                     HOLDING CORP., a Delaware corporation ("LPA
                                     Holdings"), LA PETITE ACADEMY, INC., a
                                     Delaware corporation (the "Company") and
                                     GARY A. GRAVES ("Executive").

                                    RECITALS

                  In order to induce Executive to agree to serve as Chief
Operating Officer and President of the Company, LPA Holdings and the Company
desire to provide Executive with compensation and other benefits on the terms
and conditions set forth in this Agreement.

                  Executive is willing to enter into such employment and perform
services for the Company on the terms and conditions set forth in this
Agreement.

                  It is therefore hereby agreed by and among the parties as
follows:

         Section 1.        Employment.

                  (a) Subject to the terms and conditions of this Agreement, the
Company agrees to employ Executive (i) as Chief Operating Officer from the
Commencement Date until the termination of this Agreement, and (ii) as President
from and after January 15, 2003 (or such earlier date as the Company may elect
Executive as its President). In his capacity as Chief Operating Officer and,
subject to the foregoing, as President, of the Company, Executive shall have all
of the customary powers, responsibilities and authorities of presidents and
chief operating officers of corporations of the size, type and nature of the
Company.

                  (b) Subject to the terms and conditions of this Agreement,
Executive hereby accepts employment as Chief Operating Officer and, subject to
Section 1, as President, of the Company and agrees to devote his full working
time and efforts, to the best of his ability, experience and talent, to the
performance of services, duties and responsibilities in connection therewith.
Nothing in this Agreement shall preclude Executive from engaging, consistent
with his duties and responsibilities hereunder, in charitable and community
affairs, from managing his personal investments or, except as otherwise provided
in Section 12 hereof, from serving as a member of boards of directors or as a
trustee of other companies, associations or entities.

         Section 2.        Term of Employment. Subject to the valid execution of
a Stockholders Written Consent on or prior to the date hereof approving the
terms of this Agreement and electing that payments under this Agreement be
exempt from treatment as "parachute payments" under Section 280G of the Internal
Revenue Code of 1986, as amended, the Executive's term of employment under this
Agreement shall be deemed to have commenced on the Commencement Date and,
subject to the terms hereof, shall terminate on the third anniversary of the
Commencement Date (the "Termination Date"); provided, however, that on such
anniversary date and on each subsequent one-year anniversary thereof, the
Termination Date shall
<PAGE>
automatically be extended for a period of one year unless either party shall
have given written notice to the other party not less than ninety days prior to
such Termination Date that the Termination Date shall not be so extended.

         Section 3.        Compensation.

                  (a) Initial Base Salary. The Company shall pay Executive a
base salary ("Base Salary") at the annual rate of $350,000. The Base Salary
shall be payable in accordance with the ordinary payroll practices of the
Company and shall be subject to increase as determined by the Board or its
compensation committee.

                  (b) Annual Bonus. In addition to his Base Salary, Executive
shall be entitled to receive a cash bonus (the "Bonus") with respect to each
fiscal year; provided that the Executive is employed by the Company on the last
day of such fiscal year. The Bonus shall be paid as follows:

                           (i) Prior to the end of each fiscal year the Board,
         in good faith consultation with the Executive, shall determine the
         target EBITDA for the immediately succeeding fiscal year (the "Plan
         EBITDA") for use in determining the Company's bonus payable to
         participants in the Company's bonus pool, provided, that for the fiscal
         year ending June 30, 2003, Plan EBITDA will be determined within 90
         days of after the date hereof and the amount of the Bonus payable for
         such fiscal year will be pro-rated by multiplying (A) the Bonus that
         would be paid in respect of such fiscal year based on annualizing the
         actual EBITDA from the Commencement Date to the end of such fiscal year
         by (B) a fraction, the numerator of which is the number of days elapsed
         from the Commencement Date to the end of such fiscal year and the
         denominator of which is 365. For purposes hereof, EBITDA shall be as
         defined in the Indenture dated as of May 11, 1998, among the Company,
         PNC Bank, as Trustee, and the other parties thereto.

                           (ii) The Executive shall be entitled to a Bonus based
         upon the attainment of a specified percentage of the actual EBITDA in
         relation to Plan EBITDA. No Bonus will be payable in the event that
         actual EBITDA is less than 90% of Plan EBITDA and the maximum bonus of
         150% of Base Salary is payable only when actual EBITDA is more than
         110% of Plan EBITDA. If actual EBITDA as a percentage of Plan EBITDA
         falls within one of the gradations specified below, the percentage of
         Base Salary specified below will be earned in even increments within
         the relevant gradation.

<TABLE>
<CAPTION>
Range of EBITDA                     Percentage of Base Salary
---------------                     -------------------------
<S>                                 <C>
90% or less of Plan EBITDA                  0%

More than 90% but less than or              50%
equal to 100% of Plan EBITDA

More than 100% but less than or             100%
equal to 110% of Plan EBITDA

More than 110% of Plan EBITDA               150%
</TABLE>

                                       2
<PAGE>
                  (c) Options. LPA Holdings agrees to cause to be granted to the
Executive options to purchase 180,254 shares of common stock of LPA Holdings at
an exercise price of $0.01 per share. One forty-eighth of the options will vest
and become exercisable on the Commencement Date and the remaining options will
vest and become exercisable at a rate of one forty-eighth per month on the 19th
day of each month following the Commencement Date for a 47 month period
thereafter. Such vesting will be accelerated upon the earlier of the
consummation of a Change-in-Control (as defined in the LPA Holdings' 1998 Stock
Option Plan) or the consummation of an underwritten registered public offering
of Common Stock of LPA Holdings. Such options and the underlying shares will be
issued pursuant to an agreement that contains repurchase rights, tag-along
rights, drag along rights and other provisions substantially equivalent to those
set forth in the LPA Holdings' 1998 Stock Option Plan.

                  (d) Compensation Plans and Programs. Executive shall
participate in any compensation plan or program, annual or long-term, maintained
by the Company on terms no less favorable than those applicable to other senior
management personnel of the Company.

         Section 4.        Employee Benefits.

                  (a) Employee Benefit Programs, Plans and Practices. During the
term of his employment hereunder, the Company shall provide to Executive
coverage under any employee benefit programs, plans and practices (commensurate
with his positions in the Company and to the extent possible under any employee
benefit plan), in accordance with the terms hereof, which the Company makes
available to its senior executive officers, including but not limited to (i)
retirement, pension and profit-sharing, and (ii) medical, dental,
hospitalization, life insurance, short and long-term disability, accidental
death and dismemberment and travel accident coverage.

                  (b) Vacation and Fringe Benefits. Executive shall be entitled
to a paid vacation each fiscal year of no less than four weeks. The Company may,
in its sole discretion, grant additional vacation time to Executive. Executive
shall participate in any fringe benefits offered to other senior management
personnel of the Company, including directors and officers insurance to the
extent offered by the Company, on terms no less favorable than those applicable
to such other senior management personnel.

         Section 5.        Expenses. Executive is authorized to incur reasonable
expenses in carrying out his duties and responsibilities under this Agreement,
including without limitation, expenses for travel and similar items related to
such duties and responsibilities. The Company will reimburse Executive for all
such expenses upon presentation by Executive from time to time of an itemized
account of such expenditures.

         Section 6.        Termination of Employment.

                  (a) The Company may terminate Executive's employment at any
time, and Executive may terminate his employment at any time. Nothing contained
in this Agreement shall limit Executive's rights under the Consolidated Omnibus
Budget Reconciliation Act.

                  (b) Termination Not for Cause or Termination for Good Reason.

                                       3
<PAGE>
                           (i) If Executive's employment is terminated (1) by
the Company other than for Cause (as defined in Section 6(c)(ii) hereof), (2)
due to Executive's death or disability, or (3) by Executive for Good Reason (as
defined in Section 6(b)(ii) hereof), Executive shall be entitled to receive from
the Company, in lieu of any other cash compensation provided for herein but not
in substitution for compensation already paid or earned, payable in accordance
with the Company's customary payroll practices, for the Severance Period, an
amount equal to the sum of (A) the Executive's Base Salary at its then current
annual rate plus (B) the quotient obtained by dividing the Pro-Rata Bonus by the
number of payroll periods in the Company's fiscal year. For purposes hereof, the
term "Severance Period" means (x) if such termination occurs on or prior to the
one-year anniversary of the Commencement Date, 6 months from the date of
termination and (y) if such termination occurs subsequent to the one-year
anniversary of the Commencement Date or pursuant to Section (6)(b)(ii)(E) below,
12 months from the date of termination. Additionally, upon such termination
Executive shall be entitled to the following:

                                    (A)      within a reasonable period of time
         after the date of termination, a cash lump sum equal to (x) any
         compensation payments deferred by Executive, together with any
         applicable interest or other accruals thereon; and (y) any unpaid
         amounts, as of the date of such termination, in respect of the Bonus
         for the fiscal year ending before the fiscal year in which such
         termination occurs;

                                    (B)      for the period from the date of
         termination of Executive's employment until the end of the Severance
         Period, the Executive shall continue to be covered under and
         participate in the Company's employee benefit programs, plans and
         practices described in Section 4(a) hereof or under such other plans of
         the Company which provide for equivalent coverage to the extent and on
         the terms in effect on Executive's date of termination (other than any
         disability plan for which coverage cannot be maintained after such
         termination);

                                    (C)      the rights to payments under
         applicable plans or programs, including but not limited to those
         described in Section 3(d) hereof, as may be determined pursuant to the
         terms of such plans or programs. This Section 6(b)(i) shall survive the
         termination or expiration of this Agreement.

                           (ii)     For purposes of this Agreement, "Good
Reason" shall mean the occurrence of any of the following events without
Executive's express prior written consent and which event shall not have been
cured within a 10 day period after notice from the Executive:

                                    (A)      the assignment to Executive by the
         Company of duties substantially inconsistent with Executive's
         positions, duties, responsibilities, authorities, titles and offices as
         set forth in Section 1 hereof, or any material reduction by the Company
         of Executive's duties or responsibilities or any removal of Executive
         as the Chief Operating Officer or President of the Company, except in
         connection with the termination of Executive's employment for any other
         reason;

                                       4
<PAGE>
                                    (B)      a reduction by the Company in
         Executive's Base Salary or Bonus (other than by reason of the terms of
         Section 3(b) hereof) as in effect at the commencement of employment
         hereunder or as the same may be increased from time to time during the
         terms of this Agreement;

                                    (C)      any material breach by the Company
         of any material provision of this Agreement;

                                    (D)      a Change of Control shall have been
         consummated; or

                                    (E)      the Company shall have failed to
         elect Executive as President on or before January 15, 2003.

                           (iii)    For purposes of this Agreement, "Pro Rata
Bonus" shall mean a cash bonus in an amount equal to the product of (A) the
Bonus that would be paid in respect of the current fiscal year based on
annualizing the actual EBITDA from the commencement of the fiscal year in which
a termination occurs to the date of termination multiplied by (B) a fraction,
the numerator of which is the number of days elapsed from the last day of the
immediately preceding fiscal year to the date of such termination and the
denominator of which is 365.

                           (iv)     For purposes of this Agreement, "Disability"
means Executive's failure to render the services provided for under this
Agreement due to the illness, physical or mental disability or other incapacity
of the Executive for a period of the longer of (A) 90 consecutive days or for at
least 45 days in any 180 day period, or (B) the period of time required for the
Executive to qualify for disability benefits under the Company's long term
disability insurance policy.

                  (c) Voluntary Termination by Executive: Discharge for Cause.

                           (i)      In the event that Executive's employment is
terminated by the Company for Cause, as hereinafter defined, or by Executive
other than for Good Reason, prior to the Termination Date, Executive shall be
entitled to receive all salary and benefits to which Executive is entitled up to
and including the date of Executive's termination of employment hereunder,
including, without limitation, compensation payments deferred by Executive and
any accrued and unpaid amounts in respect of the Bonus for the fiscal year
ending before the fiscal year in which such termination occurs. The obligations
of the Company under this Agreement to make any further payments, or provide any
benefits specified herein, to Executive shall cease and terminate on the date on
which Executive's employment is terminated by the Company for Cause or by
Executive other than for Good Reason. Termination of Executive in accordance
with this Section 6(b) shall be communicated to Executive pursuant to a notice
of a resolution of a majority of the Board determining that Executive is subject
to Discharge for Cause as defined herein.

                           (ii)     As used herein, the term "Cause" shall be
limited to (A) action by Executive involving willful malfeasance in connection
with his employment having a material adverse effect on the Company, (B)
material breach by Executive of this

                                       5
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Agreement or any other agreement entered into between Executive and the Company
after a written notice of such breach shall have been delivered to the Executive
and, if such breach can be cured, such breach shall not have been cured prior to
the tenth day after delivery of such notice, (C) continuing refusal by Executive
in willful breach of this Agreement to perform the duties ordinarily performed
by a chief operating officer or, subject to Section 1, as president (other than
any such failure resulting from his reasonably documented incapacity due to
physical or mental illness) after a written demand for substantial performance
is delivered to his by the Board which demand specifically identifies the manner
in which the Board believes that he has not substantially performed his duties
or (D) Executive being convicted of any felony (or any misdemeanor involving the
property or assets of the Company) under the laws of the United States or any
State. Notwithstanding the foregoing, the Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
his a copy of a resolution duly adopted by the affirmative vote of not less than
a majority of the entire Board at a meeting of the Board (after reasonable
notice to Executive and opportunity for his, together with counsel, to be heard
before the Board), finding that the Executive was guilty of conduct set forth
above in this subsection. For purposes of this definition of Cause, action or
inaction by Executive shall not be considered "willful" unless done or omitted
by Executive (1) intentionally or not in good faith and (2) without reasonable
belief that Executive's action or inaction was in the best interests of the
Company, and shall not include failure to act by reason of partial or total
incapacity due to physical or mental illness.

                  (d) DEFRA.

                           (i)      Notwithstanding anything in this Agreement
to the contrary, in the event that the provisions of the Deficit Reduction Act
of 1984 ("DEFRA"), and Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code") relating to "excess parachute payments" (as defined in the
Code) shall be applicable to any payment or benefit received or to be received
by Executive, then the total amount of payments or benefits payable to Executive
shall be the greater of (x) the largest amount such that the provisions of DEFRA
and Section 280G of the Code relating to "excess parachute payments" shall no
longer be applicable and (y) 80% of the amount of the payments to be received by
the Executive. Notwithstanding the foregoing, such amount (y) shall be deemed to
be less than the amount determined pursuant to clause (x) in the immediately
preceding sentence unless it exceeds the amount determined pursuant to clause
(x) by at least $50,000. Should such a reduction be required, the Executive
shall determine, in the exercise of his sole discretion, which payment or
benefit to reduce or eliminate. Pending such determination, the Company shall
continue to make all other required payments to Executive at the time and in the
manner provided herein and shall pay the largest portion of any parachute
payments such that the provisions of DEFRA relating to "excess parachute
payments" shall no longer be applicable.

                           (ii)     Due to the complexity in the application of
Section 280(G) of the Code, it is possible that payments made or benefits
received hereunder should not have been made under Section 6(c) (an
"Overpayment"). In the event that it is determined in writing by the Company's
outside auditors or tax advisors in their reasonable good faith

                                       6
<PAGE>
         judgment or by any court of competent jurisdiction that an Overpayment
         has been made resulting in an "Excess Parachute Payment" as defined in
         Section 280(G)(b)(1) of the Code, then any such Overpayment shall be
         treated for all purposes as an unsecured, long-term loan from the
         Company to the Executive, his personal representative, his successors
         or assigns, as the case may be, that is payable, together with accrued
         interest from the date of the making of the Overpayment at the rate of
         8% per annum on the later to occur of the third anniversary of the
         payment of such Overpayment, or 6 months following the date upon which
         it is determined an Overpayment was made. Should it be determined that
         such an Overpayment has been made, the Executive shall determine, in
         the exercise of his sole discretion, which payments or benefits shall
         be deemed to constitute the Overpayment.

         Section 7.        Notices. All notices or communications hereunder
shall be in writing, addressed as follows:

                           To the Company and LPA Holdings

                                    La Petite Academy, Inc.
                                    14 Corporate Woods
                                    8717 W. 110th Street, Suite 300
                                    Overland Park, Kansas 66210

                                    with a copy to:

                                    LPA Investment LLC
                                    c/o J.P. Morgan Partners, LLC
                                    1221 Avenue of the Americas
                                    New York, N.Y. 10020-1080
                                    Attention: Official Notices Clerk
                                    Fax: (212) 899-3402

                                    with a copy to:

                                    O'Sullivan LLP
                                    30 Rockefeller Plaza, 24th Floor
                                    New York, New York 10112
                                    Attention: Adam K. Weinstein, Esq.

                           To Executive:

                                    Gary A. Graves
                                    2364 Fawn Lake Circle
                                    Naperville, Illinois 60564

                                       7
<PAGE>
                                    with a copy to:

                                    Seyfarth Shaw
                                    55 E. Monroe Street, Suite 4200
                                    Chicago, Illinois 60603-5803
                                    Attention: Eugene Jacobs

         Any such notice or communication shall be sent certified or registered
         mail, return receipt requested, postage prepaid, addressed as above (or
         to such other address as such party may designate in a notice duly
         delivered as described above), and the actual date of mailing shall
         constitute the time at which notice was given.

                                       8
<PAGE>
         Section 8.        Separability; Legal Fees; Arbitration. If any
provision of this Agreement shall be declared to be invalid or unenforceable, in
whole or in part, such invalidity or unenforceability shall not affect the
remaining provisions hereof, which shall remain in full-force and effect. Any
controversy or claim arising out of or relating to this Agreement or the breach
of this Agreement (other than Section 12 hereof) that cannot be resolved by
Executive on the one hand and the Company on the other, including any dispute as
to the calculation of Executive's benefits or any payments hereunder, shall be
submitted to arbitration in New York, New York in accordance with Delaware law
and the procedures of the American Arbitration Association in accordance with
its National Rules For Resolution of Employment Disputes. The determination of
the arbitrators shall be conclusive and binding on the Company and Executive,
and judgment may be entered on the arbitrators' award in any court having
jurisdiction. To the extent a party prevails in any dispute arising out of this
Agreement or any of its terms and provisions, all reasonable costs, fees and
expenses relating to such dispute, including the party's reasonable legal fees,
shall be borne by the party not prevailing in the resolution of such dispute,
but only to the extent that the arbitrator or court, as the case may be, deems
reasonable and appropriate given the merits of the claims and defenses asserted.

         Section 9.        No Obligation to Mitigate Damages. Executive shall
not be required to mitigate damages or the amount of any payment provided for
under this Agreement by seeking other employment or otherwise. Without limiting
the Company's rights under Section 12, no payment under this Agreement shall be
reduced by any compensation that Executive may earn from a third party after any
termination of employment.

         Section 10.       Assignment. This contract shall be binding upon and
inure to the benefit of the heirs and representatives of Executive and the
assigns and successors of LPA Holdings and the Company, but neither this nor any
rights hereunder shall be assignable or otherwise subject to hypothecation by
Executive (except by will or by operation of the laws of intestate succession)
or by LPA Holdings or by the Company, except that LPA Holdings and the Company
may assign this Agreement to any successor (whether by merger, purchase or
otherwise) to all or substantially all of the stock, assets or businesses of LPA
Holdings or the Company.

         Section 11.       Amendment. This Agreement may only be amended by
written agreement of the parties hereto.

         Section 12.       Nondisclosure of Confidential Information; Non-
Competition.

                  (a) Executive shall not, without the prior written consent of
the Company, divulge, disclose or make accessible to any other person, firm,
partnership, corporation or other entity any Confidential Information pertaining
to the business of the Company, except (i) while employed by the Company, in the
business of and for the benefit of the Company, or (ii) when required to do so
by a court of competent jurisdiction, by any governmental agency having
supervisory authority over the business of the Company, or by any administrative
body or legislative body (including a committee thereof) with purported or
apparent jurisdiction to order Executive to divulge, disclose or make accessible
such information. For purposes of this Section 12(a), "Confidential Information"
shall mean non-public information concerning the Company's financial data,
strategic business plans, product development (or other proprietary product
data),

                                       9
<PAGE>
customer lists, marketing plans and other non-public, proprietary and
confidential information of the Company that is not otherwise available to the
public.

                  (b) For a period of one year commencing on Executive's date of
termination for any reason, Executive agrees that, without the prior written
consent of the Company, he shall not, directly or indirectly, (i) either as
principal, manager, agent, consultant, officer, stockholder, partner, investor,
lender or employee or in any other capacity, carry on, be engaged in or have any
financial interest in, any business which is in material competition with the
business of the Company and/or its affiliates or (ii) solicit any employees of
the Company and/or its affiliates.

                  (c) For purposes of Section 12(b) hereof, a business shall be
deemed to be in competition with the Company if it is significantly involved in
the rendering of any service significantly purchased, sold, dealt in or rendered
by the Company and/or its affiliates. As used in the preceding sentence, the
term "significantly" shall be deemed to refer to activities generating gross
annual sales of at least $25 million. Nothing in this Section 12 shall be
construed so as to preclude Executive from investing in any publicly held
company provided Executive's beneficial ownership of any class of such company's
securities does not exceed 5% of the outstanding securities of such class.

                  (d) Executive and the Company agree that the foregoing
covenant not to compete is a reasonable covenant under the circumstances, and
further agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of such
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenants contained in this Section 12 would irreparably injure the Company.
Accordingly, the Company may, in addition to pursuing any other remedies they
may have in law or in equity, obtain an injunction against Executive from any
court having jurisdiction over the matter, restraining any further violation of
this Section 12 by Executive.

                                       10
<PAGE>
         Section 13.       Beneficiaries; References. Executive shall be
entitled to select (and change, to the extent permitted under any applicable
law) a beneficiary or beneficiaries to receive any compensation or benefit
payable hereunder following Executive's death, and may change such election, in
either case by giving the Company written notice thereof. In the event of
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative. Any reference to the
masculine gender in this Agreement shall include, where appropriate, the
feminine.

         Section 14.       Survivorship. The respective rights and obligations
of the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
The provisions of this Section 14 are in addition to the survivorship provisions
of any other section of this Agreement.

         Section 15.       Governing Law. This Agreement shall be construed,
interpreted and governed in accordance with the laws of the State
of Delaware, without reference to rules relating to conflict of laws.

         Section 16.       Withholding. The Company shall be entitled to
withhold from any payment hereunder any amount required by law to be
withheld.

         Section 17.       Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original.

         Section 18.       Construction. The language used in this Agreement has
been chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party. In construing this Agreement,
no consideration shall be given to the fact or presumption that either party had
a greater or lesser hand in drafting the Agreement.

         Section 19.       Indemnification. The Executive will be entitled to
indemnification as an officer of the Company as set forth in the
Company's By-Laws in effect on the date hereof.

         Section 20.       Entire Agreement. This Agreement reflects the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof and replaces and supercedes any prior employment agreements.

                                    * * * * *

                                       11
<PAGE>
                                    LA PETITE ACADEMY, INC.


                                    By:   /s/ Thomas McGarry
                                          -------------------------------------
                                           Name: Thomas McGarry
                                          Title: Vice President



                                    LPA HOLDING CORP.


                                    By:   /s/ Judith A. Rogala
                                          -------------------------------------
                                           Name: Judith A. Rogala
                                          Title: Chief Executive Officer and
                                                 President


                                    Gary A. Graves
                                    -------------------------------------------
                                    Executive