##### Table of Contents






SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K



|  |                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|x | Annual Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 for the fiscal year ended
    March 29, 2002                                           
| 
|o | Transition report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 for the transition period
    from                       to                       .

Commission File Number 0-27656




CHILDTIME LEARNING CENTERS, INC.

(Exact name of registrant as specified in its
charter)


|                                                                                |  |                                                        
|------------------------------------------------------------------------------- |  | -------------------------------------------------------
|                                                                               
|Michigan
    (State or other jurisdiction of
    incorporation or organization) |  | 38-3261854
    (I.R.S. Employer
    Identification No.)

38345 West 10 Mile Road, Suite 100,
Farmington Hills, Michigan 48335

| |                                          |           
| | ---------------------------------------- | ----------
| | (Address of principal executive offices) | (Zip Code)

Registrants telephone number, including
area code: (248) 476-3200

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



|                                                            |                           
|----------------------------------------------------------- | --------------------------
|Securities registered pursuant to Section 12(g) of the Act: | Common Stock, No Par Value

(Title of Class)


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

Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.  [EMPTY BALLOT BOX]

The aggregate
market value of voting Common Stock held by non-affiliates of
the registrant as of June 15, 2002, computed by reference
to the last sale price for such stock on that date as reported
on the Nasdaq National Market System, was approximately
$5,227,304.

At June 15,
2002, the number of shares outstanding of the registrants
Common Stock, without par value, was 5,225,772.

Portions of the
registrants Proxy Statement for its 2002 Annual
Meeting of Shareholders have been incorporated by reference in
Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



|                                                                            |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART II                                                                    
|PART III                                                                   
|PART IV                                                                    
|SIGNATURES                                                                 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|Report of Independent Accountants                                          
|CONSOLIDATED BALANCE SHEET                                                 
|CONSOLIDATED STATEMENT OF OPERATIONS                                       
|CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY                  
|CONSOLIDATED STATEMENT OF CASH FLOWS                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|Quarterly Data                                                             
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS                           
|INDEX TO EXHIBITS                                                          
|First Amendment to Amended & Restaed Credit Agrmnt                         
|Option Agreement                                                           
|Option Agreement                                                           
|Consulting Agreement                                                       
|Employment Agreement                                                       
|Employment Severance Agreement                                             
|Fee Agreement                                                              
|List of Subsidiaries                                                       
|Consent of PricewaterhouseCoopers, LLP                                     



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Safe Harbor Statement Under
Private Securities Litigation Reform Act of 1995

Statements included herein which are not
historical facts are forward-looking statements pursuant to the
safe harbor provisions of the Private/ Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number
of risks and uncertainties, including, but not limited to,
continuation of federal and state assistance programs, demand
for child care, general economic conditions as well as pricing,
competition and insurability. Childtime Learning Centers, Inc.
cautions that actual results could differ materially from those
projected forward-looking statements.

Item 1. Business

General

Childtime Learning Centers, Inc. conducts
business through its wholly owned subsidiary Childtime
Childcare, Inc. and its wholly owned subsidiaries, Childtime
Childcare  Michigan, Inc., and Childtime
Childcare  PMC, Inc. (together referred to as the
Company). All significant intercompany transactions
have been eliminated.

The Company provides for-profit child care
through 286 child care centers as of March 29, 2002,
located in 23 states and the District of Columbia.
Center-based child care and preschool educational services are
provided five days a week throughout the year to children
between the ages of six weeks and twelve years. At
March 29, 2002, the Company had over 26,000 children
enrolled (full and part-time) nationwide. Substantially all of
the Companys child care centers are operated under the
Childtime Childrens Centers name. The
Companys centers are primarily located on free-standing
sites in suburban residential areas with substantial preschool
populations. Included among the Companys 286 child
care centers at March 29, 2002, were
42 at-work sites providing child care for
working parents at various business enterprises, office
complexes, shopping centers and hospitals.

The Companys strategy is to offer an
independently developed, nationally recognized educational
curriculum within a stimulating environment in order to provide
high quality child care and to maximize development and
preparation of children for school. The Company places a great
deal of emphasis on the recruitment, selection and ongoing
training of its child care center directors. Within a framework
of centralized financial and quality controls, the Company
grants significant authority over center operations to its
center directors and rewards its center directors on an
incentive basis tied to individual center performance.

The Company utilizes a 52 to 53 week fiscal
year (generally comprised of 13 four-week periods), ending
on the Friday closest to March 31. The fiscal years ended
March 29, 2002, March 30, 2001 and March 31, 2000
all contained 52 weeks. The first quarter for fiscal 2002,
2001 and 2000 contained 16 weeks, while the remaining
quarters contained 12 weeks.

Recent Developments

During fiscal 2002, the Company held various
discussions and conversations to acquire the assets of Tutor
Time Learning Systems, Inc. In February 2002, the discussions
resulted in the Company entering into a letter of intent to
acquire substantially all of the assets and liabilities of Tutor
Time. At that time, the Tutor Time system consisted of 235 child
care centers located in 25 states and three countries, with
an approximate licensed capacity of 45,000 students. Of the
childcare centers in the Tutor Time system, approximately
90 centers were owned by Tutor Time, with the remaining
centers being franchised by Tutor Time to third parties.

On March 21, 2002, the Company terminated
its proposed acquisition of Tutor Time. Tutor Time subsequently
filed for bankruptcy protection on May 11, 2002. Pursuant
to procedures approved by the U.S. Bankruptcy Court for the
Southern District of Florida, on June 18, 2002, the Company
submitted a bid to purchase the assets of Tutor Time for an
aggregate purchase price of $22,000,000 plus the assumption of
specified liabilities. The Companys bid, together with any
other bid that may be submitted, will be subject to a hearing,
and possibly an auction, currently scheduled for June 27,
2002. At this time, the Company has no assurance that its bid
will be the successful bid.

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Business Strategy

The Companys business strategy is to
(i) provide a greater focus on enhancing profitability of
existing centers through various programs; (ii) continue to
invest in its centers to maintain and improve quality;
(iii) emphasize its sales and marketing programs aimed at
increasing new enrollments and promoting customer loyalty;
(iv) offer programs to better utilize its centers on a
year-round basis; (v) provide regional finance and training
managers as additional support staff to center directors, in an
effort to improve center performance; and (vi) continue to
improve the quality of its staff through recruitment, training
and incentive programs.

Set forth below are certain key elements of the
Companys business strategy:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Standardized
    Operations.The Company has a
    consistent overall approach in providing child care services in
    its centers. With the exception of certain employer-sponsored
    sites and approximately 20 centers located within Texas and
    Arizona, the centers operate under the Childtime
    Childrens Centers name in suburban communities or
    at-work locations which have similar demographic
    characteristics. Each center utilizes an independently
    developed, nationally recognized educational curriculum. All
    center facilities are well maintained, similarly equipped and
    utilize the closed classroom concept. The Company utilizes
    prototype building designs for use in its build-to-suit centers.                                                                                                                                                                                                                                                                                     
|
| | Center
    Entrepreneurship.Within a framework
    of centralized financial and quality controls, each center
    director is empowered to customize the centers programs,
    and other features to adapt to local market requirements. Each
    director is also involved in the budgeting and financial
    planning process with regard to his or her center. The Company
    believes that its center directors are given more autonomy than
    are directors of other child care centers enabling them to
    better market their center while meeting the child care
    objectives of local customers. The Company trains its center
    directors to fulfill these additional responsibilities through a
    series of internally and externally prepared training programs
    designed to enhance interpersonal and business skills, basic
    financial concepts and marketing. Center directors are
    compensated, in part, through an incentive program based on the
    performance of the center under their supervision.
|
| | Growth Strategy.In
    prior years the Company has historically added approximately 30
    to 40 centers per year. In fiscal 2001, however, that
    number was significantly reduced. In fiscal 2002, the Company
    acquired or opened only four centers while closing
    22 centers, reflecting the Companys continued
    strategy of improving the operations of its existing centers,
    rather than aggressively pursuing the acquisition of additional
    centers. The Company will, however, consider a major acquisition
    of an existing childcare operation that competes in a different
    market niche. (See Growth Strategy below) Following
    this strategy, the Company is pursuing the acquisition of Tutor
    Time Learning Systems, Inc. (See Recent Developments
    above.)                                                                                                                                                                                                                             

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Growth Strategy

The Company has expanded its business in prior
years through a number of acquisitions and build-to-suit
centers. The following table sets forth the number of child care
centers acquired or otherwise opened, as well as closed, during
the periods indicated.

|                    |                          |                           |     |           |   |           |     |    |    |  |     |     |    | 
|------------------- | ------------------------ | ------------------------- | --- | --------- | - | --------- | --- | -- | -- |  | --- | --- | -- | 
|                    |                          |                          
|                    |                          | Fiscal Year Ended        
|                    |                          |                          
|                    |                          | March 29,                 |     | March 30, |   | March 31,
|                    |                          | 2002                      |     | 2001      |   | 2000     
|                    |                          |                           |     |           |   |          
|Number of centers:  |                          |                           |     |           |   |           |     |    |    |  |     |    
|Beginning of period |                          |                           | 304 |           |   |           | 293 |    |    |  | 270 |    
|                    | Additions during period: |                           |     |           |   |           |     |    |    |  |     |     |   
|                    |                          | Acquisitions and other    |     |           | 1 |           |     |    | 10 |  |     |     | 34 | 
|                    |                          | New builds and new leases |     |           | 3 |           |     |    | 8  |  |     |     | 4  | 
|                    |                          |                           |     |           |   |           |     |    |    |  |     |    
|                    | Total additions          |                           |     | 4         |   |           |     | 18 |    |  |     | 38  |   
|                    | Closings during period   |                           |     | (22       | ) |           |     | (7 | )  |  |     | (15 | ) 
|                    |                          |                           |     |           |   |           |     |    |    |  |     |    
|End of period       |                          |                           | 286 |           |   |           | 304 |    |    |  | 293 |    
|                    |                          |                           |     |           |   |           |     |    |    |  |     |    

In making its previous expansion decisions, the
Company strove to add units in its existing markets in order to
increase market concentration and to leverage administrative and
advertising expenses. Entry into new markets was also
considered, but only if these markets could eventually support a
minimum of 10 centers. As the result of a change in
strategy, the Company is now focused on improving the
performance of existing centers before it continues to add units
to its existing operations. Accordingly, during fiscal 2002 and
2001, the Company significantly reduced the amount of
acquisitions as compared to previous fiscal years. For fiscal
2003, the outlook is again similar. The Company continuously
reviews its existing center portfolio in an effort to ensure the
centers meet its minimum standards. Centers become candidates
for closure when they fail to meet certain demographic or
financial criteria. As a result, the Company decided to close
22 centers during fiscal 2002, 18 of which were included in
its restructuring plan initiated at the end of fiscal 2001. In
addition, the Company continually reviews the operations of its
remaining centers to determine if additional centers will be
closed during fiscal 2003.

In choosing locations for new centers, the
Company considers a number of factors, emphasizing suburban
neighborhoods with growing populations of young families.
Management looks for sites in proximity to newly developed or
developing residential areas on heavily traveled local streets.
The Company performs a detailed analysis of the demographics of
the area surrounding the proposed site and focuses on several
site selection criteria: an above-average concentration in the
percentage of children under age six; a minimum population
density of 25,000 people within a three-mile radius surrounding
a proposed site; and an average household income in excess of
$50,000. The Company also analyzes the percentage of the
population consisting of college-educated, dual income families,
as well as the average home value in the target area. The
Company believes that parents in more affluent areas are more
willing to pay a premium for higher quality child care services.

In addition to acquiring or building centers in
residential areas, in the past the Company has obtained
contracts with employers and office complex managers to operate
centers in at-work locations. Historically, public agencies and
hospitals have been the principal employers providing or
otherwise arranging for child care services for their employees.
A number of private sector employers have begun to offer this
benefit, as they recognize that reduction of employee
absenteeism due to a lack of reliable and available child care
can significantly offset the cost to employers in offering such
benefits.

The Companys acquisition and new build
activity is limited to child care centers in market areas
showing strong growth potential and to sites which the Company
believes it can conform to its standard facility and educational
format. The Company believes, at the appropriate time, that it
can continue to acquire centers on terms that compare favorably
with the costs and risks of establishing new facilities. In an
effort to standardize its new facilities, the Company has
developed two building prototypes which accommodate 130 to 180

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children. There are no assurances, however, that
it will be able to continue to acquire and develop new sites in
an economic manner.


The Company will also consider a major
acquisition of an existing childcare operation that operates in
a different market niche. (See Recent Developments
above.)

Educational Programs

The Companys educational programs stress
the process of learning and discovery. The staff is trained to
support children in their active explorations and to help them
to become self-confident, independent and inquisitive learners.
The Company believes in fostering all aspects of a childs
development: social, emotional, physical and intellectual. The
two primary means of meeting this goal are the use in each
center of a nationally recognized educational curriculum
developed by independent educators and the centers ongoing
dialogue with parents in providing a learning environment for
their children whom meets or exceeds their expectations as
customers.

In each center, the Company utilizes The
Creative Curriculum®For Early Childhood, a nationally
recognized educational curriculum published by Teaching
Strategies, Inc. and written by Diane Trister Dodge (a member of
the Governing Board of the National Association for the
Education of Young Children from 1990 to 1994) and Laura J.
Colker. The Company believes that using a curriculum prepared by
independent educators, knowledgeable in the education of young
children, enables them to take advantage of professional
expertise that is otherwise not available to themselves or other
child care center operators. In addition, an externally
developed curriculum typically emphasizes educational objectives
over cost and other financial objectives. The Company trains its
center directors and other caregivers to utilize The Creative
Curriculum®.

Children enrolled at a center are placed into
groups, according to their emotional, physical, intellectual and
social maturity, rather than merely the childs age. Each
group has specific learning goals which enable the staff to
develop planning activities and daily programs and to assess
each childs growth and development. Although all centers
utilize the same educational curriculum, the staff at each
center is responsible for developing daily lesson plans and
activities appropriate for each of its developmental groups and
for its locale. At designated times during the year, an informal
developmental assessment is prepared for each child and reviewed
with the childs parents.

The Companys classrooms are organized in
seven levels following the sequential process of growth and
development, from infancy through school-age:

Infants (six
weeks  twelve months)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A homelike environment and positive caregiver
    interactions foster the infants sense of trust and
    self-esteem. Daily routines (feeding, diapering and rocking) and
    sensory experiences are used to promote listening and language
    skills to help infants learn about the world around them. Play
    activities and interactions focus on the development of large
    muscles for sitting, crawling, standing and walking. Activities
    that develop small muscles for grasping, reaching, holding and
    picking up objects are also utilized on a routine basis.

Young Toddler
(1  2 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom space and materials are organized to
    support the young toddlers need to physically explore,
    discover and to be independent. Caregivers provide comforting
    words and lap time to help toddlers deal with separation from
    parents. Toddlers are encouraged to participate in daily
    routines to develop self-help skills and self-esteem. Play
    activities with sensory experiences provide opportunities to
    help in the development of thinking skills, large and small
    muscles and assist in promoting communication skills. Stories,
    pictures and books are introduced to help toddlers experience
    reading as a pleasurable activity. Caregivers reinforce positive
    behaviors, set limits and are consistently available as a
    homebase to support the toddlers conflicting
    need for independence and comfort.

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Toddler
(2  3 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom space and materials are organized to
    support the older toddlers increased need for independence
    in making simple decisions, engaging in pretend play and playing
    cooperatively with other children. Toddlers are supported in
    their self-help skills (dressing, feeding and toileting) and
    encouraged to help with daily routines in order to become
    familiar with the sequence of events to foster their
    self-esteem. Play activities provide opportunities to practice
    skills, increase communication about sensory experiences and
    promote listening and speaking skills. Indoor and outdoor
    activities focus on helping toddlers strengthen small muscles
    and aid in the development of hand-eye coordination and large
    muscles.

Preschool 1
(3  4 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom space and materials are organized in
    distinct interest centers to support young preschoolers
    initiative to practice their new skills and express their ideas
    and feelings. These centers are set up to encourage preschoolers
    to select play activities, engage in hands-on exploration,
    participate in pretend play and develop the ability to play
    cooperatively. Small muscles and hand-eye coordination continue
    to be strengthened through art activities, sand and water play
    and by working with manipulative toys and blocks. The daily
    schedule includes many activities for large muscle development.
    Stories and books are used daily to increase familiarity with
    the meaning of letters and words (emergent literacy) and to
    foster reading as a pleasurable activity.

Preschool 2
(4  5 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom organization and the daily schedule
    provide increased opportunities for independent and small group
    play in interest centers. Such group play supports older
    preschoolers developing ability to organize their own
    play, assign roles and tasks and work towards a common goal.
    Activities provide hands-on experiences. Caregiver interaction
    focuses on helping preschoolers organize the information they
    gather, develop an understanding of number concepts, reasoning
    and problem solving skills (matching, classifying and
    sequencing), while expanding listening and language skills.
    Independent and group activities with books and stories promote
    reading readiness. Caregivers create a print rich environment
    (signs, labels and charts) and provide opportunities for
    children to draw, paint and engage in writing activities.
    Children are increasingly involved in helping to set limits for
    positive and caring behaviors.

Five Year Old
or Kindergartner (5  6 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom organization, materials and activities
    support the five year-olds increased ability to understand
    written symbols (letters, numbers and some words) and create an
    interest in writing. Educational interest centers continue to
    provide opportunities for hands-on exploration to sharpen
    observation skills, explore cause and effect, share and play
    cooperatively with others, plan and carry out a task and engage
    in independent or group play for an extended period of time.
    Materials are provided to encourage representation, symbolic
    play and to practice drawing and writing. Activities are planned
    to help children learn to follow directions, recall and sequence
    events, understand measurement, recognize how materials can
    change, think creatively to solve problems, improve their
    coordination skills and use their bodies in challenging outdoor
    play tasks. Centers which offer a kindergarten program for
    transitioning children into first grade follow the local school
    districts specific goals and assessment requirements.

School-ages
(6  12 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom space, equipment and materials are
    organized to support school-agers sense of industry and
    competence and to accommodate the wide range of interests and
    abilities of six to twelve year-olds. The program provides
    opportunities for school-agers to pursue their interests,
    perfect coordination of large and small muscles and to learn to
    work with others. The environment is designed to engage children

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| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | in activities (arts and crafts, cooking, dramatic
    play, music, dance, games and sports) they can pursue
    independently, with a friend, or as a group project. Caregiver
    integration focuses on helping children set reasonable goals and
    manageable tasks, guiding them to think about the consequences
    of their words and actions so as to foster a sense of community.

Through parent surveys, the Company continually
assesses the quality of its education curriculum. These surveys
provide the Company with feedback on parent satisfaction with
their childs developmental growth and with the
Companys curriculum, center director and overall quality
of the center. Center directors also conduct both formal and
informal parent interviews in order to ascertain parent
satisfaction levels and address any concerns. Information gained
from these interviews is forwarded to the Companys
management for review. The Company also endeavors to provide an
exit-survey to parents who stop utilizing its services.

The Company continues to focus its efforts to
accredit many of its centers by the National Association for the
Education of Young Children (NAEYC) or the National
Child Care Association (NCCA). The NAEYC and NCCA
are national organizations which have established comprehensive
criteria for providing quality child care. NAEYC and NCCA have
developed and implemented a child care center accreditation
process through which child care providers can receive formal,
national recognition of their child care program. The Company
believes that the review process leading toward accreditation
assists the Company in its efforts to continually improve its
programs and facilities. The Company shares NAEYC and
NCCAs commitment to provide quality child care and
accordingly, continues an aggressive accreditation program.

Products and Services

General.Subsequent
to the end of fiscal 2002, the Company reorganized its
operations into one division with the overall operations headed
by a Vice President of Operations. The Vice President oversees
four regions, with each region comprised of a regional
operations manager, regional finance manager and regional
training manager. Regional offices are located in Baltimore,
Maryland; Cleveland, Ohio; Dallas, Texas and Escondido,
California. Reporting to the regional operations manager are 5
to 6 area managers, with each area manager responsible for
10 to 16 centers depending upon geographic dispersion of
the centers. Each region comprises approximately
75 centers. Each individual center has a dedicated center
director and a staff ranging from 15 to 30 persons. The
centers operate year round, five days per week, generally
opening at 6:30 a.m. and remaining open until
6:30 p.m. A child may be enrolled in any of a variety of
program schedules, from a full-time, five-day-per-week plan to
as little as two or three half-days a week. A child attending
full-time typically spends approximately 9 hours a day,
five days per week, at a center.

The Companys current weekly tuition for
full-day service typically ranges from $74 to
$265 depending on the location of the center and the age of
the child. Tuition is generally paid, in advance, on a weekly
basis. In addition, parents currently pay an annual registration
fee ranging from $25 to $80. The Company generally reviews
its tuition rates at least once each year to determine whether
rates at a particular center should be changed in light of that
centers competitive environment and financial results.

Center Operations.Each center is managed by a director
who is supervised by an area manager. The Company places a great
deal of emphasis on the recruitment, selection and ongoing
training of center directors. Center directors are hired by
their respective area manager from a pool of candidates who have
undergone an initial psychological profile screen, reference
check, and criminal background check. All center directors are
required by state regulations to have some minimum level of
training, which is typically in the form of credit hours from a
state approved training agency or an accredited educational
institution. The Company prefers that potential directors have a
bachelors degree in early childhood education, child
development or a health related field plus a minimum of two
years experience in licensed child care. Many directors are
recruited from within the Company and have served as caregivers
or assistant directors in one of the Companys centers. A
center director has overall responsibility for the operations of
a center including: ensuring that the center is operated in
accordance with Company and state licensing standards and
operating procedures; providing an educational, caring and safe
environment for children and their parents; marketing the
Company to parents and otherwise promoting the positive image of
the Company in the community. The

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center directors receive a salary and bonus tied
to the financial and operating performance of their center. Each
center director is also responsible for hiring his or her staff,
including caregivers.


The center director assesses and collects tuition
and fees. All funds received by each center are deposited in an
account established by the Company in a local bank. All payroll
and most other center expenses are paid directly by the
Companys corporate office. Basic supplies are purchased by
the centers pursuant to national vendor contracts negotiated by
the corporate office to take advantage of volume buying
discounts and to retain financial controls. Direct expenditures
by the centers are limited to miscellaneous operating expenses.

Area Supervision.An
area manager hires the director of each of his or her centers
and is supervised by a regional manager. Area managers also work
very closely with other corporate staff members, such as the
Vice President  Human Resources, Director of Real
Estate, Vice President  Marketing, Corporate
Controller or Director of Legal Affairs, on such issues as
center acquisition and marketing, personnel actions and
financial planning. Additional duties of area managers are to
facilitate communications between center directors and the
corporate office, as well as among center directors, and to
monitor cost control and revenue generation efforts and
licensing compliance. Area managers typically spend 80% of their
work time in the centers they supervise. Area managers receive a
salary and bonus tied to the financial and operating performance
of the centers under their supervision.

Training.The
Company believes that the skills and expertise of the director
and staff at each center are among the most significant factors
for parents selecting center-based child care programs. In order
to enhance the quality of the staff at each center, the Company
provides both externally and internally developed training
programs for its personnel. It has developed training materials
and manuals for its staff and conducts seminars for its area
managers and directors on such subjects as interpersonal and
business skills, basic financial concepts and marketing. All
management personnel (including area managers, center directors
and assistant directors) participate in periodic training
programs or meetings and must comply with applicable state and
local licensing regulations. Center staff is required to
participate in orientation and training sessions. The Company is
organized for its operations into four regional areas, each of
which has an on-site regional training manager to assist in the
development and implementation of its training programs. These
training programs are designed to prepare and enhance the skills
of its caregivers to meet the Companys internal standards
and applicable state licensing requirements. Effective in fiscal
2002, all new center directors attend a one-week training course
held at their respective region office within four weeks of
their hire date.

Safety.The Company
is committed to the health and safety of the children in its
care. To prevent unauthorized persons from entering the center,
a majority of the buildings use a double door entrance with a
security code and have a centrally monitored security system to
protect the center after hours. Each day, children must be
signed in and out by parents, legal guardians or an authorized
designee of the parent or guardian. All centers have at least
one staff member trained in first aid and CPR.

Center staff members are trained to detect child
neglect and abuse, and are required by law and company policy to
immediately report all suspected instances. In the rare event
that an employee is accused of child neglect or abuse, it is the
Companys policy to place the employee on paid
administrative leave pending the results of an independent state
agency investigation, in which the Company cooperates fully. No
assurances can be made that allegations of child neglect or
abuse will not be made in the future. However, allegations of
child neglect or abuse against an employee are rare, and in most
cases, covered by the Companys general liability
insurance. Since these incidents fall within the insurance
policy limits, it is the Companys position that such
occurrences will not materially affect the financial position,
results of operations, or cash flow position of the Company. The
Company maintains general liability insurance and appropriate
umbrella policies in adequate amounts, as described under
Insurance.

Financial Planning; Budgeting and Cost
Control.The Company has implemented a
program of financial planning and cost control which seeks to
maximize operational profit without sacrificing quality child
care. This goal is accomplished by actively engaging the area
manager and center director in the formulation and
implementation of the budget for each center. During the
budgeting process, key budget metrics are initially developed at
the center level, with center directors taking an active role in
developing and submitting the budget for their respective
centers through their area manager and on to the Companys
corporate

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management for approval. The Companys
operations are organized into four regional areas, each of which
includes an on-site regional finance manager. The regional
finance manager is responsible for assisting the director and
area manager in the budgeting process along with other financial
functions. Directors are then responsible for implementing the
approved budget and become primarily responsible for the
financial performance of the center. In order to encourage
profitable performance, the Company has implemented a financial
incentive program for meeting or exceeding pre-approved budget
goals.


Facilities.Most of
the Companys centers are freestanding structures owned or
leased by the Company. The Company utilizes prototype buildings
designed specifically for each state emphasizing energy
efficiencies, lower maintenance costs and enhanced appearance.
Depending on the state, these prototype designs contain between
7,900 to 9,000 square feet in a one story, air-conditioned
building. The interiors primarily consist of closed classrooms
bordering a central hallway. Such a design accommodates the
desire to allow children the freedom to explore their
environment as well as the staffs need to be able to
monitor activities in the classroom. The Companys centers
contain classrooms, recreational areas, a kitchen and bathroom
facilities and are typically designed to accommodate the
grouping of children by age or development. Room materials are
chosen for their educational value, quality and versatility. The
infant/young toddler room features separate, sanitary diaper
changing areas. Each facility has a playground designed to
accommodate the full range of children attending the center,
including an area specifically for toddlers. The playground is
fenced in for security and organized to provide adequate
supervision for every age group. Each center is equipped with a
variety of audio-visual aids, educational supplies, games, toys,
indoor and outdoor play equipment. In addition, most of the
centers are equipped with personal computers and software
designed for preschool and school age children. Virtually all of
the centers are also equipped with Company-owned or leased
vehicles for the transportation of children to and from
elementary schools and for field trips. Van drivers carry cell
phones in the event of a break down while on the road.

The aggregate licensed capacity of the
Companys centers (not including those under management
contracts) at March 29, 2002 was 36,044 children (or an
average of 130 children per center). The capacity variance
differs from state to state because of various licensing
requirements.

At-Work Sites.In
addition to operating residential child care centers, the
Company also managed, at March 29, 2002, 42 child care
centers in at-work locations, making it one of the largest
providers of at-work child care services. Many of these centers,
including those for Schering Plough (a division of the Schering
Corporation), Blue Cross Blue Shield of Mississippi and Henry
Ford Health Systems, are located on or near the premises of a
specific employer and involve varying degrees of involvement
from the employer, such as ownership of the premises, minimum
enrollment guarantees, the assumption of financial
responsibility for the ongoing operations of the center, other
management arrangements, or any combination of the above. Other
at-work centers are located in office complexes or shopping
centers. Historically, public agencies and hospitals have been
the principal employers providing or otherwise arranging for
child care services for their employees. A number of private
sector employers have begun to offer this benefit, as they
recognize that reduction of employee absenteeism due to a lack
of reliable and available child care can significantly offset
the cost to employers of offering such benefits.

Marketing

The Company believes that the quality of a
centers director, staff, center location, and consistent
localized advertising and marketing are the key components to a
successful center. The Company relies heavily on recommendations
from current customers as a source of new enrollments. To
encourage recommendations, the Company offers a referral bonus
to parents and employees of the Company who successfully
recommend the Company to others. In addition, the Company
advertises through a variety of database direct marketing
programs which target parents within a specified radius of each
center. The advertising budget is largely spent in the summer
months in anticipation of the back-to-school enrollment in new
centers. The Company also advertises through direct mail
distribution of promotional material in residential areas
surrounding a center and through listings in the Yellow Pages
and maintains an internet web site. The Company will continue to
promote its safe, secure facilities along with its respected
curriculum and

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qualified staff through direct marketing
campaigns timed around peak enrollment periods or to support
specified programs.


Seasonality

Generally, the Companys accounting periods
are organized into 13 four-week periods, with 4 four-week
periods comprising the first fiscal quarter and 3 four-week
periods comprising each of the second, third and fourth fiscal
quarters. Consequently, the Companys quarterly revenues
and gross profit results for the first quarter are favorably
impacted by the additional four weeks included in such period.
Periodically, due to the Companys closing the fiscal year
on the Friday closest to March 31, the Company will have a
five-week period in the thirteenth period of its fiscal year.

In July and August of each year (the last month
of the Companys first fiscal quarter and the first month
of the Companys second fiscal quarter), the Company has
historically experienced an enrollment decline. To offset this
decline, the Company has successfully implemented and marketed a
summer camp program with a new theme and focus each year. As a
result of such programming and the timing of the quarters,
average weekly revenues by quarter during fiscal 2002 and 2001
were very consistent and not as adversely impacted by the normal
summer enrollment decline. In addition, new enrollments are
generally highest in September and January; accordingly, August
and December are traditionally the best months to open new
centers. However, with the exception of spring, the Company has
demonstrated an ability to successfully open centers throughout
the year because of enhanced pre-opening marketing efforts.
Total enrollments (and, accordingly, the Companys results)
are typically the strongest in the fourth quarter (which include
the months of January, February and March).

Competition

The child care and preschool education industry
is highly fragmented and competitive and has historically been
dominated by small, local nursery schools and child care
centers. The Companys competition consists principally of
local nursery schools and child care centers (some of which are
non-profit, including church-affiliated centers), providers of
services that operate out of homes and other proprietary
multi-unit child care center providers some of which are larger
and may have substantially greater financial resources than the
Company. The largest providers of for-profit child care and
preschool education are KinderCare Learning Centers, Inc. and La
Petite Academy, Inc. The Company believes it is able to compete
favorably with these providers by offering a high quality level
of child care services. This is especially true in competing
against local nursery schools, child care centers and in-home
providers where the Company is often at a price disadvantage,
because these providers generally charge less for their services
than the Company charges. Many church-affiliated and other
non-profit child care centers have lower rental costs, if any,
than the Company and may receive donations or other funding to
cover operating expenses. Consequently, operators of such
centers often charge tuition rates that are less than the
Companys rates. In addition, fees for home-based care are
normally lower than fees for center-based care because providers
of home care are not always required to satisfy the same health,
safety, insurance or operational regulations as the
Companys centers. The Company competes by hiring and
training quality center directors and by offering
professionally-planned educational and recreational programs,
modern, well-equipped facilities, and trained staff and
supervisory personnel. In addition, the Company also provides a
range of services, including infant and toddler care, drop in
service, and the transportation between the Companys child
care centers and schools of older children enrolled in the
Companys before and after school program.

Personnel

As of March 29, 2002, the Company employed
more than 5,500 persons (including part-time and substitute
caregivers), of whom 49 are employed at corporate headquarters,
16 are employed at the 4 regional offices and 22 are employed as
area managers. The remainder are employed at the Companys
child care centers. Center employees include center directors,
assistant directors, full-time and part-time teachers,
caregivers, substitute caregivers, aides and other staff,
including cooks and van drivers. All center directors, regional
managers, area managers and most corporate supervisory personnel
are salaried; all other employees

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are paid on an hourly basis. The Company does not
have an agreement with any labor union and believes that its
relations with its employees are good.


The Company is also subject to the Fair Labor
Standards Act, which governs minimum wages, overtime
compensation and working conditions. A portion of the
Companys personnel (estimated to be less than 1% as a
percentage of total payroll expense) are paid at the federal
minimum wage.

Regulation

Child care centers are subject to numerous state
and local regulations and detailed licensing requirements.
Although these regulations vary from jurisdiction to
jurisdiction, government agencies generally review, among other
things, the adequacy of buildings and equipment, licensed
capacity, the ratio of staff to children, staff training, record
keeping, the dietary program, the daily curriculum and health
and safety standards. In most jurisdictions, these agencies
conduct scheduled and unscheduled inspections of centers, and
licenses must be renewed periodically. In a few jurisdictions,
new legislation or regulations have been enacted or are being
considered which establish requirements for employee background
checks or other clearance procedures for new employees of child
care centers. Repeated failures by a center to comply with
applicable regulations can subject it to state sanctions, which
might include fines, corrective orders, being placed on
probation or, in more serious cases, suspension or revocation of
the centers license to operate. Management believes the
Company is in substantial compliance with all material
regulations applicable to its business.

For the fiscal year ended March 29, 2002,
approximately 22% the Companys revenues were generated
from federal and state child care assistance programs, primarily
the Child Care and Development Block Grant and At-Risk Programs.
These programs are typically designed to assist low-income
families with child care expenses and are administered through
various state agencies. Although no federal license is required
at this time, there are minimum standards which must be met to
qualify for participation in certain federal programs. There is
no assurance that funding for such federal and state programs
will continue at current levels and a significant reduction in
such funding may have an adverse impact on the Company.

There are certain tax incentives for parents
utilizing child care programs. Section 21 of the Internal
Revenue Code provides a federal income tax credit ranging from
20% to 30% of certain child care expenses for qualifying
individuals (as defined therein). The fees paid to the
Company for child care services by eligible taxpayers qualify
for the tax credit, subject to the limitations of
Section 21. In 2001, the amount of the qualifying child
care expenses was limited to $2,400 for one child and $4,800 for
two or more children. Therefore, the maximum credit ranged from
$480 to $720 for one child and from $960 to $1,440 for two or
more children. In 2002, the tax credit will range from 20% to
35% of qualifying child care expenses, which will be limited to
$3,000 for one child and $6,000 for two or more children in
2002. Therefore, the maximum credits will range from $600 to
$1,050 for one child and $1,200 to $2,100 for two or more
children. Tax incentives provided under the Internal Revenue
Code are subject to change.

The Company must also comply with the Americans
with Disabilities Act (ADA), which prohibits
discrimination on the basis of disability in public
accommodations and employment. Costs incurred to date by the
Company to comply with the ADA have not been significant. A
determination that the Company is not in compliance with the
ADA, however, could result in the imposition of fines or an
award of damages to private litigants, and could require
significant expenditures. The Company believes that the majority
of its centers are substantially in compliance with all material
ADA requirements.

Insurance

The Companys insurance program currently
includes the following types of policies: workers
compensation, commercial general and automobile liability,
commercial property, director and officer liability, flood
coverage in applicable locations, excess umbrella
liability, and a medical payment program for accidents which
provides secondary coverage for each child enrolled in a Company
center. The policies provide for a variety of coverages and are
subject to various limits and deductibles. For fiscal 2002 and
2001, the Companys policies for workers compensation
had a deductible of $250,000 per occurrence. The commercial
general liability policy includes coverage for child physical
and sexual abuse claims, with an annual limit of $1,000,000

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per location (including all general liability
claims except product liability claims), $1,000,000 per
occurrence and $3,000,000 in the aggregate. The Company also has
excess umbrella coverage, relating to general
liabilities (exclusive of child physical and sexual abuse
claims) in the amount of $20,000,000 per year. Management
believes the Companys current insurance coverages are
adequate to meet its needs.


Item 2. Properties

The following table shows the locations of the
Companys centers, including those operated under
management contracts, as of March 29, 2002 (the numbers in
parentheses reflect the number of centers in that state):

|                 |  |                    
|---------------- |  | -------------------
|Arizona (22)     |  | New Mexico (1)     
|California (34)  |  | New York (26)      
|Florida (12)     |  | North Carolina (12)
|Georgia (15)     |  | Ohio (22)          
|Illinois (7)     |  | Oklahoma (8)       
|Iowa (3)         |  | Pennsylvania (1)   
|Maryland/DC (14) |  | South Carolina (1) 
|Michigan (19)    |  | Texas (47)         
|Mississippi (1)  |  | Virginia (13)      
|Missouri (4)     |  | Washington (8)     
|Nevada (7)       |  | Wisconsin (1)      
|New Jersey (8)   |  |                    

As of March 29, 2002, the Company operated
286 centers, 226 of which were operated under lease or operating
agreements, 51 of which were owned and 9 of which were operated
under management contracts. The leases have terms ranging from 1
to 25 years, often with renewal options, with most leases
having an initial term of 5 to 20 years. The leases
typically require the Company to pay utilities, maintenance,
insurance and property taxes and some provide for contingent
rentals if the centers revenues exceed a specified base
level.

As of March 29, 2002, the Company had leases
or operating agreements with initial terms (including renewal
options) expiring as follows:

|               |  |                               |    | 
|-------------- |  | ----------------------------- | -- | 
|               |  | Number of Leases or          
|Fiscal Year    |  | Operating Agreements Expiring
|               |  |                              
|2002-2003      |  |                               | 41 | 
|2004-2005      |  |                               | 27 | 
|2006-2009      |  |                               | 77 | 
|2010 and later |  |                               | 97 | 

The Company also owns one undeveloped site
acquired prior to 1990. This property does not currently fit
within the Companys long-term growth strategy.
Accordingly, this site is carried on the Companys books at
fair value less cost to sell in the amount of $15,600 and is
held for sale.

The Company currently leases approximately 12,800
square feet for its corporate offices in Farmington Hills,
Michigan. This lease expires at December 31, 2002, and the
Company is currently seeking to lease approximately
16,000  18,000 square feet of office space in the
same general metropolitan area.

Item 3. Legal Proceedings

The Company is involved from time to time in
routine litigation arising out of the ordinary course of its
business, most of which is covered by general liability
insurance. In managements opinion, none of the litigation
in which the Company is currently involved will have a material
effect on its financial condition, results of operations, or
cash flows. (See Contingencies in Item 7 of
Managements Discussion and Analysis of Financial Condition
and Results of Operations.)

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Item 4. Submission of Matters to a
Vote of Security Holders

None.

Item 4A. Executive Officers of the
Registrant

The information regarding executive officers of
the Company contained in Item 10 of this Report as it
appears in Part III of this Report is incorporated herein
by reference.

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PART II


Item 5. Market for Registrants
Common Equity and Related Stockholder Matters

The Companys Common Stock is regularly
quoted on The Nasdaq National Market System under the symbol
CTIM. The following table sets forth, for the fiscal years ended
March 29, 2002, and March 30, 2001, the high and low
closing sale prices for the Companys Common Stock.

|             |             |              |   |      |  |  |   |      | 
|------------ | ----------- | ------------ | - | ---- |  |  | - | ---- | 
|             |             |             
|             |             | Common Stock
|             |             | Sales Prices
|             |             |             
|             |             | High         |   | Low 
|             |             |              |   |     
|Fiscal 2002: |             |              |   |      |  |  |   |     
|             | 1st Quarter |              | $ | 9.00 |  |  | $ | 6.76 | 
|             | 2nd Quarter |              | $ | 9.05 |  |  | $ | 7.00 | 
|             | 3rd Quarter |              | $ | 8.00 |  |  | $ | 5.50 | 
|             | 4th Quarter |              | $ | 5.90 |  |  | $ | 2.90 | 
|            
|Fiscal 2001: |             |              |   |      |  |  |   |     
|             | 1st Quarter |              | $ | 8.13 |  |  | $ | 6.38 | 
|             | 2nd Quarter |              | $ | 8.63 |  |  | $ | 7.50 | 
|             | 3rd Quarter |              | $ | 7.61 |  |  | $ | 5.56 | 
|             | 4th Quarter |              | $ | 9.22 |  |  | $ | 6.25 | 

The Company has not paid dividends on shares of
Common Stock and has no intention of declaring or paying any
such dividends in the foreseeable future. The Company is not
currently subject to any contractual restrictions on its ability
to pay dividends. Nonetheless, the Company intends to retain its
earnings, if any, to finance the growth and development of its
business, including future acquisitions.

As of June 15, 2002, there were
approximately 550 holders of the Companys Common Stock
(including individual participants in security position
listings).

On June 6, 2002, the Company received
notification from NASDAQ that its common stock, during the last
30 consecutive trading days, had not maintained a minimum market
value of publicly held shares (i.e., not including affiliates)
of $5,000,000, as required to maintain its listing on The Nasdaq
National Market System. The Company has until September 4,
2002, to regain compliance, in order to retain its listing on
The Nasdaq National Market System. To regain compliance, the
market value of publicly held shares of the Companys
common stock must be $5,000,000 or greater for a minimum of 10
consecutive trading days. If such a market volume cannot be
obtained, the Company may apply to transfer its securities to
The Nasdaq SmallCap Market. If such a transfer application is
properly submitted by September 4, 2002, the initiation of
delisting proceedings will be stayed pending the Nasdaq
staffs review of the transfer application. Although there
are no assurances that a transfer application to The Nasdaq
SmallCap Market, if necessary, would be approved, the Company
believes that it meets the applicable standards for inclusion
for that market.

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Item 6. Selected Financial
Data

The following table sets forth, for the periods
indicated, selected data from the Companys financial
statements. This table should be read in conjunction with
Item 7 (Managements Discussion and Analysis of
Financial Condition and Results of Operations) and with the
Companys Consolidated Financial Statements and related
Notes for the year and period ended March 29, 2002
appearing elsewhere in this Report.

Childtime Learning Centers, Inc. and
Consolidated Subsidiaries

|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |       |       |        | 
|---------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------- | ---------- | ------ | ---------- | ------- | ---------- | ----- | ---------- | ------- | ----- | ----- | ------ | ------- | ----- | ----- | ------ | ------ | ----- | ----- | ------ | 
|                                                                             |                                                                                               | March 29,                                         |                   | March 30,  |        | March 31,  |         | April 2,   |       | April 3,  
|                                                                             |                                                                                               | 2002                                              |                   | 2001       |        | 2000       |         | 1999       |       | 1998      
|                                                                             |                                                                                               | (52 weeks)                                        |                   | (52 weeks) |        | (52 weeks) |         | (52 weeks) |       | (53 weeks)
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |           
|                                                                             |                                                                                               |                                                  
|                                                                             |                                                                                               | (Dollars in thousands, except for per share data)
|Selected Income Statement Data:                                              |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|Revenues                                                                     |                                                                                               | $                                                 | 142,399           |            |        | $          | 147,843 |            |       | $          | 129,121 |       |       | $      | 113,241 |       |       | $      | 98,158 |      
|Cost of revenues                                                             |                                                                                               |                                                   | 129,185           |            |        |            | 131,269 |            |       |            | 112,172 |       |       |        | 96,541  |       |       |        | 83,432 |      
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|                                                                             |                                                                                               |                                                   | Gross profit      |            |        | 13,214     |         |            |       | 16,574     |         |       |       | 16,949 |         |       |       | 16,700 |        |       |       | 14,726 | 
|Provision for doubtful accounts                                              |                                                                                               |                                                   | 1,324             |            |        |            | 406     |            |       |            | 385     |       |       |        | 278     |       |       |        | 330    |      
|Marketing expenses                                                           |                                                                                               |                                                   | 1,464             |            |        |            | 1,666   |            |       |            | 1,601   |       |       |        | 1,454   |       |       |        | 1,265  |      
|General and administrative expenses(1)                                       |                                                                                               |                                                   | 11,996            |            |        |            | 8,825   |            |       |            | 7,598   |       |       |        | 6,854   |       |       |        | 6,193  |      
|Restructuring expense                                                        |                                                                                               |                                                   | 578               |            |        |            | 4,000   |            |       |            | 0       |       |       |        | 0       |       |       |        | 0      |      
|Mold remediation expense                                                     |                                                                                               |                                                   | 1,005             |            |        |            | 0       |            |       |            | 0       |       |       |        | 0       |       |       |        | 0      |      
|Failed merger costs                                                          |                                                                                               |                                                   | 952               |            |        |            | 0       |            |       |            | 0       |       |       |        | 0       |       |       |        | 0      |      
|Impairment charges                                                           |                                                                                               |                                                   | 1,916             |            |        |            | 1,447   |            |       |            | 282     |       |       |        | 0       |       |       |        | 0      |      
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|                                                                             |                                                                                               | Operating income                                  |                   |            | (6,021 | )          |         |            | 230   |            |         |       | 7,083 |        |         |       | 8,114 |        |        |       | 6,938 |       
|Interest expense                                                             |                                                                                               |                                                   | 458               |            |        |            | 966     |            |       |            | 428     |       |       |        | 312     |       |       |        | 287    |      
|Interest (income)                                                            |                                                                                               |                                                   | (53               | )          |        |            | (57     | )          |       |            | (157    | )     |       |        | (240    | )     |       |        | (226   | )    
|Other (income), net                                                          |                                                                                               |                                                   | (10               | )          |        |            | (185    | )          |       |            | (117    | )     |       |        | (119    | )     |       |        | (34    | )    
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|                                                                             | Income (loss) before income taxes and
    cumulative effect of change in accounting principle |                                                   |                   | (6,416     | )      |            |         | (494       | )     |            |         | 6,929 |       |        |         | 8,161 |       |        |        | 6,911 |      
|Income tax provision (benefit)                                               |                                                                                               |                                                   | (2,381            | )          |        |            | (160    | )          |       |            | 2,600   |       |       |        | 3,065   |       |       |        | 2,565  |      
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|Income (loss) before cumulative effect of
    change in accounting principle |                                                                                               |                                                   | (4,035            | )          |        |            | (334    | )          |       |            | 4,329   |       |       |        | 5,096   |       |       |        | 4,346  |      
|Cumulative effect of change in accounting
    principle (net of tax)         |                                                                                               |                                                   | 0                 |            |        |            | 275     |            |       |            | 0       |       |       |        | 0       |       |       |        | 0      |      
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|                                                                             |                                                                                               |                                                   | Net income (loss) |            | $      | (4,035     | )       |            | $     | (609       | )       |       | $     | 4,329  |         |       | $     | 5,096  |        |       | $     | 4,346  | 
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|Earnings (loss) per share:                                                   |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|                                                                             | Basic-income (loss) before cumulative effect
    of change in accounting principle            |                                                   | $                 | (0.77      | )      |            | $       | (0.07      | )     |            | $       | 0.82  |       |        | $       | 0.94  |       |        | $      | 0.80  |      
|                                                                             | Cumulative effect of change in accounting
    principle                                       |                                                   |                   | 0          |        |            |         | (0.05      | )     |            |         | 0     |       |        |         | 0     |       |        |        | 0     |      
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|                                                                             |                                                                                               | Net income (loss)                                 |                   | $          | (0.77  | )          |         | $          | (0.12 | )          |         | $     | 0.82  |        |         | $     | 0.94  |        |        | $     | 0.80  |       
|                                                                             | Diluted-income (loss) before cumulative
    effect of change in accounting
    principle      |                                                   | $                 | (0.77      | )      |            | $       | (0.07      | )     |            | $       | 0.82  |       |        | $       | 0.93  |       |        | $      | 0.80  |      
|Cumulative effect of change in accounting
    principle                      |                                                                                               |                                                   | 0                 |            |        |            | (0.05   | )          |       |            | 0       |       |       |        | 0       |       |       |        | 0      |      
|                                                                             |                                                                                               |                                                   |                   |            |        |            |         |            |       |            |         |       |       |        |         |       |       |        |        |      
|Net income (loss) per share  Diluted                                        |                                                                                               | $                                                 | (0.77             | )          |        | $          | (0.12   | )          |       | $          | 0.82    |       |       | $      | 0.93    |       |       | $      | 0.80   |      

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|                                     |  |                                                   |        |            |  |            |        |            |  |            |        |  |  |   |        |  |  |   |        | 
|------------------------------------ |  | ------------------------------------------------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ---------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                     |  | March 29,                                         |        | March 30,  |  | March 31,  |        | April 2,   |  | April 3,  
|                                     |  | 2002                                              |        | 2001       |  | 2000       |        | 1999       |  | 1998      
|                                     |  | (52 weeks)                                        |        | (52 weeks) |  | (52 weeks) |        | (52 weeks) |  | (53 weeks)
|                                     |  |                                                   |        |            |  |            |        |            |  |           
|                                     |  |                                                  
|                                     |  | (Dollars in thousands, except for per share data)
|Selected Balance Sheet Data:         |  |                                                   |        |            |  |            |        |            |  |            |        |  |  |   |        |  |  |   |        | 
|Total assets                         |  | $                                                 | 74,115 |            |  | $          | 74,111 |            |  | $          | 71,174 |  |  | $ | 62,611 |  |  | $ | 58,118 | 
|Total long-term debt                 |  | $                                                 | 3,196  |            |  | $          | 4,224  |            |  | $          | 4,214  |  |  | $ | 1,892  |  |  | $ | 2,243  | 
|Total shareholders equity           |  | $                                                 | 43,482 |            |  | $          | 47,236 |            |  | $          | 44,939 |  |  | $ | 46,407 |  |  | $ | 41,287 | 
|                                    
|Selected Operating Data:             |  |                                                   |        |            |  |            |        |            |  |            |        |  |  |   |        |  |  |   |        | 
|Number of centers (at end of period) |  |                                                   | 286    |            |  |            | 304    |            |  |            | 293    |  |  |   | 270    |  |  |   | 242    | 
|Center capacity (at end of period)   |  |                                                   | 36,044 |            |  |            | 38,877 |            |  |            | 36,770 |  |  |   | 32,832 |  |  |   | 28,911 | 




|    |                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2002 general and administrative expense includes
    regional operating structure expenses ($1.2 million),
    settlement of a property development lawsuit
    ($0.8 million), and the conversion and installation of a
    new revenue management information system ($0.5 million).

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

General

During the past five fiscal years, the Company
has increased the number of centers from 242, at the beginning
of fiscal year 1998, to 286 at fiscal year end 2002. The Company
has achieved this growth through a combination of acquisitions,
prototype build-to-suit centers, and new leases. Fiscal 2002
growth consisted of 3 new build-to-suit leased centers and one
management contract, due to the Companys new strategy to
focus on improving existing operations. During the fiscal year,
the Company closed 22 under-performing centers, 18 of which had
been identified in its restructuring plan at the prior fiscal
year ended March 30, 2001. The Company has maintained its
strategic plan of identifying short and long-term profitability
goals and identified areas designed to improve productivity and
reduce operating costs.

The Company is subject to certain risks common to
the providers of child care and early education, including
dependence on key personnel, dependence on client relationships,
competition from alternate sources or providers of the
Companys services, market acceptance of work and family
services, the ability to hire and retain qualified personnel,
the Companys ability to manage its overall cost structure
and general economic conditions.

Critical Accounting Policies

The Company prepares its financial statements in
conformity with accounting principles generally accepted in the
United States. In preparing these statements management makes
certain estimates, judgments and assumptions, which affect the
reported amounts of assets and liabilities at the date of the
financial statements, as well as the amounts of revenue and
expenses for each period presented. The application of the
Companys accounting policies, in certain instances,
requires the exercise of judgment and assumptions that pertain
to future uncertainties and as a result, actual future results
could differ from managements estimates. The accounting
policies management believes are critical in the preparation of
the Companys financial statements relate to revenue
recognition, accounts receivable, impairment of long-lived
assets, liability for workers compensation insurance
obligations, and income taxes.

Revenue Recognition.The Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin 101, which
requires that the following criteria be met before recognizing
revenue: persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the fee is fixed
and determinable, and collectibility is reasonably assured. The
Companys revenues consist primarily of tuition paid by
parents, supplemented in some cases by payments (either partial
or in total) from government agencies. Each agency has its own
set of guidelines in administering subsidies and management must
constantly monitor affected centers to ensure compliance.
Revenues also include, to a lesser degree, management fees paid
by corporate sponsors. Revenue is recognized as services are
performed. In some

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centers the Company receives revenue in advance
of services being rendered, in which case, revenue is deferred
until the services have been provided.


Accounts Receivable.The Company generates accounts
receivable primarily from fees charged to governmental agencies,
and to a lesser degree parents. The Company monitors collections
and payments from these customers and maintains a provision for
estimated losses based on historical trends and current overall
economic conditions. Amounts charged to this provision for
uncollectible accounts receivable have historically been within
the Companys expectations, but there can be no assurance
that future experience will be consistent with the
Companys past experience.

Impairment of Long-Lived Assets.The Company records the excess of
purchase cost over the fair value of net tangible assets of
acquired companies as acquired goodwill or other identifiable
intangible assets. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, annually, and, when
events and circumstances occur that may indicate impairment,
management evaluates the recoverability of acquired goodwill and
other intangible assets by comparing the carrying value of the
asset to the associated projected undiscounted annual cash
flows. Management also considers business prospects, market
trends and other economic factors in performing this evaluation.
The extent of the impairment is measured as the difference
between the fair market of the asset and its carrying value,
with fair market value calculated using projected future
discounted cash flows. Based on this evaluation, the Company
recorded a charge to operations of $1,916,000, $1,447,000 and
$282,000 during fiscal 2002, 2001 and 2000, respectively. If
actual results or circumstances are less favorable than those
forecasted by management, or if upon completion of the new
impairment tests under SFAS No. 142, Goodwill and
Other Intangible Assets, the Company identifies an
impairment, a future charge may be required. SFAS No. 142
became effective for the Company beginning in fiscal 2003.
Additional information regarding SFAS No. 142 is set forth
in the Summary of Significant Accounting Policies
note in the Notes to Consolidated Financial Statements included
elsewhere in this Report.

Liability for Workers Compensation
Insurance Obligations.The Company
self-insures a significant portion of its workers compensation
insurance plans. The full extent of certain liabilities, in many
cases, may not become fully recognized for several years. The
Company, therefore, estimates the potential obligation for
liabilities which have been incurred but not yet reported based
upon historical data and experience, and utilizes an outside
consulting firm to assist the Company in developing these
estimates. Although management believes that the amounts accrued
for these obligations are sufficient, any significant increase
in either the number of claims and/or costs associated with
claims made under these plans could have a material adverse
effect on the Companys financial results.

Income Taxes.Accounting for income taxes requires
management to estimate its income taxes in each jurisdiction in
which it operates. Due to differences in the timing of the
recognition of items included in income for financial accounting
and tax purposes, temporary differences arise which are recorded
as deferred tax assets or liabilities. The likelihood of
recovery of these assets is dependent on the Companys
ability to implement its tax planning strategy, which includes
the sale and closure of certain centers. Should any amounts be
determined not to be recoverable, or assumptions change, the
Company would be required to take a charge, which could have a
material effect on the Companys financial results.
Additionally, there are capital loss carryforwards that must be
offset by capital gains in future years. The Company anticipates
capital gains sufficient to cover the capital loss carryforwards
in future years.

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Results of Operations

The following table sets forth, for the periods
indicated, certain items from Selected Consolidated
Financial Data expressed as a percentage of revenues and
the percentage change in the dollar amounts of such items
compared to the prior period:

|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |       |        |  
|--------------------------------------------------------------------------------------------- | ---------------- | --------------------- | ----- | ------------------- | ---- | ---------- | ----- | ---------- | ---- | ---------- | ----- | ---- | --- | - | ------ | -------- | -- |  | ------ | ----- | ------ | -
|                                                                                              |                  |                       |       |                    
|                                                                                              |                  | Percentage of Revenue |       | Percentage Increase
|                                                                                              |                  | Fiscal Year Ended     |       | (Decrease)         
|                                                                                              |                  |                       |       |                    
|                                                                                              |                  | March 29,             |       | March 30,           |      | March 31,  |       | FY02 over  |      | FY01 over 
|                                                                                              |                  | 2002                  |       | 2001                |      | 2000       |       | FY01       |      | FY00      
|                                                                                              |                  | (52 weeks)            |       | (52 weeks)          |      | (52 weeks) |       | (52 weeks) |      | (52 weeks)
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |           
|Revenues                                                                                      |                  |                       | 100.0 | %                   |      |            | 100.0 | %          |      |            | 100.0 | %    |     |   | -3.7   | %        |    |  | 14.5   | %    
|Cost of revenues                                                                              |                  |                       | 90.7  | %                   |      |            | 88.8  | %          |      |            | 86.9  | %    |     |   | -1.6   | %        |    |  | 17.0   | %    
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |      
|                                                                                              | Gross profit     |                       |       | 9.3                 | %    |            |       | 11.2       | %    |            |       | 13.1 | %   |   |        | -20.3    | %  |  |        | -2.2  | %     
|Provision for doubtful accounts                                                               |                  |                       | 0.9   | %                   |      |            | 0.3   | %          |      |            | 0.3   | %    |     |   | 226.1  | %        |    |  | 5.5    | %    
|Marketing expenses                                                                            |                  |                       | 1.0   | %                   |      |            | 1.1   | %          |      |            | 1.2   | %    |     |   | -12.1  | %        |    |  | 4.1    | %    
|General and administrative expenses                                                           |                  |                       | 8.4   | %                   |      |            | 6.0   | %          |      |            | 5.9   | %    |     |   | 35.9   | %        |    |  | 16.1   | %    
|Restructuring expense                                                                         |                  |                       | 0.4   | %                   |      |            | 2.7   | %          |      |            | 0.0   | %    |     |   | -85.6  | %        |    |  | NM     |      
|Mold remediation expense                                                                      |                  |                       | 0.7   | %                   |      |            | 0.0   | %          |      |            | 0.0   | %    |     |   | NM     |          |    |  | NM     |      
|Failed merger costs                                                                           |                  |                       | 0.7   | %                   |      |            | 0.0   | %          |      |            | 0.0   | %    |     |   | NM     |          |    |  | NM     |      
|Impairment charges                                                                            |                  |                       | 1.4   | %                   |      |            | 1.0   | %          |      |            | 0.2   | %    |     |   | 32.4   | %        |    |  | 413.1  | %    
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |      
|                                                                                              | Operating income |                       |       | -4.2                | %    |            |       | 0.2        | %    |            |       | 5.5  | %   |   |        | -2,717.8 | %  |  |        | -96.8 | %     
|Interest expense                                                                              |                  |                       | 0.3   | %                   |      |            | 0.6   | %          |      |            | 0.3   | %    |     |   | -52.6  | %        |    |  | 125.7  | %    
|Interest (income)                                                                             |                  |                       | 0.0   | %                   |      |            | 0.0   | %          |      |            | -0.1  | %    |     |   | NM     |          |    |  | NM     |      
|Other (income), net                                                                           |                  |                       | 0.0   | %                   |      |            | -0.1  | %          |      |            | -0.1  | %    |     |   | NM     |          |    |  | NM     |      
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |      
|Income (loss) before income taxes and
    cumulative effect of change in accounting principle |                  |                       | -4.5  | %                   |      |            | -0.3  | %          |      |            | 5.4   | %    |     |   | NM     |          |    |  | -107.1 | %    
|Income tax provision (benefit)                                                                |                  |                       | -1.7  | %                   |      |            | -0.1  | %          |      |            | 2.0   | %    |     |   | NM     |          |    |  | -106.2 | %    
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |      
|Income (loss) before cumulative effect of
    change in accounting principle                  |                  |                       | -2.8  | %                   |      |            | -0.2  | %          |      |            | 3.4   | %    |     |   | NM     |          |    |  | -107.7 | %    
|Cumulative effect of change in accounting
    principle (net of tax)                          |                  |                       | 0.0   | %                   |      |            | 0.2   | %          |      |            | 0.0   | %    |     |   | -100.0 | %        |    |  | NM     |      
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |      
|                                                                                              |                  | Net income (loss)     |       |                     | -2.8 | %          |       |            | -0.4 | %          |       |      | 3.4 | % |        |          | NM |  |        |       | -114.1 | %
|                                                                                              |                  |                       |       |                     |      |            |       |            |      |            |       |      |     |   |        |          |    |  |        |      

Fiscal 2002 Compared to Fiscal 2001.Revenues decreased to
$142.4 million in fiscal 2002 (52 weeks), from
$147.8 million in fiscal 2001 (52 weeks), a decrease
of $5.4 million or 3.7%. The decrease was primarily
attributable to the impact of the 18 centers closed during the
first quarter of fiscal 2002 pursuant to the restructuring plan
initiated at the end of fiscal 2001 ($5.0 million net decrease)
and an additional 4 centers closed during fiscal 2002
($0.7 million). Centers opened during fiscal 2002 provided
an additional increase in revenues ($1.5 million), which
partially offset the centers closed during fiscal 2002 and
decreased utilization. Decreased utilization reflected lower
enrollment for the last two quarters of fiscal 2002, due to a
downturn in the economy after September 11, and an increase
in the national unemployment rate. Due to these factors,
comp center (i.e., a center opened for at least
18 months) revenues were $136.0 million in fiscal 2002
compared with $137.2 million in fiscal 2001, representing a
decrease of 0.8% from the prior year.

Gross profit decreased to $13.2 million in
fiscal 2002 from $16.6 million in fiscal 2001, a decrease
of 20.3%. As a percentage of revenues, gross profit decreased to
9.3% in fiscal 2002 from 11.2% in fiscal 2001. The decrease in
margin was due to several factors including decreased
utilization, certain regional markets falling below enrollment
expectations, an unfavorable sales mix (higher revenues from
unprofitable infant programs and lower revenues from profitable
pre-school programs), and an increased number of new
build-to-suit centers which experience initial start up losses
early in their operations.

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During fiscal 2002, the Company implemented a new
center based management information system that now provides the
Company with significantly more detailed information on its
receivables, particularly its subsidized accounts. As a result
of this information, difficulties encountered during the
implementation, and the current recessionary environment, the
Company recorded a $1.3 million provision for doubtful
accounts in fiscal 2002.

Marketing expenses decreased to $1.5 million
in fiscal 2002 from $1.7 million in fiscal 2001, a 12.1%
decrease. The decrease was primarily due to the 18 centers
closed pursuant to the restructuring plan initiated at the end
of fiscal 2001. As a percentage of revenues, marketing expenses
decreased to 1.0% in fiscal 2002 from 1.1% in 2001.

General and administrative expenses increased to
$12.0 million in fiscal 2002 from $8.8 million in
2001, a 35.9% increase. The increase is primarily due to the
four region office operating structure ($1.2 million)
established during the second quarter of fiscal 2002, settlement
of a property development lawsuit ($0.8 million) and the
conversion and installation of a new revenue management
information system ($0.5 million). As a percentage of
revenues, general and administrative expenses increased to 8.4%
in fiscal 2002 from 6.0% in fiscal 2001.

The Company instituted a restructuring program in
March 2001, and incurred a charge of $4,000,000 for fiscal year
ended March 30, 2001. For the fiscal year ended
March 29, 2002, additional restructuring costs were
$578,000. As part of the 2001 program, the Company, during the
first quarter of fiscal 2002, closed 18 of 19 under-performing
centers targeted for closing under that program. These 19
under-performing centers generated operating losses in fiscal
2001 of $526,000 on revenues of $6,132,000. An additional 4
centers, not identified under the 2001 restructuring program,
were also closed during fiscal 2002. These under-performing
centers generated operating losses in fiscal 2002 of $265,000 on
revenues of $1,484,000.

The total restructuring charge of $4,000,000 in
fiscal 2001 is comprised of $1,915,000 of estimated undiscounted
lease termination costs, $1,539,000 of impairment of fixed and
intangible assets and $546,000 of severance costs. The total
restructuring charge of $578,000 for fiscal 2002 is comprised of
$150,000 of unanticipated required maintenance and additional
estimated undiscounted lease termination costs (net of $73,000
of recoveries from favorable severance settlements) associated
with the 2001 restructuring plan and $428,000 of severance costs
for three executives associated with the 2002 plan to
restructure the Companys management. Both plans are
expected to be completed in fiscal 2003.

In fiscal 2002, to continue providing a safe
environment for our customers, the Company began a mold
remediation program for its operating centers, identifying
approximately 86 affected centers. The Company expensed
$1,005,000 in fiscal 2002 for the required remediation. The
remediation efforts will be substantially complete by the end of
the second quarter of fiscal 2003.

On February 1, 2002, the Company entered
into a letter of intent to acquire substantially all of the
assets and liabilities of Tutor Time, but subsequently
terminated its offer in March 2002. The costs incurred related
to the terminated acquisition totaled $953,000 and were
determined not to be related to the current offer to acquire
Tutor Time. See Recent Developments under
Item 1, Business.

In accordance with the Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, the Company recorded a non-cash impairment
charge of $1,916,000 in the fourth quarter of the current fiscal
year to write down a portion of the recorded asset values of 15
of the Companys under-performing centers to estimated fair
values. The Company recorded a non-cash impairment charge of
$1,447,000 in the fourth quarter of fiscal 2001 for 14 of the
Companys under-performing centers identified in its
restructuring plan.

Interest expense decreased to $.5 million in
fiscal 2002 from $1.0 million in fiscal 2001, primarily due
to the reduction of the Federal Reserve prime lending rate
generating a lower average prime rate for fiscal 2002 compared
to fiscal 2001. As a percentage of revenues, interest expense
decreased to 0.3% in fiscal 2002 from 0.6% during fiscal 2001.

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Due to the Companys financial results, an
income tax benefit in the amount of $2.4 million was
recognized for fiscal 2002 as compared to an income tax benefit
of $.3 million for fiscal 2001.

As a result of the foregoing changes, the
Companys net loss was $4.0 million, or -2.8% of
revenues, in fiscal 2002 as compared to a net loss of
$.6 million, or -0.4% of revenues, in fiscal 2001.

Fiscal 2001 Compared to Fiscal 2000.Revenues increased to
$147.8 million in fiscal 2001 (52 weeks), from
$129.1 million in fiscal 2000 (52 weeks), an increase
of $18.7 million or 14.5%. The increase was primarily
attributable to a full year impact of centers opened in fiscal
2000 ($11.9 million) and centers added during fiscal 2001
($6.4 million). Centers opened prior to fiscal 2000
provided an additional increase ($2.4 million), partially
offset by a decrease in centers closed during fiscal 2001
($2.3 million). The growth in comparable center revenues
resulted from increases in tuition rates, slightly offset by
decreased utilization.

Gross profit decreased to $16.6 million in
fiscal 2001 from $16.9 million in fiscal 2000, a decrease
of 2.2%. As a percentage of revenues, gross profit decreased to
11.0% in fiscal 2001 from 12.9% in fiscal 2000. The decrease in
margin was due to several factors including certain regional
markets falling below enrollment expectations, operating losses
of $0.8 million from the recently closed Oxford Learning
Centers of America, higher occupancy costs, an unfavorable sales
mix (higher revenues from unprofitable infant programs and lower
revenues from profitable pre-school programs) and an increased
number of new build-to-suit centers which experience initial
start up losses early in their operations.

Marketing expenses increased to $1.7 million
in fiscal 2001 from $1.6 million in fiscal 2000, a 4.1%
increase. The increase was primarily due to the additional
marketing expenses relating to the opening or acquisition of 18
new centers in fiscal 2001 as well as a full year of expense for
the 38 new centers opened or acquired in fiscal 2000. As a
percentage of revenues, however, marketing expenses decreased to
1.1% in fiscal 2001 from 1.2% in 2000, due primarily to
operating leverage provided by higher revenues.

General and administrative expenses increased to
$8.8 million in fiscal 2001 from $7.6 million in 2000,
a 16.1% increase. The increase is primarily due to a charge of
$486,000 for the Jacobson Partners options and related
consulting fees, the Company adding three new area offices and
the additional expenses associated with the operation of more
centers during fiscal 2001 compared to the prior year. As a
percentage of revenues, general and administrative expenses
increased to 6.0% in fiscal 2001 from 5.9% in fiscal 2000.

In January 2001, the Company hired a new
management team, who reviewed the Companys operations and
developed a new strategic direction. This review identified
short and long term profitability goals and identified areas
designed to improve productivity and reduce operating costs.

The Company instituted a restructuring program
and incurred a charge of $4,000,000 in March 2001. In this
regard, the Company closed all 10 of its Oxford Learning Centers
of America and identified 19 under-performing centers to be
closed in fiscal 2002. Approximately 200 employees were or will
be involuntarily terminated in connection with the closures of
Oxford Learning Centers of America and the 19 under-performing
Childtime centers. These under-performing centers generated
operating losses in fiscal 2001 of $526,000 on revenues of
$6,132,000, while Oxford Learning Centers of America generated
operating losses of $818,000 on revenues of $465,000.

The total restructuring charge of $4,000,000 is
comprised of $1,915,000 of estimated undiscounted lease
termination costs, $1,539,000 of impairment of fixed and
intangible assets and $546,000 of severance costs.

In accordance with the Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, the Company recorded a non-cash impairment
charge of $1,447,000 in the fourth quarter of the current fiscal
year to write down a portion of the recorded asset values of 14
of the Companys other under-performing centers to
estimated fair values.

The Company also recorded a charge of
$0.4 million for the cumulative effect of an accounting
change relating to the revenue recognition of registration and
material fees (see Note 2(k) to the Companys Notes to
Consolidated Financial Statements).

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Interest expense increased to $1.0 million
in fiscal 2001 from $0.4 million in fiscal 2000, primarily
due to interest paid on new acquisition debt, an increase in the
average outstanding balance on the Companys line of credit
and a higher average prime rate for fiscal 2001 than for fiscal
2000. As a percentage of revenues, interest expense increased to
0.6% in fiscal 2001 from 0.3% during fiscal 2000.

Due to the Companys financial results, an
income tax benefit in the amount of $0.3 million was
recognized for fiscal 2001 as compared to an income tax
provision of $2.6 million for fiscal 2000.

As a result of the foregoing changes, the
Companys net loss was $0.6 million, or -0.4% of
revenues, in fiscal 2001 as compared to $4.3 million, or
3.4% of revenues, in fiscal 2000.

Liquidity and Capital Resources

The Companys primary cash requirements
during fiscal 2002 were capital maintenance of existing centers,
the development of corporate and regional management structure,
2001 and 2002 restructuring costs and the repayment of debt and
related interest. The Company does not have any immediate plans
for expansion beyond the potential acquisition of Tutor Time and
its primary cash requirements for fiscal 2003 are capital
maintenance of existing centers, remaining payments related to
the 2001 restructuring plan, costs associated with the
remediation of mold and repayment of debt and related interest.
The Company believes that operating cash flows, together with
amounts available under the new secured revolving line of credit
facility, will be sufficient to satisfy the Companys
anticipated cash requirements on both a short-term and long-term
basis.

During fiscal 2002, the Company replaced its
revolving line of credit agreement by entering into a new
$17.5 million line of credit agreement with its existing
lender. The new credit agreement will mature on
September 30, 2004, and is secured by the Companys
receivables, equipment and certain real estate. During fiscal
2002, the line of credit reached a maximum borrowing of
$5,984,000 under the credit agreement, compared to $5,735,000
for fiscal year 2001. However, after subsequent payments, the
balance as of March 29, 2002 was $2,500,000, as compared to
the balance on March 30, 2001 of $0.

If the Company is successful in acquiring the
assets of Tutor Time Learning Systems, Inc. (see Recent
Developments under Item 1, Business), the Company
contemplates financing the acquisition from proceeds available
under its revolving line of credit and from subordinated debt
and equity funding from institutional investors, including an
affiliate of Jacobson Partners (with whom directors of the
Company are participants). The terms of such potential funding
have not been finalized. See Related Party
Transactions below.

During fiscal 2002, $1.4 million of net cash
provided by operations, $2.5 million from borrowings on the
line of credit and $0.5 million of proceeds on the sale of
assets, were principally used for investment in capital
expenditures totaling $4.1 million and payments on
long-term debt ($1.2 million). The Company incurred
additional seller-financed notes payable of approximately
$2.0 million during fiscal 2001 relating to the acquisition
of centers.

Expenditures related to information technology
systems were part of managements five-year information
system plan to accommodate the growth of the Company for the
next five to ten years. During fiscal 2002, the Company
implemented a new center-based management information system
throughout the Company which utilizes touch screens for parent
and employee sign-in, providing more information on center
activity and generating this information much faster than the
prior system. The cost of the hardware associated with this
project was $400,000. The Company also incurred approximately
$550,000 in expenses associated with training its center
directors, area managers and regional managers on the new system.

Net accounts receivable increased to
$5.2 million at March 29, 2002, from $4.7 million
at March 30, 2001. This increase was principally due to
increased participation in federal child care assistance
programs and slower payments from certain agencies.

The Company from time to time enters into
contractual arrangements with general contractors for the
construction of build-to-suit centers. The Companys
Director of Real Estate Development and staff oversee the design
and construction of the new build centers and pay the periodic
contractual construction draws to the

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general contractor as well as other developmental
costs incurred. The Company then periodically throughout the
construction phase requests reimbursement for the construction
draws and development costs from the property owner/landlord
with which the Company has a contractual leaseback arrangement.
The Company has various legal remedies available pursuant to
construction agreements to minimize the risk of
non-reimbursement as well as holding a security interest in the
building during the construction phase. Reimbursable
construction costs decreased to $0.0 million at
March 29, 2002, from $1.1 million at March 30,
2001.


Accrued wages and payroll taxes decreased to
$3.3 million at March 29, 2002, from 3.5 million
at March 30, 2001. This was primarily due to a decrease in
the payroll costs of operating 286 centers at the end of fiscal
2002 compared to 304 at the end of fiscal 2001.

During fiscal 2002, the Company opened 4 centers,
consisting of 3 build-to-suit centers or new leases and 1
management contract. Typically, the cash required to open a
build-to-suit center, including capital expenditures for
leasehold improvements and initial start-up costs, is
approximately $100,000 to $110,000, with each center
experiencing additional cash requirements of approximately
$50,000 during its first six to nine months of operation. The
costs for a new management contract to run an at-work-center
vary depending, in part, upon the profitability and maturity of
the at-work-center, as well as their size and number. The
Company has historically been required to invest approximately
$10,000 to $50,000 to bring certain at-work-centers up to the
Companys standards.

At March 29, 2002, aggregate principal
payments due on long-term debt over the next four years and
thereafter are as follows:

|                    |  |                |       | 
|------------------- |  | -------------- | ----- | 
|                    |  | (in thousands)
|2003                |  | $              | 1,133 | 
|2004                |  |                | 721   | 
|2005                |  |                | 2,304 | 
|2006                |  |                | 81    | 
|2007 and thereafter |  |                | 90    | 
|                    |  |                |       | 
|                    |  | $              | 4,329 | 
|                    |  |                |       | 

Future minimum rental commitments at
March 29, 2002 for all non-cancelable operating leases are
as follows:

|           |  |                |        |                |  |   |       | 
|---------- |  | -------------- | ------ | -------------- |  | - | ----- | 
|           |  | Total  All    |        | Closed Centers
|           |  | Centers        |        | Only          
|           |  |                |        |               
|           |  |               
|           |  | (in thousands)
|2003       |  | $              | 20,661 |                |  | $ | 519   | 
|2004       |  |                | 19,545 |                |  |   | 322   | 
|2005       |  |                | 18,343 |                |  |   | 311   | 
|2006       |  |                | 17,091 |                |  |   | 448   | 
|2007       |  |                | 15,512 |                |  |   | 398   | 
|Thereafter |  |                | 79,312 |                |  |   | 1,419 | 

Closed Centers Only, represents the
minimum lease payments in total for all closed centers. The
Company has accrued as of March 29, 2002, $755,000 in
restructuring charges related to these lease payments. The
Company expects to assign the remaining amounts to a third party
or negotiate reductions with the landlord.

In addition, the Company is contingently liable
on approximately $1.0 million for lease assignments already
negotiated in connection with certain lease terminations
resulting from the fiscal 2001 restructuring program. There are
no other significant off-balance sheet arrangements.

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Related Party Transactions

In July 2000, the Company retained Jacobson
Partners to provide management and financial consulting
services. For such services, Jacobson Partners receives an
annual consulting fee of $250,000, plus reimbursement of
reasonable out-of-pocket expenses. In addition, investment funds
controlled by Jacobson Partners received options to acquire
557,275 shares of the Companys common stock. See
Note 10 of the Notes to Consolidated Financial Statements
included elsewhere in this Report. In connection with the
proposed Tutor Time acquisition (see Recent
Developments under Item 1, Business), Jacobson
Partners has been retained to provide investment advisory
services (including for related post-closing services), and, if
the Company is successful in acquiring the assets of Tutor Time,
one of the above-described investment funds controlled by
Jacobson Partners has committed to partially fund the financing
of the acquisition. If the Company is successful in acquiring
the Tutor Time assets, Jacobson Partners will be entitled to a
fee of $1,000,000, of which $333,334 will be payable in cash and
the remainder will be payable by the issuance of 175,438 shares
of the Companys common stock (based on a conversion price
of $3.80 per share). Although the terms of the financing
arrangement have not yet been finalized, the Company believes
that the foregoing transactions are, or will be, on terms
similar to arms-length terms available from unrelated
parties. Total expenses incurred for Jacobson Partners were
$261,255, $485,916 and $0 for 2002, 2001 and 2000, respectively.

Jacobson Partners is a private equity firm whose
managing partner is Benjamin R. Jacobson, a director of the
Company. James J. Morgan, the Companys Chairman of
the Board and Interim Chief Executive Officer, is also a partner
of Jacobson Partners. George A. Kellner, the controlling
shareholder of the Company and its Vice Chairman of the Board,
and Milton H. Dresner, another director of the Company, are
investors in the investment funds described above.
George A. Kellner also serves as a special advisor to
Jacobson Partners.

Outlook for the Company

The Companys centers had experienced a
significant decline in comp center revenues at the
end of fiscal 2002 with March 2002 comps down 5.5%
compared with the prior year. This decline continued during the
first eight weeks of fiscal 2003, although at a lower rate.
Comp center revenues were down 4.9% during the first
four weeks of fiscal 2003 and 2.8% during weeks five through
eight of fiscal 2003.

Contingencies

As previously reported, the Company was a
defendant in a personal injury lawsuit. The Company settled the
case and the entire amount of the settlement was covered under
the Companys insurance policy. During fiscal 2002, the
Company decided not to pursue opening three new build-to-suit
centers after leases for these centers had been signed with the
developer of the centers. The Company was subsequently sued by
the developer for breach of contract. This case was settled at
the end of fiscal 2002, and a current liability has been
recorded on the balance sheet as of March 29, 2002 in the
amount of $800,000.

Various legal actions and other claims are
pending or could be asserted against the Company. Litigation is
subject to many uncertainties; the outcome of individual
litigated matters is not predictable with assurance, and it is
reasonably possible that some of these matters may be decided
unfavorably to the Company. It is the opinion of management that
the ultimate liability, if any, with respect to these matters
will not materially affect the financial position, results of
operations or cash flows of the Company.

The Company is contingently liable for
approximately $1.0 million for subleases negotiated in
connection with the above noted lease terminations.

Quantitative and Qualitative Disclosure about
Market Risk

The Company has considered the provisions of
Financial Reporting Release No. 48, Disclosure of
Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative
and Qualitative Information about Market Risk Inherent in
Derivative Financial Instrument, Other Financial Instruments and
Derivative Commodity Instruments. The Company had no
holdings of derivative financial or commodity-based instruments
at March 29, 2002. A review of the

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Companys other financial instruments and
risk exposures at that date revealed that the Company had
exposure to interest rate risk. At March 29, 2002 the
Company performed a sensitivity analysis to assess this risk and
concluded that the effects of a hypothetical change of 200 basis
points in the average interest rate would not be expected to
materially affect the Companys financial position, results
of operations or cash flow.


New Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. SFAS
No. 141 requires, among other things, that the purchase
method of accounting for business combinations be used for all
business combinations initiated after June 30, 2001. SFAS
No. 142 addresses the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS
No. 142 requires, among other things, that goodwill and
other indefinite-lived intangible assets no longer be amortized
and that such assets be tested for possible impairment at least
annually. SFAS No. 142 became effective for the Company
beginning March 30, 2002. The Company will test goodwill
for impairment using the two-step process prescribed in SFAS
No. 142. The Company expects to complete the first step by
the second quarter of 2003. Any impairment that is required to
be recognized upon the adoption of SFAS No. 142 would be
reflected as a cumulative effect of a change in accounting
principle. The Company must complete the measurement of any
impairment loss upon the initial adoption of SFAS No. 142
by March 28, 2003. The Company is in the process of
implementing SFAS No. 142 and has not yet determined what
effect these impairment tests will have on the Companys
consolidated financial statements. In accordance with SFAS
No. 142, the Company will no longer record amortization
expense of approximately $1,600,000 related to goodwill. Other
intangible assets will continue to be amortized over their
useful lives.

SFAS No. 143, Accounting for Asset
Retirement Obligations was issued in August 2001, and addresses
legal obligations (arising from laws, statutes, contracts, etc.)
that an entity must satisfy when disposing of tangible,
long-lived assets. The standard requires entities to record the
fair value of a liability for an asset retirement obligation in
the period in which it is incurred. The Company is evaluating
the impact this Statement will have on its consolidated
financial statements and is anticipating the adoption of SFAS
No. 143 in the first quarter of Fiscal 2004.

SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets was issued in July 2001, and
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supercedes SFAS
No. 121 on the same topic and establishes an accounting
model for the impairment of long-lived assets. The Company is
evaluating the impact this Statement will have on its
consolidated financial statements and will adopt SFAS
No. 144 in the first quarter of Fiscal 2003.

Effect of Inflation

The Company does not believe that general
inflation has had an overall material effect on the results of
its operations over the past three fiscal years.

Item 8. Financial Statements and
Supplementary Data

The financial statements and supplementary data
required by this Item are included in the Consolidated Financial
Statements set forth on pages F-1 through F-17, attached
hereto and found following the signature page of this Report.

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

None.

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PART III


Item 10. Directors and Executive
Officers of the Registrant

Set forth below is certain information with
respect to the executive officers of the Company.

|                     |  |     |    |          |  |                                                                         
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|James J. Morgan      |  |     | 60 |          |  | Chairman of the Board, Interim President and
    Chief Executive Officer
|Leonard C. Tylka     |  |     | 55 |          |  | Interim Chief Financial Officer and Treasurer                           
|Karen Danner         |  |     | 47 |          |  | Vice President  Operations                                             
|Scott W. Smith       |  |     | 44 |          |  | Vice President  Human Resources                                        
|Denise A. Pollicella |  |     | 34 |          |  | Secretary and General Counsel                                           

During the year, the Company restructured its
management team. James J. Morgan was appointed as Chairman of
the Board and subsequently re-appointed as Interim President and
Chief Executive Officer. In addition, Leonard C. Tylka was
retained as Interim Chief Financial Officer and Treasurer,
Denise A. Pollicella was retained as Secretary and General
Counsel, and Karen Danner was appointed Vice
President  Operations. Subsequent to fiscal 2002,
Scott W. Smith was appointed as Vice President  Human
Resources. The following is a brief summary of each
officers recent business experience:

James J. Morganhas
served as the Interim President and Chief Executive Officer of
the Company from January 2001 until August 2001 and since March
2002. Since August 2001, Mr. Morgan has also served as the
Companys Chairman of the Board. Mr. Morgan is an
investor in Jacobson Partners and performs consulting
assignments for that entity. Benjamin Jacobson, a director of
the Company, is the managing general partner of Jacobson
Partners. Mr. Morgan retired in 1997 as President and Chief
Executive Officer of Philip Morris Incorporated. Mr. Morgan
also serves as a Director of Bertuccis, Inc., a full-service,
casual dining, Italian restaurant chain headquartered in
Maynard, Massachusetts, and Conforma Clad, Inc., a manufacturer
of specialized bearings and other industrial components located
in New Albany, Indiana.

Leonard C. Tylkahas
served as the Interim Chief Financial Officer and Treasurer of
the Company since January 2001. Mr. Tylka has also served
as a director of the Company since November 1990. From 1987
through May 1997, he served as the Controller of KD Equities, a
private equity investment firm located in New York City. From
May 1997 to September 1998, Mr. Tylka was Corporate
Development Manager for The Loewen Group, Inc., a publicly held
funeral home and cemetery operator, headquartered in Burnaby,
British Columbia, Canada. From April 1999 to January 2001, he
served as Chief Financial Officer of Polar Ice Entertainment
Inc., an ice rink entertainment center owner-operator located in
Tempe, Arizona.

Karen Dannerhas
served as Vice President  Operations since March
2002. Prior to joining Childtime, Mrs. Danner spent
15 years with Blockbuster Video, Inc., where most recently,
she was Senior Vice President, Retail Operations for the Midwest
region. Mrs. Danner had senior operational leadership
responsibility for over 950 Blockbuster Video company-owned
stores in a nine-state area. Mrs. Danner holds a BA from
the University of Missouri.

Scott W. Smithhas
served as Vice President  Human Resources since
May 1, 2002. Prior to joining Childtime, Mr. Smith was
the Vice President of Human Resources for Glotel, PLC, a human
capital solutions provider located in London, England, where he
had responsibility for the startup of the Human Resources
Department. Prior to that, Mr. Smith worked for Kelly
Services, a temporary employment placement firm located in Troy,
Michigan, for 8 years, most recently serving as the Vice
President of Human Resources. Mr. Smith holds a BS from
Central Michigan University.

Denise A. Pollicellahas served as Secretary and General
Counsel of the Company since January 2001. Ms. Pollicella
has been with the Company since April 1998, serving as Director
of Legal Affairs. From March 1996 to January 1998, she served as
an employment and civil rights defense attorney in Detroit,
Michigan.

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Ms. Pollicella holds a BA from the
University of Michigan and a JD from Wayne State University Law
School.


Additional information required by this Item will
be contained in the 2002 Proxy Statement of the Company under
the captions, Election of Directors and
Compliance with Section 16(a) of the Securities and
Exchange Act of 1934 and is incorporated herein by
reference.

Item 11. Executive
Compensation

Information required by this Item will be
contained in the 2002 Proxy Statement of the Company under the
captions, Executive Compensation, Compensation
Committee Interlocks and Insider Participation,
Committees of the Board of Directors and
Director Compensation, and is incorporated herein by
reference.

Item 12. Security Ownership of
Certain Beneficial Owners and Management

Information required by this Item will be
contained in the 2002 Proxy Statement of the Company under the
captions, Election of Directors and Principal
Shareholders, and is incorporated herein by reference.

Additional information regarding the
Companys equity compensation plans follows:

Equity Compensation Plan Information

|                                                               |       |                            |         |                           |  |                       |      |  |  |  |         |         | 
|-------------------------------------------------------------- | ----- | -------------------------- | ------- | ------------------------- |  | --------------------- | ---- |  |  |  | ------- | ------- | 
|                                                               |       |                            |         |                           |  | (c)                  
|                                                               |       |                            |         |                           |  |                      
|                                                               |       |                            |         |                           |  | Number of securities 
|                                                               |       |                            |         |                           |  | remaining available  
|                                                               |       | (a)                        |         | (b)                       |  | for future issuance  
|                                                               |       |                            |         |                           |  | under equity         
|                                                               |       | Number of securities to be |         | Weighted-average exercise |  | compensation plans   
|                                                               |       | issued upon exercise of    |         | price of outstanding      |  | (excluding securities
|                                                               |       | outstanding options,       |         | options, warrants         |  | reflected in         
|Plan category                                                  |       | warrants and rights        |         | and rights                |  | column (a))          
|                                                               |       |                            |         |                           |  |                      
|Equity compensation plans approved by security
    holders     |       |                            | 616,578 |                           |  | $                     | 9.63 |  |  |  | 321,580 |        
|Equity compensation plans not approved by
    security holders |       |                            | 140,000 |                           |  | $                     | 8.45 |  |  |  | 0       |        
|                                                               |       |                            |         |                           |  |                       |      |  |  |  |         |        
|                                                               | Total |                            |         | 756,578                   |  |                       |      |  |  |  |         | 321,580 | 
|                                                               |       |                            |         |                           |  |                       |      |  |  |  |         |        

The following is a brief summary of the equity
compensation plans which have not been approved by the
Companys security holders:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) Upon his appointment in January 2001 as
    Interim President and Chief Executive Officer, James J.
    Morgan was granted options to purchase 60,000 shares of the
    Companys common stock at $7.00 per share. As
    originally granted, the options were to vest at the rate of
    10,000 shares per month and were to expire January 2003. After
    his appointment in August 2001 as Chairman of the Board, the
    expiration of these options was extended to September 2006. At
    that time, Mr. Morgan was also granted options to purchase
    an additional 50,000 shares at $11.00 per share. These
    additional options vest after one year and expire September
    2006. The options automatically vest upon a change of control of
    the Company.
|
| | 2) In March 2001, the Interim Chief
    Financial Officer, Leonard C. Tylka was granted options to
    purchase 10,000 shares of the Companys common stock at a
    price of $7.97 per share. These options vest evenly over
    3 years and expire in March 2007. In September 2001,
    Mr. Tylka was granted additional options to purchase 20,000
    shares at $11.00 per share. These additional shares vest in
    September 2002 and expire in September 2006.
    Mr. Tylkas options automatically vest upon a change
    of control of the Company.                                                                                                                                                                                                                

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3) On June 26, 2002, in connection with
    the Companys proposed acquisition of Tutor Time Learning
    Systems, Inc. (see Recent Developments under
    Item 1), the Company entered into an investment advisory
    agreement with Jacobson Partners (see Related Party
    Transactions under Item 7). If the Company is
    successful in acquiring the Tutor Time assets, Jacobson Partners
    will be entitled to a fee of $1,000,000, of which $333,334 will
    be payable in cash and the remainder will be payable by the
    issuance of 175,438 shares of the Companys common
    stock (based on a conversion price of $3.80 per share).

Item 13. Certain Relationships and
Related Transactions

Information required by this item will be
contained in the 2002 Proxy Statement under the caption,
Compensation Committee Interlocks and Insider
Participation, and is incorporated herein by reference.
Additionally, see Note 10 of the Notes to Consolidated
Financial Statements and Related Party Transactions
under Item 7 above.

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PART IV


Item 14. Exhibits, Financial
Statements, Schedule, and Reports on Form 8-K

(a) 1. Financial
Statements



| |                                                                            
| | ---------------------------------------------------------------------------
| | The financial statements filed with this Report
    are listed on page F-1.

2. Financial Statements
Schedule

The financial statements schedule filed with this
Report is listed on page F-1. Other financial statement
schedules, for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission, are not required under the related instructions or
are inapplicable and, therefore, have been omitted.



| |            
| | -----------
| | 3. Exhibits

The exhibits filed with this Report are listed on
the Exhibit Index on pages E-1
through E-2.

(b) Reports on Form 8-K

On February 1, 2002, the Company filed a
Current Report on Form 8-K to report the issuance of a
press release announcing the signing of a letter of intent by
the Company and Tutor Time Learning Systems, Inc. with regard to
the proposed acquisition of Tutor Time by The Company.

On March 21, 2002, the Company filed a
Current Report on Form 8-K to report the issuance of a
press release announcing the termination of the proposed
acquisition transaction with Tutor Time Learning Systems, Inc.

On March 26, 2002, the Company filed a
Current Report on Form 8-K to report the issuance of a
press release announcing changes in the organization with the
resignation of its President and Chief Executive Officer and the
re-appointment of James Morgan, the Chairman of the Board of the
Company, as the Interim President and Chief Executive Officer.
The Company in a separate announcement named Karen Danner as the
new Vice President  Operations.

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SIGNATURES


Pursuant to the requirements of Section 13
of the Securities Exchange Act of 1934, the registrant has
caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on June 26, 2002.



| |                                 
| | --------------------------------
| | CHILDTIME LEARNING CENTERS, INC.

Dated: June 26, 2002

| |     |                    
| | --- | -------------------
| | By: | /s/ JAMES J. MORGAN

| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| |                                                                                                  
| | James J. Morgan, 
     Chairman of the Board, Interim President 
     and Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated on June 26, 2002.

|                                             |  |                                                                                                                     
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------
|Signature                                    |  | Title                                                                                                               
|                                             |  |                                                                                                                     
|                                            
|/s/ JAMES J. MORGANJames J. Morgan           |  | Chairman of the Board, Interim President, Chief
    Executive Officer and Director
    (Principal Executive Officer)
|                                            
|/s/ LEONARD C. TYLKALeonard C. Tylka         |  | Interim Chief Financial Officer and Director
    (Principal Financial and Accounting Officer)                       
|                                            
|/s/ MILTON H. DRESNERMilton H. Dresner       |  | Director                                                                                                            
|                                            
|/s/ JASON K. FELDJason K. Feld               |  | Director                                                                                                            
|                                            
|/s/ BENJAMIN R. JACOBSONBenjamin R. Jacobson |  | Director                                                                                                            
|                                            
|/s/ GEORGE A. KELLNERGeorge A. Kellner       |  | Director                                                                                                            

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CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


AND FINANCIAL STATEMENT SCHEDULE


The following consolidated financial statements
of Childtime Learning Centers, Inc. are referred to in
Item 8:

|                                                                                                                    |                                                               |       |     |            | 
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----- | --- | ---------- | 
|                                                                                                                    |                                                               | Pages
|                                                                                                                    |                                                               |      
|Report of Independent Accountants                                                                                   |                                                               |       | F-2 |           
|                                                                                                                   
|Financial Statements:                                                                                               |                                                               |       |     |           
|                                                                                                                   
|                                                                                                                    | Consolidated Balance Sheet                                    |       |     | F-3        | 
|                                                                                                                   
|                                                                                                                    | Consolidated Statement of Operations                          |       |     | F-4        | 
|                                                                                                                   
|                                                                                                                    | Consolidated Statement of Changes in
    Shareholders Equity |       |     | F-5        | 
|                                                                                                                   
|                                                                                                                    | Consolidated Statement of Cash Flows                          |       |     | F-6        | 
|                                                                                                                   
|                                                                                                                    | Notes to Consolidated Financial Statements                    |       |     | F-7 - F-19 | 
|                                                                                                                   
|The following consolidated financial statement
    schedule of Childtime Learning Centers, Inc. is included herein: |                                                               |       |     |           
|                                                                                                                   
|                                                                                                                    | Schedule II  Valuation and
    qualifying accounts           |       |     | S-1        | 

All other schedules for which provision is made
in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.

F-1



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##### Table of Contents








Report of Independent Accountants


To the Board of Directors and Shareholders of 
 Childtime Learning Centers, Inc. and Subsidiaries:

In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) on page 28 present fairly, in all
material respects, the financial position of Childtime Learning
Centers, Inc. and Subsidiaries (the Company) at
March 29, 2002 and March 30, 2001, and the results of
their operations and their cash flows for each of the three
fiscal years in the period ended March 29, 2002 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 28 presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 2(k) to the
Companys consolidated financial statements, effective
April 1, 2000, the Company changed its method of
recognizing revenue associated with accounting for registration
fees.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

June 26, 2002


F-2



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEET


|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |        |         |        | 
|--------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------ | --------- | ------- | ------ | ------ | ------ | ------- | ------ | 
|                                                                                                                |                                                                                              | March 29,                                      |                                            | March 30,
|                                                                                                                |                                                                                              | 2002                                           |                                            | 2001     
|                                                                                                                |                                                                                              |                                                |                                            |          
|                                                                                                                |                                                                                              |                                               
|                                                                                                                |                                                                                              | (In thousands                                 
|                                                                                                                |                                                                                              | except for share data)                        
|ASSETS                                                                                                          |                                                                                              |                                                |                                            |           |         |        |        |       
|Current assets:                                                                                                 |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                | Cash and cash equivalents                                                                    |                                                | $                                          | 4,891     |         |        | $      | 3,379  |        
|                                                                                                                | Accounts receivable, less allowance for doubtful
    accounts of $693 and $360, respectively |                                                |                                            | 5,235     |         |        |        | 4,697  |        
|                                                                                                                | Reimbursable construction costs                                                              |                                                |                                            |          |         |        |        | 1,065  |        
|                                                                                                                | Prepaid expenses and other                                                                   |                                                |                                            | 2,329     |         |        |        | 2,773  |        
|                                                                                                                | Income tax receivable                                                                        |                                                |                                            | 2,509     |         |        |        |       |        
|                                                                                                                | Deferred income taxes                                                                        |                                                |                                            | 3,764     |         |        |        | 3,342  |        
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | Total current assets                       |           |         | 18,728 |        |        |         | 15,256 | 
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|Land, buildings and equipment:                                                                                  |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                | Land                                                                                         |                                                |                                            | 9,503     |         |        |        | 9,730  |        
|                                                                                                                | Buildings                                                                                    |                                                |                                            | 19,180    |         |        |        | 19,161 |        
|                                                                                                                | Vehicles, furniture and equipment                                                            |                                                |                                            | 14,820    |         |        |        | 13,960 |        
|                                                                                                                | Leasehold improvements                                                                       |                                                |                                            | 10,010    |         |        |        | 8,245  |        
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | 53,513                                     |           |         |        | 51,096 |       
|                                                                                                                |                                                                                              | Less accumulated depreciation and amortization |                                            |           | (16,531 | )      |        |        | (14,399 | )     
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | 36,982                                     |           |         |        | 36,697 |       
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|Other non current assets:                                                                                       |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                | Intangible assets, net                                                                       |                                                |                                            | 17,325    |         |        |        | 21,079 |        
|                                                                                                                | Refundable deposits and other                                                                |                                                |                                            | 1,080     |         |        |        | 1,079  |        
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | 18,405                                     |           |         |        | 22,158 |       
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | Total assets                               |           | $       | 74,115 |        |        | $       | 74,111 | 
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|LIABILITIES                                                                                                     |                                                                                              |                                                |                                            |           |         |        |        |       
|Current liabilities:                                                                                            |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                | Revolving line of credit                                                                     |                                                | $                                          | 2,500     |         |        | $      |       |        
|                                                                                                                | Current maturities of long-term debt                                                         |                                                |                                            | 1,133     |         |        |        | 1,321  |        
|                                                                                                                | Accounts payable                                                                             |                                                |                                            | 2,230     |         |        |        | 2,450  |        
|                                                                                                                | Book overdrafts                                                                              |                                                |                                            | 4,041     |         |        |        | 2,806  |        
|                                                                                                                | Accrued wages and payroll taxes                                                              |                                                |                                            | 3,324     |         |        |        | 3,516  |        
|                                                                                                                | Restructuring accrual                                                                        |                                                |                                            | 829       |         |        |        | 2,410  |        
|                                                                                                                | Accrued vacation                                                                             |                                                |                                            | 1,184     |         |        |        | 1,241  |        
|                                                                                                                | Other current liabilities                                                                    |                                                |                                            | 8,094     |         |        |        | 4,517  |        
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | Total current liabilities                  |           |         | 23,335 |        |        |         | 18,261 | 
|Long-term debt                                                                                                  |                                                                                              |                                                | 3,196                                      |           |         |        | 4,224  |       
|Deferred rent liability                                                                                         |                                                                                              |                                                | 983                                        |           |         |        | 1,074  |       
|Deferred income taxes                                                                                           |                                                                                              |                                                | 3,119                                      |           |         |        | 3,316  |       
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | Total liabilities                          |           |         | 30,633 |        |        |         | 26,875 | 
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|Commitments and contingencies (see Note 11)                                                                     |                                                                                              |                                                |                                            |           |         |        |        |       
|SHAREHOLDERS EQUITY                                                                                            |                                                                                              |                                                |                                            |           |         |        |        |       
|Common stock, 10,000,000 shares authorized, no
    par value; 5,240,772 and 5,225,772 outstanding, respectively |                                                                                              |                                                | 31,183                                     |           |         |        | 30,902 |       
|Preferred stock, 1,000,000 shares authorized, no
    par value; no shares issued or outstanding                 |                                                                                              |                                                |                                           |           |         |        |       |       
|Retained earnings                                                                                               |                                                                                              |                                                | 12,299                                     |           |         |        | 16,334 |       
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | Total shareholders equity                 |           |         | 43,482 |        |        |         | 47,236 | 
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       
|                                                                                                                |                                                                                              |                                                | Total liabilities and shareholders equity |           | $       | 74,115 |        |        | $       | 74,111 | 
|                                                                                                                |                                                                                              |                                                |                                            |           |         |        |        |       

The accompanying notes are an integral part of
the consolidated financial statements.

F-3



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENT OF OPERATIONS


|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |        | 
|------------------------------------------------------------------------------------ | ------------------------------------------------------------------------ | -------------- | ------- | --------- | - | --------- | ------- | ------ | - | - | ------- | ------ | 
|                                                                                     |                                                                          | March 29,      |         | March 30, |   | March 31,
|                                                                                     |                                                                          | 2002           |         | 2001      |   | 2000     
|                                                                                     |                                                                          |                |         |           |   |          
|                                                                                     |                                                                          |               
|                                                                                     |                                                                          | (In thousands)
|Revenues                                                                             |                                                                          | $              | 142,399 |           |   | $         | 147,843 |        |   | $ | 129,121 |       
|Cost of revenues                                                                     |                                                                          |                | 129,185 |           |   |           | 131,269 |        |   |   | 112,172 |       
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Gross profit                                                             |                |         | 13,214    |   |           |         | 16,574 |   |   |         | 16,949 | 
|Provision for doubtful accounts                                                      |                                                                          |                | 1,324   |           |   |           | 406     |        |   |   | 385     |       
|Marketing expenses                                                                   |                                                                          |                | 1,464   |           |   |           | 1,666   |        |   |   | 1,601   |       
|General and administrative expenses                                                  |                                                                          |                | 11,996  |           |   |           | 8,825   |        |   |   | 7,598   |       
|Restructuring expense                                                                |                                                                          |                | 578     |           |   |           | 4,000   |        |   |   |        |       
|Mold remediation expense                                                             |                                                                          |                | 1,005   |           |   |           |        |        |   |   |        |       
|Failed merger costs                                                                  |                                                                          |                | 952     |           |   |           |        |        |   |   |        |       
|Impairment charges                                                                   |                                                                          |                | 1,916   |           |   |           | 1,447   |        |   |   | 282     |       
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Operating income                                                         |                |         | (6,021    | ) |           |         | 230    |   |   |         | 7,083  | 
|Interest expense                                                                     |                                                                          |                | 458     |           |   |           | 966     |        |   |   | 428     |       
|Interest income                                                                      |                                                                          |                | (53     | )         |   |           | (57     | )      |   |   | (157    | )     
|Other income, net                                                                    |                                                                          |                | (10     | )         |   |           | (185    | )      |   |   | (117    | )     
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Income (loss) before income taxes and change in
    accounting principle |                |         | (6,416    | ) |           |         | (494   | ) |   |         | 6,929  | 
|Income tax provision (benefit)                                                       |                                                                          |                | (2,381  | )         |   |           | (160    | )      |   |   | 2,600   |       
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Net income (loss) before change in accounting
    principle              |                |         | (4,035    | ) |           |         | (334   | ) |   |         | 4,329  | 
|Cumulative effect of change in accounting
    principle (less tax benefit of $148)   |                                                                          |                |        |           |   |           | 275     |        |   |   |        |       
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Net income (loss)                                                        |                | $       | (4,035    | ) |           | $       | (609   | ) |   | $       | 4,329  | 
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|Earnings (loss) per share:                                                           |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|Basic-income (loss) before cumulative effect of
    change in accounting principle   |                                                                          | $              | (0.77   | )         |   | $         | (0.07   | )      |   | $ | 0.82    |       
|Cumulative effect of change in accounting
    principle                              |                                                                          |                |        |           |   |           | (0.05   | )      |   |   |        |       
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Net income (loss)                                                        |                | $       | (0.77     | ) |           | $       | (0.12  | ) |   | $       | 0.82   | 
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|Diluted-income (loss) before cumulative
    effect of change in accounting principle |                                                                          | $              | (0.77   | )         |   | $         | (0.07   | )      |   | $ | 0.82    |       
|Cumulative effect of change in accounting
    principle                              |                                                                          |                |        |           |   |           | (0.05   | )      |   |   |        |       
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       
|                                                                                     | Net income (loss)                                                        |                | $       | (0.77     | ) |           | $       | (0.12  | ) |   | $       | 0.82   | 
|                                                                                     |                                                                          |                |         |           |   |           |         |        |   |   |         |       

The accompanying notes are an integral part of
the consolidated financial statements.

F-4



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY


|                                |  |                      |       |          |  |          |        |       |  |   |        |   |  |   |        |  
|------------------------------- |  | -------------------- | ----- | -------- |  | -------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                |  |                     
|                                |  | Shareholders Equity
|                                |  |                     
|                                |  |                      |       |         
|                                |  | Common Stock         |       |         
|                                |  |                      |       | Retained |  |         
|                                |  | Shares               |       | Amount   |  | Earnings |        | Total
|                                |  |                      |       |          |  |          |        |      
|                                |  |                     
|                                |  | (In thousands)      
|Balances, April 2, 1999         |  |                      | 5,432 |          |  | $        | 30,836 |       |  | $ | 15,571 |   |  | $ | 46,407 |  
|Repurchase of common stock      |  |                      | (500  | )        |  |          | (2,840 | )     |  |   | (2,957 | ) |  |   | (5,797 | )
|Net income                      |  |                      |      |          |  |          |       |       |  |   | 4,329  |   |  |   | 4,329  |  
|                                |  |                      |       |          |  |          |        |       |  |   |        |   |  |   |        |  
|Balances, March 31, 2000        |  |                      | 4,932 |          |  |          | 27,996 |       |  |   | 16,943 |   |  |   | 44,939 |  
|Shares issued under stock plans |  |                      | 294   |          |  |          | 2,500  |       |  |   |       |   |  |   | 2,500  |  
|Stock compensation              |  |                      |      |          |  |          | 406    |       |  |   |       |   |  |   | 406    |  
|Net income (loss)               |  |                      |      |          |  |          |       |       |  |   | (609   | ) |  |   | (609   | )
|                                |  |                      |       |          |  |          |        |       |  |   |        |   |  |   |        |  
|Balances, March 30, 2001        |  |                      | 5,226 |          |  | $        | 30,902 |       |  | $ | 16,334 |   |  | $ | 47,236 |  
|Shares issued                   |  |                      | 15    |          |  |          | 122    |       |  |   |       |   |  |   | 122    |  
|Stock compensation              |  |                      |      |          |  |          | 159    |       |  |   |       |   |  |   | 159    |  
|Net income (loss)               |  |                      |      |          |  |          |       |       |  |   | (4,035 | ) |  |   | (4,035 | )
|                                |  |                      |       |          |  |          |        |       |  |   |        |   |  |   |        |  
|Balances, March 29, 2002        |  |                      | 5,241 |          |  | $        | 31,183 |       |  | $ | 12,299 |   |  | $ | 43,482 |  
|                                |  |                      |       |          |  |          |        |       |  |   |        |   |  |   |        |  

The accompanying notes are an integral part of
the consolidated financial statements.

F-5



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |        |        |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------- | ------ | --------- | ----- | ------ | ------- | ----- | ------ | ------ | ------ | ------ | -
|                                                         |                                                                                       |                                                                                                                                                          
|                                                         |                                                                                       | Fiscal Years Ended                                                                                                                                       
|                                                         |                                                                                       |                                                                                                                                                          
|                                                         |                                                                                       | March 29,                                                                                                                                                 |                                                               | March 30, |        | March 31,
|                                                         |                                                                                       | 2002                                                                                                                                                      |                                                               | 2001      |        | 2000     
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |          
|                                                         |                                                                                       |                                                                                                                                                          
|                                                         |                                                                                       | (in thousands)                                                                                                                                           
|Cash flows from operating
    activities:                |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|                                                         | Net income (loss)                                                                     |                                                                                                                                                           | $                                                             | (4,035    | )      |           | $     | (609   | )       |       | $      | 4,329  |       
|                                                         | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |        |       
|                                                         |                                                                                       | Depreciation expense                                                                                                                                      |                                                               |           | 2,927  |           |       |        | 2,586   |       |        |        | 2,030  |       
|                                                         |                                                                                       | Amortization expense                                                                                                                                      |                                                               |           | 1,862  |           |       |        | 2,012   |       |        |        | 1,393  |       
|                                                         |                                                                                       | Provision for doubtful accounts                                                                                                                           |                                                               |           | 1,325  |           |       |        | 406     |       |        |        | 385    |       
|                                                         |                                                                                       | Stock compensation expense                                                                                                                                |                                                               |           | 159    |           |       |        | 406     |       |        |        |       |       
|                                                         |                                                                                       | Deferred rent liability                                                                                                                                   |                                                               |           | (68    | )         |       |        | (55     | )     |        |        | (49    | )     
|                                                         |                                                                                       | Deferred income taxes                                                                                                                                     |                                                               |           | (619   | )         |       |        | (2,323  | )     |        |        | (9     | )     
|                                                         |                                                                                       | (Gains) losses and provisions for losses
    including impairment charges on land, buildings, equipment,
    intangible assets and land held for disposal |                                                               |           | 2,243  |           |       |        | 2,717   |       |        |        | 295    |       
|                                                         |                                                                                       | Changes in assets and liabilities providing
    (consuming) cash:                                                                                         |                                                               |           |        |           |       |        |         |       |        |        |        |       
|                                                         |                                                                                       |                                                                                                                                                           | Accounts receivable                                           |           |        | (1,863    | )     |        |         | (886  | )      |        |        | (1,476 | )
|                                                         |                                                                                       |                                                                                                                                                           | Prepaid expenses and other assets                             |           |        | (2,066    | )     |        |         | (225  | )      |        |        | (349   | )
|                                                         |                                                                                       |                                                                                                                                                           | Restructuring accrual                                         |           |        | (1,581    | )     |        |         | 2,410 |        |        |        |       |  
|                                                         |                                                                                       |                                                                                                                                                           | Accounts payable, accruals, and other current
    liabilities |           |        | 3,082     |       |        |         | 1,794 |        |        |        | 949    |  
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|                                                         |                                                                                       | Net cash provided by operating activities                                                                                                                 |                                                               |           | 1,366  |           |       |        | 8,233   |       |        |        | 7,498  |       
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|Cash flows from investing
    activities:                |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|                                                         | Expenditures for land, buildings and equipment                                        |                                                                                                                                                           |                                                               | (4,101    | )      |           |       | (4,049 | )       |       |        | (3,664 | )     
|                                                         | Expenditures for reimbursable construction costs                                      |                                                                                                                                                           |                                                               | (939      | )      |           |       | (6,990 | )       |       |        | (2,660 | )     
|                                                         | Acquisition of intangible assets                                                      |                                                                                                                                                           |                                                               |          |        |           |       | (1,962 | )       |       |        | (3,235 | )     
|                                                         | Proceeds from sales of land, buildings, equipment
    and intangible assets           |                                                                                                                                                           |                                                               | 539       |        |           |       | 629    |         |       |        | 725    |       
|                                                         | Net payments for refundable deposits and other
    assets                             |                                                                                                                                                           |                                                               |          |        |           |       | (67    | )       |       |        | (64    | )     
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|                                                         |                                                                                       | Net cash used in investing activities                                                                                                                     |                                                               |           | (4,501 | )         |       |        | (12,439 | )     |        |        | (8,898 | )     
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|Cash flows from financing
    activities:                |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|                                                         | Net borrowings (repayments) on revolving line of
    credit                           |                                                                                                                                                           |                                                               | 2,500     |        |           |       | (1,358 | )       |       |        | 1,358  |       
|                                                         | Changes in book overdraft                                                             |                                                                                                                                                           |                                                               | 1,237     |        |           |       | (651   | )       |       |        | 3,456  |       
|                                                         | Payments on long-term debt                                                            |                                                                                                                                                           |                                                               | (1,216    | )      |           |       | (2,815 | )       |       |        | (2,295 | )     
|                                                         | Repayments of reimbursable construction costs                                         |                                                                                                                                                           |                                                               | 2,004     |        |           |       | 7,205  |         |       |        | 1,539  |       
|                                                         | Repurchase of common stock                                                            |                                                                                                                                                           |                                                               |          |        |           |       |       |         |       |        | (5,797 | )     
|                                                         | Issuance of common stock                                                              |                                                                                                                                                           |                                                               | 122       |        |           |       | 2,500  |         |       |        |       |       
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|                                                         |                                                                                       | Net cash provided by financing activities                                                                                                                 |                                                               |           | 4,647  |           |       |        | 4,881   |       |        |        | (1,739 | )     
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|Net increase (decrease) in cash and cash
    equivalents |                                                                                       |                                                                                                                                                           | 1,512                                                         |           |        |           | 675   |        |         |       | (3,139 | )     
|Cash and cash equivalents, beginning of year             |                                                                                       |                                                                                                                                                           | 3,379                                                         |           |        |           | 2,704 |        |         |       | 5,843  |       
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       
|Cash and cash equivalents, end of year                   |                                                                                       | $                                                                                                                                                         | 4,891                                                         |           |        | $         | 3,379 |        |         | $     | 2,704  |       
|                                                         |                                                                                       |                                                                                                                                                           |                                                               |           |        |           |       |        |         |       |        |       

The accompanying notes are an integral part of
the consolidated financial statements.

F-6



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1. Principles of Consolidation and
Corporate Organization:

The consolidated financial statements include the
accounts of Childtime Learning Centers, Inc. and its wholly
owned subsidiaries (together referred to as the
Company). All significant intercompany transactions
have been eliminated. The Company began operations in 1967.
Childtime Learning Centers, Inc. was incorporated on
November 2, 1995 and completed its initial public offering
on February 2, 1996. As of March 29, 2002, the Company
provides for-profit child care through 286 child care centers
located in 23 states and the District of Columbia (see
Note 12).

2. Summary of Significant Accounting
Policies:

a. Fiscal Year:The Company utilizes
a 52-53 week fiscal year (comprised of 13 four-week
periods), ending on the Friday closest to March 31. The
fiscal years ended March 29, 2002, March 30, 2001 and
March 31, 2000 all contained 52 weeks.

b. Cash and Cash Equivalents:The
Company considers all temporary investments with original
maturities of three months or less at time of purchase to be
cash equivalents.

c. Land, Buildings and Equipment:Land, buildings and equipment are recorded at cost.
Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets (generally 40 years
for buildings and between 3 and 10 years for vehicles,
furniture and equipment). Leasehold improvements are recorded at
cost and amortized on a straight-line basis over the lesser of
the estimated useful life of the leasehold improvement
(generally 15 years) or the life of the lease. Gains and
losses on sales and retirements are included in the
determination of the results of operations. Maintenance and
repair costs for new centers are charged to operating expense in
the period incurred.

d. Intangible Assets:Intangible
assets represent principally the unamortized excess of the cost
of acquiring Childtime (by the predecessor of Childtime Learning
Centers, Inc.) and other acquisitions of existing child care
facilities over the fair values of the companies net
tangible assets at the dates of acquisition. The intangible
assets are being amortized using a straight-line method over
various periods, but primarily over 15 years, with such
amortization expense included in cost of revenues. Accumulated
amortization at March 29, 2002 and March 30, 2001 was
$7,206,630 and $5,806,263, respectively.

e. Impairment of Long-Lived Assets:Long-lived assets are comprised of intangible assets and
property, plant and equipment. Long-lived assets are reviewed
annually for impairment and whenever events or changes in
circumstances indicate that the carrying amount of the asset may
not be recoverable. The Company assesses the recoverability of
the unamortized cost of acquired assets in excess of fair value
based on a review of projected undiscounted cash flows of the
related centers. These cash flows are reviewed by management in
connection with the Companys annual long-range planning
process. Once the Company has utilized its resources in order to
make the center profitable, without success, and future cash
flows fail to match the carrying value of the assets, they are
deemed to be impaired. The extent of the impairment is measured
as the difference between the fair market of the asset and its
carrying value, with fair market value calculated using
projected future discounted cash flows. At March 29, 2002,
the Company recorded impairment losses of $1,692,830 on
intangible assets and $222,697 on tangible property, as compared
to impairment losses of $1,079,125 on intangible assets and
$367,639 on tangible property for the fiscal year ending
March 30, 2001. If actual results or circumstances are less
favorable than those forecasted by management, or if upon
completion of the new impairment tests under SFAS No. 142,
Goodwill and Other Intangible Assets, the Company
identifies an impairment, a future charge may be required. SFAS
No. 142 became effective for the Company beginning in
fiscal 2003.

f.  Income Taxes:The Company
provides for income taxes for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets
are

F-7



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



2. Summary of Significant Accounting
Policies  (Continued)


determined based on the difference between
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse.

g. Financial Instruments:In
managements opinion, the carrying values of cash and cash
equivalents, accounts receivable and payable, and accrued
liabilities approximate fair value due to the short-term
maturities of these instruments. The carrying values of
long-term debt approximate fair value based on the current
borrowing rates for similar instruments.

h. Risk Concentration:Accounts
receivable is the principal financial instrument that subjects
the Company to concentration of credit risk. Concentration of
credit risk is somewhat limited due to the Companys large
number, diversity and dispersion of customers. The Company
maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable.

Revenues from federal and state child care
assistance programs represent a significant portion of total
revenues. For fiscal 2002, 2001 and 2000, federal assistance
revenues were approximately $31,000,000 (22 percent),
$31,100,000 (21 percent) and $24,800,000 (19 percent),
respectively.

In connection with certain build-to-suit centers
to be leased, the Company enters into arrangements, whereby the
Company accumulates costs during the construction process and is
then reimbursed by the developer. The Company has various legal
remedies available pursuant to the construction agreements to
minimize the risk of non-reimbursement. For the years ended
March 29, 2002, March 30, 2001 and March 31,
2000, the Company financed construction costs of $938,809,
$6,990,355 and $2,659,854, respectively. Related repayments
received under reimbursement agreements were $2,004,017,
$7,204,495 and $1,538,755 for the years then ended.

i.  Common Stock Repurchase:During fiscal 2000, the Companys board of directors
authorized the repurchase of up to 500,000 shares of the
Companys common stock. During fiscal 2000, the Company
purchased all 500,000 shares at a total cost of $5,797,401. The
Companys repurchase of shares was recorded as a charge
against common stock in an amount equal to the average paid in
capital per share, multiplied by the number of shares
repurchased. The excess of the aggregate repurchase price over
the amount charged against common stock is charged against
retained earnings. During fiscal 2000, $2,957,401 was charged
against retained earnings. The Company was not authorized to
repurchase any additional shares during fiscal 2001 or 2002.

j.  Common Stock and Earnings Per
Share:All earnings per share amounts have been presented to
conform with the requirements of SFAS 128, Earnings
Per Share. A reconciliation of the denominators used in
the basic and diluted EPS calculation follows:

|             |                                                           |                                                  |  |           |           |           |  |           |           |  |  |           |           | 
|------------ | --------------------------------------------------------- | ------------------------------------------------ |  | --------- | --------- | --------- |  | --------- | --------- |  |  | --------- | --------- | 
|             |                                                           | March 29,                                        |  | March 30, |           | March 31,
|             |                                                           | 2002                                             |  | 2001      |           | 2000     
|             |                                                           |                                                  |  |           |           |          
|Denominator: |                                                           |                                                  |  |           |           |           |  |           |           |  |  |          
|             | Weighted average shares outstanding EPS, basic            |                                                  |  | 5,233,684 |           |           |  | 5,102,146 |           |  |  | 5,251,438 |          
|             | Incremental shares from assumed conversion of
    options |                                                  |  | 0         |           |           |  | 0         |           |  |  | 19,793    |          
|             |                                                           |                                                  |  |           |           |           |  |           |           |  |  |          
|             |                                                           | Weighted average shares outstanding EPS, diluted |  |           | 5,233,684 |           |  |           | 5,102,146 |  |  |           | 5,271,231 | 
|             |                                                           |                                                  |  |           |           |           |  |           |           |  |  |          

Incremental shares from assumed conversion of
options of 605,251, 551,444 and 163,874 in fiscal 2002, 2001 and
2000, respectively, have been excluded from shares used in
computing diluted earnings (loss) per share as the effect would
be anti-dilutive.

k. Revenue Recognition:Substantially
all of the Companys revenues are derived from providing
child care services through residential and at-work centers. All
revenues are recognized as the service is provided.

F-8



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



2. Summary of Significant Accounting
Policies  (Continued)


For services provided to employers under
short-term (1-5 years) management contract arrangements
where the employer assumes financial responsibility for the
ongoing operations, only the management fee is recorded as
revenue. Management contracts generally call for reimbursement
of all operational costs of the center plus a management fee,
negotiated based on center size, as well as various operational
and financial considerations.

Effective April 1, 2000, the Company changed
its method of revenue recognition in accordance with SEC Staff
Accounting Bulletin 101, Revenue Recognition.
Previously all registration and material fees had been recorded
when received. Under the accounting method adopted retroactive
to April 1, 2000, the Company now recognizes registration
and material fees over the typical school year of September
through August. The cumulative effect of the change on prior
years resulted in a charge to income (net of taxes) of $275,000,
which was recognized during fiscal 2001.

The pro forma effect of retroactive application
of SAB 101 as of the beginning of fiscal 2000 would have
resulted in revenue of $128.7 million, gross profit of
$16.5 million, net income of $4.1 million, and diluted
earnings per share of $0.77 for fiscal year 2000.

l.  Pre-Opening Costs:Pre-opening costs are expensed as incurred.

m. Advertising Expenses:Yellow pages
advertising costs are expensed concurrent with the period in
which the Yellow Pages books are distributed to customers. All
other marketing costs are treated as period expenses and,
accordingly, are expensed in the period incurred. The Company
incurred advertising expenses of $1,219,000, $1,128,000 and
$1,215,000 during fiscal 2002, 2001 and 2000, respectively.

n. Business Risks:The Company is
subject to certain risks common to the providers of child care
and early education, including dependence on key personnel,
dependence on client relationships, competition from alternate
sources or providers of the Companys services, market
acceptance of work and family services, the ability to hire and
retain qualified personnel and general economic conditions.

o. Use of Estimates:The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions (in areas, among others, such as provision for
doubtful accounts and accrued workers compensation
expense), that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

p. Reclassifications:Certain amounts
for the fiscal years ended March 30, 2001 and
March 31, 2000 have been reclassified to conform to the
presentation adopted in fiscal 2002.

q. Segment Reporting:The Company
organizes itself as one segment for reporting purposes.

r.  New Accounting Pronouncements:In June 2001, the Financial Accounting Standards Board
issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. SFAS
No. 141 requires, among other things, that the purchase
method of accounting for business combinations be used for all
business combinations initiated after June 30, 2001. SFAS
No. 142 addresses the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS
No. 142 requires, among other things, that goodwill and
other indefinite-lived intangible assets no longer be amortized
and that such assets be tested for possible impairment at least
annually. SFAS No. 142 became effective for the Company
beginning March 30, 2002. The Company will test goodwill
for impairment using the two-step process prescribed in SFAS
No. 142. The Company expects to complete the first step by
the second quarter of 2003. Any impairment that is required to
be recognized upon the adoption of SFAS No. 142 would be
reflected as a cumulative effect of a change in accounting
principle. The Company must complete the measurement of any
impairment loss upon the initial adoption of SFAS

F-9



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2. Summary of Significant Accounting
Policies  (Continued)

No. 142 by March 28, 2003. The
Company is in the process of implementing SFAS No. 142 and
has not yet determined what effect these impairment tests will
have on the Companys consolidated financial statements. In
accordance with SFAS No. 142, the Company will no longer
record amortization expense of approximately $1,600,000 related
to goodwill. Other intangible assets will continue to be
amortized over their useful lives.

SFAS No. 143, Accounting for Asset
Retirement Obligations, was issued in August 2001, and addresses
legal obligations (arising from laws, statutes, contracts, etc.)
that an entity must satisfy when disposing of tangible,
long-lived assets. The standard requires entities to record the
fair value of a liability for an asset retirement obligation in
the period in which it is incurred. The Company is evaluating
the impact this Statement will have on its consolidated
financial statements and is anticipating the adoption of SFAS
No. 143 in the first quarter of fiscal 2004.

SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, was issued in July 2001, and
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supercedes SFAS
No. 121 on the same topic and establishes an accounting
model for the impairment of long-lived assets. The Company is
evaluating the impact this Statement will have on its
consolidated financial statements and will adopt SFAS
No. 144 in the first quarter of fiscal 2003.

3. Acquisitions:

The Company completed 10 center acquisitions
during fiscal 2001 for an aggregate of approximately $1,962,000
in cash and $1,962,000 in seller-financed debt. Approximately
$3,235,000 of intangible assets were recorded as a result of the
fiscal 2001 acquisitions. For fiscal 2001, all acquisitions
occurred at the beginning of the fiscal year. Therefore,
pro-forma financial information is not required. The Company did
not acquire any centers in fiscal year ended March 29,
2002. See Note 16, Subsequent Events.

4. Other Current Assets and
Liabilities:

Other current assets and liabilities are composed
of the following:

|                                           |                                                                                                                                                                         |                |       |           |  |   |       |       | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ----- | --------- |  | - | ----- | ----- | 
|                                           |                                                                                                                                                                         | March 29,      |       | March 30,
|                                           |                                                                                                                                                                         | 2002           |       | 2001     
|                                           |                                                                                                                                                                         |                |       |          
|                                           |                                                                                                                                                                         |               
|                                           |                                                                                                                                                                         | (in thousands)
|Prepaid expenses and other current assets: |                                                                                                                                                                         |                |       |           |  |   |       |      
|                                           | Prepaid rent                                                                                                                                                            |                | $     | 1,537     |  |   | $     | 1,662 | 
|                                           | Other                                                                                                                                                                   |                |       | 792       |  |   |       | 1,111 | 
|                                           |                                                                                                                                                                         |                |       |           |  |   |       |      
|                                           |                                                                                                                                                                         | $              | 2,329 |           |  | $ | 2,773 |      
|                                           |                                                                                                                                                                         |                |       |           |  |   |       |      
|Other current liabilities:                 |                                                                                                                                                                         |                |       |           |  |   |       |      
|                                           | Unearned revenue                                                                                                                                                        |                | $     | 1,262     |  |   | $     | 1,421 | 
|                                           | Accrued merger expenses                                                                                                                                                 |                |       | 693       |  |   |       | 0     | 
|                                           | Accrued property taxes                                                                                                                                                  |                |       | 613       |  |   |       | 683   | 
|                                           | Accrued legal settlement                                                                                                                                                |                |       | 800       |  |   |       | 0     | 
|                                           | Accrued mold remediation                                                                                                                                                |                |       | 810       |  |   |       | 0     | 
|                                           | Accrued workers compensation expense (net
    of $1,122 and $781 of advance deposits held by insurance company
    at March 29, 2002 and March 30, 2001, respectively) |                |       | 1,617     |  |   |       | 989   | 
|                                           | Other                                                                                                                                                                   |                |       | 2,299     |  |   |       | 1,424 | 
|                                           |                                                                                                                                                                         |                |       |           |  |   |       |      
|                                           |                                                                                                                                                                         | $              | 8,094 |           |  | $ | 4,517 |      
|                                           |                                                                                                                                                                         |                |       |           |  |   |       |      

F-10



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5. Financing Arrangements:

Financing arrangements consist of the following:

|                                                                                                                                                                                                                                                                                                                                       |  |                |       |           |  |   |       | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | --------- |  | - | ----- | 
|                                                                                                                                                                                                                                                                                                                                       |  | March 29,      |       | March 30,
|                                                                                                                                                                                                                                                                                                                                       |  | 2002           |       | 2001     
|                                                                                                                                                                                                                                                                                                                                       |  |                |       |          
|                                                                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                                                                       |  | (in thousands)
|Note payable (collateralized by a letter of
    credit) to a corporation resulting from an acquisition, interest
    at prime (4.75 percent at March 29, 2002 and
    8.0 percent at March 30, 2001), quarterly principal
    payments of $100,000 plus interest, remaining balance payable
    January 2005                           |  | $              | 1,100 |           |  | $ | 1,500 | 
|Notes payable (non-collateralized) to
    corporations resulting from an acquisition, interest at prime,
    principal and interest due in full April 2004                                                                                                                                                                             |  |                | 1,923 |           |  |   | 1,805 | 
|Notes payable (non-collateralized) to various
    entities and individuals resulting from acquisitions, interest
    at various fixed rates ranging from 7.75 to 8.5 percent and
    variable rates ranging from prime to prime plus 1 percent,
    various payment terms with original maturities ranging from one
    to seven years |  |                | 1,306 |           |  |   | 2,240 | 
|                                                                                                                                                                                                                                                                                                                                       |  |                |       |           |  |   |       | 
|                                                                                                                                                                                                                                                                                                                                       |  |                | 4,329 |           |  |   | 5,545 | 
|Less current maturities of long-term debt                                                                                                                                                                                                                                                                                              |  |                | 1,133 |           |  |   | 1,321 | 
|                                                                                                                                                                                                                                                                                                                                       |  |                |       |           |  |   |       | 
|                                                                                                                                                                                                                                                                                                                                       |  | $              | 3,196 |           |  | $ | 4,224 | 
|                                                                                                                                                                                                                                                                                                                                       |  |                |       |           |  |   |       | 

At March 29, 2002, aggregate principal
payments due on long-term debt over the next four years and
thereafter are as follows:

|                    |  |                |       | 
|------------------- |  | -------------- | ----- | 
|                    |  | (in thousands)
|2003                |  | $              | 1,133 | 
|2004                |  |                | 721   | 
|2005                |  |                | 2,304 | 
|2006                |  |                | 81    | 
|2007 and thereafter |  |                | 90    | 
|                    |  |                |       | 
|                    |  | $              | 4,329 | 
|                    |  |                |       | 

On January 31, 2002, the Company amended and
restated its revolving line of credit agreement with the
existing lender, increasing the amount available for borrowing
to $17.5 million, with interest payable monthly at a
variable rate, at the Companys option, based on either the
prime rate or the Eurodollar rate. The unused line of credit
bears a commitment fee of 0.35% payable quarterly. The new
credit agreement will mature on September 30, 2004, and is
collateralized by the Companys receivables, equipment and
certain real estate.

Under the line of credit, there were borrowings
of $2,500,000 at March 29, 2002, and no borrowings at
March 30, 2001. For the year ended March 29, 2002,
average borrowings on the line of credit were $1,066,591, with
an average interest rate of 4.35 percent, as compared to
average borrowings of $2,198,572, with an average interest rate
of 9.22 percent for the year ended March 30, 2001.
Outstanding letters of credit further reduced the availability
under the line of credit by $1,847,588 at March 29, 2002
and $2,450,147 at March 30, 2001. Under this agreement, the
Company is required to maintain certain financial ratios and
other financial conditions, the most restrictive of which
requires the Company to maintain certain debt-to-equity ratios,
a minimum fixed charge coverage and a minimum amount of tangible
net worth. In addition, there are restrictions on the incurrence
of additional indebtedness, disposition and acquisition of
assets and transactions with affiliates.

F-11



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6. Income Taxes:

The income tax provision or benefit reflected in
the consolidated statement of operations consists of the
following:

|          |                 |                |        |           |   |           |        |        |   |   |       |       |  
|--------- | --------------- | -------------- | ------ | --------- | - | --------- | ------ | ------ | - | - | ----- | ----- | -
|          |                 | March 29,      |        | March 30, |   | March 31,
|          |                 | 2002           |        | 2001      |   | 2000     
|          |                 |                |        |           |   |          
|          |                 |               
|          |                 | (in thousands)
|Current:  |                 |                |        |           |   |           |        |        |   |   |       |      
|          | Federal         |                | $      | (1,645    | ) |           | $      | 1,899  |   |   | $     | 2,440 |  
|          | State and local |                |        | (117      | ) |           |        | 116    |   |   |       | 169   |  
|          |                 |                |        |           |   |           |        |        |   |   |       |      
|          |                 |                | (1,762 | )         |   |           | 2,015  |        |   |   | 2,609 |      
|          |                 |                |        |           |   |           |        |        |   |   |       |      
|Deferred: |                 |                |        |           |   |           |        |        |   |   |       |      
|          | Federal         |                |        | (569      | ) |           |        | (2,137 | ) |   |       | (8    | )
|          | State and local |                |        | (50       | ) |           |        | (186   | ) |   |       | (1    | )
|          |                 |                |        |           |   |           |        |        |   |   |       |      
|          |                 |                | (619   | )         |   |           | (2,323 | )      |   |   | (9    | )    
|          |                 |                |        |           |   |           |        |        |   |   |       |      
|          |                 | $              | (2,381 | )         |   | $         | (308   | )      |   | $ | 2,600 |      
|          |                 |                |        |           |   |           |        |        |   |   |       |      

Differences between the income tax provision on
income before income taxes reflected in the statement of
operations and that computed by applying the statutory federal
income tax rate are attributable to the following:

|                                                   |  |                |        |           |  |           |      |   |  |   |       | 
|-------------------------------------------------- |  | -------------- | ------ | --------- |  | --------- | ---- | - |  | - | ----- | 
|                                                   |  | March 29,      |        | March 30, |  | March 31,
|                                                   |  | 2002           |        | 2001      |  | 2000     
|                                                   |  |                |        |           |  |          
|                                                   |  |               
|                                                   |  | (in thousands)
|Income tax provision at the statutory federal rate |  | $              | (2,182 | )         |  | $         | (312 | ) |  | $ | 2,356 | 
|State and local taxes, net of federal tax benefit  |  |                | (110   | )         |  |           | (46  | ) |  |   | 111   | 
|Other                                              |  |                | (89    | )         |  |           | 50   |   |  |   | 133   | 
|                                                   |  |                |        |           |  |           |      |   |  |   |       | 
|                                                   |  | $              | (2,381 | )         |  | $         | (308 | ) |  | $ | 2,600 | 
|                                                   |  |                |        |           |  |           |      |   |  |   |       | 

F-12



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



6. Income Taxes 
(Continued)


Temporary differences and carryforwards that give
rise to deferred tax assets and (liabilities) are as
follows:

|                        |                                                |                                    |        |           |     |   |        |        |    | 
|----------------------- | ---------------------------------------------- | ---------------------------------- | ------ | --------- | --- | - | ------ | ------ | -- | 
|                        |                                                | March 29,                          |        | March 30,
|                        |                                                | 2002                               |        | 2001     
|                        |                                                |                                    |        |          
|                        |                                                |                                   
|                        |                                                | (in thousands)                    
|Deferred tax asset:     |                                                |                                    |        |           |     |   |        |       
|                        | Allowance for doubtful accounts                |                                    | $      | 263       |     |   | $      | 137    |   
|                        | Vested and non-vested vacation balance         |                                    |        | 450       |     |   |        | 471    |   
|                        | Workers compensation accrual                   |                                    |        | 1,041     |     |   |        | 673    |   
|                        | Capital loss carryforwards                     |                                    |        | 205       |     |   |        | 233    |   
|                        | Provision for restructuring charges            |                                    |        | 292       |     |   |        | 837    |   
|                        | Provision for mold remediation                 |                                    |        | 308       |     |   |        | 0      |   
|                        | Stock compensation                             |                                    |        | 214       |     |   |        | 153    |   
|                        | Deferred registration fees                     |                                    |        | 168       |     |   |        | 206    |   
|                        | All other                                      |                                    |        | 9         |     |   |        | (14    | ) 
|                        |                                                |                                    |        |           |     |   |        |       
|                        |                                                | $                                  | 2,950  |           |     | $ | 2,696  |       
|                        |                                                |                                    |        |           |     |   |        |       
|Deferred tax liability: |                                                |                                    |        |           |     |   |        |       
|                        | Basis and depreciation differences of property |                                    | $      | (2,722    | )   |   | $      | (3,114 | ) 
|                        | Straight-line rent                             |                                    |        | 417       |     |   |        | 444    |   
|                        |                                                |                                    |        |           |     |   |        |       
|                        |                                                |                                    | (2,305 | )         |     |   | (2,670 | )     
|                        |                                                |                                    |        |           |     |   |        |       
|                        |                                                | Net deferred tax asset (liability) |        | $         | 645 |   |        | $      | 26 | 
|                        |                                                |                                    |        |           |     |   |        |       

The Company has capital loss carryforwards which
will expire as follows: March 28, 2003, $58,000; and
April 1, 2005, $482,000. The Company believes that all of
its deferred tax assets will be realized through the
implementation of certain tax planning strategies, which include
the sale and closure of certain centers.

7. Leases:

The Company leases certain land and buildings,
primarily childrens centers and vehicles, under
non-cancelable operating leases with original terms ranging from
1 to 25 years. Certain leases contain purchase and renewal
options, impose restrictions upon making certain payments and
incurring additional debt, and may provide for rental increases
at specified intervals and contingent rents based upon a
specified percentage of the gross revenues derived from
operating a business at the lease facility. Rental expense for
the years ended March 29, 2002, March 30, 2001 and
March 31, 2000 was $21,953,476, $21,358,383 and
$17,496,726, respectively. These amounts included contingent
rental expense of $302,487, $352,213 and $338,705 for the years
ended March 29, 2002, March 30, 2001 and
March 31, 2000, respectively.

Future minimum rental commitments at
March 29, 2002 for all non-cancelable operating leases are
as follows:

|           |  |                |        |                |  |   |       | 
|---------- |  | -------------- | ------ | -------------- |  | - | ----- | 
|           |  | Total  All    |        | Closed Centers
|           |  | Centers        |        | Only          
|           |  |                |        |               
|           |  |               
|           |  | (in thousands)
|2003       |  | $              | 20,661 |                |  | $ | 519   | 
|2004       |  |                | 19,545 |                |  |   | 322   | 
|2005       |  |                | 18,343 |                |  |   | 311   | 
|2006       |  |                | 17,091 |                |  |   | 448   | 
|2007       |  |                | 15,512 |                |  |   | 398   | 
|Thereafter |  |                | 79,312 |                |  |   | 1,419 | 

F-13



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



7. Leases 
(Continued)


Closed Centers Only represents the
minimum lease payments in total for all closed centers. The
Company has accrued $755,000 in restructuring charges related to
these lease payments. The Company expects to assign the
remaining amounts to a third party or negotiate reductions with
the landlord.

In addition, the Company is contingently liable
on approximately $1.0 million for lease assignments already
negotiated in connection with certain lease terminations
resulting from the fiscal 2001 restructuring program. There are
no other significant off-balance sheet arrangements.

8. Employee Benefit Plan:

The Company has a 401(k) Savings and Retirement
Plan (the Plan) covering substantially all of its
full-time employees. The Company matches 25 percent of
employee contributions up to 4 percent of compensation.
Employees may contribute up to 15 percent of compensation
to the Plan. Amounts expensed for the years ended March 29,
2002, March 30, 2001 and March 31, 2000 were $104,121,
$97,091 and $92,506, respectively.

9. Stock Options:

In November 1995, the Company adopted the 1995
Stock Incentive Plan for Key Employees (the Stock Option
Plan). The Stock Option Plan became effective,
February 2, 1996, concurrent with the effectiveness of the
registration statement relating to the Companys initial
public offering of Common Stock. The aggregate number of shares
that may be issued pursuant to the Stock Option Plan, was
300,000 shares. At the 2000 Annual Shareholder Meeting, an
amendment was approved increasing the amount of shares available
for grant or award by 300,000, bringing the new total to 600,000
shares. Options may be granted, or restricted stock awarded, at
the discretion of the Companys compensation committee from
time to time at a range of 75 percent to 110 percent
of the market value of the stock on the date on which such
option is granted as defined in the Stock Option Plan. Each
option granted under the plan shall expire in five to ten years
from the date of grant, as defined in the Stock Option Plan.
Restrictions on sale or transfer of stock awarded under the
Stock Option Plan, if any, range from six months to five years.
Vesting requirements are determined by the committee at the time
of the grant, provided however, no stock option may be
exercisable prior to the expiration of six months from the date
of grant unless the participant dies or becomes disabled prior
thereto. Options granted during fiscal 2002 of 620,500 were
granted at the then market price and vest evenly over a
three-year period. No compensation expense has been recorded on
any employee options, as all options were granted at the fair
market price. In addition, the Company adopted the Director
Stock Option Plan, effective February 2, 1996, providing
for annual grants of stock options to non-employee directors to
purchase common stock at fair value as of the date of such
grant. The aggregate number of shares which may be issued
pursuant to the Director Stock Option Plan, is 75,000 shares.
Each option grant under the plan shall expire five years from
the date of grant. Options vest in full on the first anniversary
of the date of grant and 12,500 and 15,000 options were granted
under the plan during fiscal 2002 and 2001, respectively.

The Company has adopted the disclosure provisions
of SFAS No. 123 Accounting for Stock-Based
Compensation, and continues to measure compensation cost
using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Had stock option compensation cost
for these plans been determined based on the fair value at the
grant dates for awards

F-14



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9. Stock Options 
(Continued)

under those plans consistent with the methodology
of SFAS No. 123, the Companys net income and earnings
per share would have been reduced to the pro forma amounts
indicated below:

|                                                                   |         |  |             |                                      |  |            |        |            |   |   |       |       |   |   |       |      | 
|------------------------------------------------------------------ | ------- |  | ----------- | ------------------------------------ |  | ---------- | ------ | ---------- | - | - | ----- | ----- | - | - | ----- | ---- | 
|                                                                   |         |  |             | Year Ended                           |  | Year Ended |        | Year Ended
|                                                                   |         |  |             | March 29,                            |  | March 30,  |        | March 31, 
|                                                                   |         |  |             | 2002                                 |  | 2001       |        | 2000      
|                                                                   |         |  |             |                                      |  |            |        |           
|                                                                   |         |  |             |                                     
|                                                                   |         |  |             | (in thousands except for share data)
|Net income (loss):                                                 |         |  | As reported |                                      |  | $          | (4,035 | )          |   | $ | (609  | )     |   | $ | 4,329 |     
|                                                                   |         |  | Pro forma   |                                      |  | $          | (4,128 | )          |   | $ | (688  | )     |   | $ | 4,106 |     
|Earnings (loss) per share:                                         |         |  |             |                                      |  |            |        |            |   |   |       |       |   |   |       |     
|                                                                   | Basic   |  |             | As reported                          |  |            | $      | (0.77      | ) |   | $     | (0.12 | ) |   | $     | 0.82 | 
|                                                                   |         |  | Pro forma   |                                      |  | $          | (0.79  | )          |   | $ | (0.13 | )     |   | $ | 0.78  |     
|                                                                   | Diluted |  |             | As reported                          |  |            | $      | (0.77      | ) |   | $     | (0.12 | ) |   | $     | 0.82 | 
|                                                                   |         |  | Pro forma   |                                      |  | $          | (0.79  | )          |   | $ | (0.13 | )     |   | $ | 0.78  |     
|Weighted average fair value of options granted
    during the year |         |  |             |                                      |  | $          | 3.54   |            |   | $ | 2.55  |       |   | $ | 4.22  |     
|                                                                   |         |  |             |                                      |  |            |        |            |   |   |       |       |   |   |       |     

The fair value of the options used to compute pro
forma net income and earnings per share disclosures is the
estimated present value at grant date using the
Black-Scholes option-pricing model with the
following weighted average assumptions for 2002, 2001 and 2000,
respectively: no dividend yield; expected volatility of 35.5,
34.2 and 39.0 percent; risk free interest rate of 4.3, 6.0
and 5.3 percent; and expected holding periods of 4.0, 3.6
and 3.7 for fiscal years 2002, 2001 and 2000, respectively.

Presented below is a summary of the status of the
stock options held by employees of the Company as of
March 29, 2002, March 30, 2001 and March 31, 2000:

|                                           |  |                |          |                |  |                |       |          |  |        |         |          |  |   |       |  |  |  |         |   |  |   |       | 
|------------------------------------------ |  | -------------- | -------- | -------------- |  | -------------- | ----- | -------- |  | ------ | ------- | -------- |  | - | ----- |  |  |  | ------- | - |  | - | ----- | 
|                                           |  |                |          |                |  |               
|                                           |  | Year Ended     |          | Year Ended     |  | Year Ended    
|                                           |  | March 29, 2002 |          | March 30, 2001 |  | March 31, 2000
|                                           |  |                |          |                |  |               
|                                           |  |                |          | Weighted       |  |                |       | Weighted |  |        |         | Weighted
|                                           |  |                |          | Average        |  |                |       | Average  |  |        |         | Average 
|                                           |  |                |          | Exercise       |  |                |       | Exercise |  |        |         | Exercise
|Options                                    |  | Shares         |          | Price          |  | Shares         |       | Price    |  | Shares |         | Price   
|                                           |  |                |          |                |  |                |       |          |  |        |         |         
|Options outstanding at beginning of Period |  |                | 401,450  |                |  | $              | 10.30 |          |  |        | 314,351 |          |  | $ | 11.80 |  |  |  | 251,267 |   |  | $ | 11.81 | 
|Granted                                    |  |                | 633,000  |                |  |                | 10.46 |          |  |        | 158,800 |          |  |   | 7.99  |  |  |  | 71,350  |   |  |   | 11.77 | 
|Exercised                                  |  |                |         |                |  |                |      |          |  |        |        |          |  |   |      |  |  |  |        |   |  |   |      | 
|Forfeited/expired                          |  |                | (684,366 | )              |  |                | 10.62 |          |  |        | (71,701 | )        |  |   | 11.01 |  |  |  | (8,266  | ) |  |   | 12.09 | 
|                                           |  |                |          |                |  |                |       |          |  |        |         |          |  |   |       |  |  |  |         |   |  |   |       | 
|Options outstanding at end of Period       |  |                | 350,084  |                |  | $              | 9.96  |          |  |        | 401,450 |          |  | $ | 10.43 |  |  |  | 314,351 |   |  | $ | 11.80 | 
|                                           |  |                |          |                |  |                |       |          |  |        |         |          |  |   |       |  |  |  |         |   |  |   |       | 
|Options exercisable                        |  |                | 278,760  |                |  | $              | 11.06 |          |  |        | 268,286 |          |  | $ | 10.89 |  |  |  | 183,667 |   |  | $ | 11.44 | 
|                                           |  |                |          |                |  |                |       |          |  |        |         |          |  |   |       |  |  |  |         |   |  |   |       | 

Of the 350,084 options outstanding at
March 29, 2002, 237,427 were exercisable at per share
prices ranging from $4.05 to $11.81, with a weighted average
exercise price of $9.96 and a weighted average remaining
contractual life of 2.8 years; 41,333 were exercisable at
per share prices ranging from $11.82 to $18.28, with a weighted
average exercise price of $17.36 and a weighted average
remaining contractual life of 2.2 years.

10. Option Grants for Consulting Services
and Related Party Transactions:

In July 2000, the Company retained Jacobson
Partners, of which Benjamin R. Jacobson, a director of the
Company, is the managing general partner, to provide management
and financial consulting services. As part of the consideration
to be paid to, and to add further incentive for such services,
Jacobson Partners was

F-15



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10. Option Grants for Consulting Services
and Related Party Transactions  (Continued)


granted stock options to purchase 557,275 shares.
As of March 29, 2002, Jacobson Partners has exercised
options totaling 294,117 shares at a cost of $2,500,000. The
remaining 263,158 shares have an option price of $9.50 and
expire in July 2002. Additionally, Jacobson Partners receives an
annual consulting fee in the amount of $250,000, plus
reimbursement of reasonable out-of-pocket expenses. As a result
of the stock option grants, the Company recorded additional
compensation expense of $297,950 in fiscal 2001. In connection
with the proposed Tutor Time acquisition (see Note 16
Subsequent Events), Jacobson Partners has been
retained to provide investment advisory services (including for
related post-closing services), and, if the Company is
successful in acquiring the assets of Tutor Time, one of the
above-described investment funds controlled by Jacobson Partners
has committed to partially fund the financing of the
acquisition. If the Company is successful in acquiring the Tutor
Time assets, Jacobson Partners will be entitled to a fee of
$1,000,000, of which $333,334 will be payable in cash and the
remainder will be payable by the issuance of 175,438 shares of
the Companys common stock (based on a conversion price of
$3.80 per share). Although the terms of the financing
arrangement have not yet been finalized, the Company believes
that the foregoing transactions are, or will be, on terms
similar to arms-length terms available from unrelated
parties. Total expenses incurred for Jacobson Partners were
$261,255, $485,196 and $0 for 2002, 2001 and 2000, respectively.
All of these related party consulting and compensation expenses
are included in General and Administrative expense in the
accompanying Consolidated Statement of Operations. James J.
Morgan, the Companys Chairman of the Board and interim
Chief Executive Officer, became a partner of Jacobson Partners
effective January 1, 2002. George A. Kellner also serves as
a special advisor to Jacobson Partners.

The Companys current interim Chief
Executive Officer, was granted 60,000 options in January 2001.
As initially granted, the options have a $7.00 exercise price,
vest at the rate of 10,000 per month and expire January 2003.
The Company recorded $108,300 of additional stock compensation
expense for these options in fiscal 2001. After the executive
was appointed Chairman of the Board in August 2001, these
options were extended to expire in September 2006. At that time,
he was also granted an additional 50,000 options. These
additional options have an $11.00 exercise price, vest after one
year and expire in September 2006. As a result of these
additional stock option grants and modifications, the Company
recorded additional compensation expense of $141,025 for fiscal
2002.

The interim Chief Financial Officer was granted
10,000 options in March 2001. The options have a $7.97 exercise
price, vest evenly over 3 years and expire in March 2007.
In September 2001, the executive was granted an additional
20,000 options. These additional options have an $11.00 exercise
price, vest after one year and expire in September 2006. As a
result of these stock option grants, the Company recorded
additional compensation expense of $18,004 for fiscal 2002.

11. Commitments &
Contingencies:

The Company is contingently liable for
approximately $1.0 million for lease assignments negotiated
in connection with certain lease terminations. (See
Note 12.)

The Company was a defendant in a personal injury
lawsuit in which the plaintiffs alleged their infant son
experienced respiratory and cardiac arrest while in the
Companys care, resulting in injuries to their child.
During fiscal 2002, the Company settled the case and the entire
amount of the settlement was covered under the Companys
insurance policy. During fiscal 2002, the Company decided not to
pursue opening three new build-to-suit centers after leases for
these centers had been signed with the developer of the centers.
The Company was subsequently sued by the developer for breach of
contract. This case was settled at the end of fiscal 2002, and a
current liability has been recorded on the balance sheet as of
March 29, 2002 in the amount of $800,000. In addition to
the above matters, there are various legal actions and other
claims are pending or could be asserted against the Company.
Litigation is subject to many uncertainties; the outcome of
individual litigated matters is not predictable with assurance,
and it is reasonably possible that some of these matters may

F-16



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



11. Commitments &
Contingencies  (Continued)


be decided unfavorably to the Company. It is the
opinion of management that the ultimate liability, if any, with
respect to these matters will not materially affect the
financial position, results of operations or cash flows of the
Company.

In fiscal 2002, to continue providing a safe
environment for our customers, the Company began a mold
remediation program for its operating centers, identifying
approximately 86 affected centers. The Company expensed
$1,005,000 in fiscal 2002 for the required remediation. The
remediation efforts will be substantially complete by the end of
the first quarter of fiscal 2003.

12. Restructuring Charges:

In January 2001, the Company hired a new senior
management team, who reviewed the Companys operations and
developed a new strategic direction. This review identified
short and long-term profitability goals and identified areas
designed to improve productivity and reduce operating costs.

The Company instituted a restructuring program in
fiscal 2001 and incurred a charge of $4,000,000 in March 2001.
In this regard, the Company closed all 10 of its Oxford
Learning Centers of America and identified 19 under-performing
centers to be closed in fiscal 2002. As of March 29, 2002,
all but one of the under-performing centers have been closed.
Approximately 200 employees were or will be involuntarily
terminated in connection with the closures of Oxford Learning
Centers of America and the 19 under-performing Childtime
centers. These under-performing centers generated operating
losses in fiscal 2001 of $526,000 on revenues of $6,132,000,
while Oxford Learning Centers of America generated operating
losses of $818,000 on revenues of $465,000.

The total fiscal 2001 restructuring charge of
$4,000,000 was comprised of $1,915,000 of estimated undiscounted
lease termination costs, $1,539,000 of impairment of fixed and
intangible assets and $546,000 of severance costs. Included as a
current liability in the March 30, 2001 balance sheet is
$2,410,000 of accrued restructuring expenses.

A summary of the restructuring reserve is as
follows (in thousands):

|                        |       |                                     |       |             |  |          |     |                |  |   |       |       |  |   |     |     | 
|----------------------- | ----- | ----------------------------------- | ----- | ----------- |  | -------- | --- | -------------- |  | - | ----- | ----- |  | - | --- | --- | 
|                        |       |                                    
|                        |       | 2001 Restructuring Reserve Analysis
|                        |       |                                    
|                        |       | Beginning                           |       |             |  | Ending  
|                        |       | Accrual                             |       | Accrual     |  | Cash     |     | Accrual       
|                        |       | March 30, 2001                      |       | Adjustments |  | Payments |     | March 29, 2002
|                        |       |                                     |       |             |  |          |     |               
|Lease termination costs |       | $                                   | 1,958 |             |  | $        | 223 |                |  | $ | 1,426 |       |  | $ | 755 |    
|Severance costs         |       |                                     | 452   |             |  |          | (73 | )              |  |   | 379   |       |  |   | 0   |    
|                        |       |                                     |       |             |  |          |     |                |  |   |       |       |  |   |     |    
|                        | Total |                                     | $     | 2,410       |  |          | $   | 150            |  |   | $     | 1,805 |  |   | $   | 755 | 
|                        |       |                                     |       |             |  |          |     |                |  |   |       |       |  |   |     |    

During fiscal 2002, a higher than anticipated
number of employees transferred to other centers within the
Company when the identified centers were closed. As a result,
the amount of severance paid to terminated employees was $73,000
less than originally estimated. Furthermore, the Company
recorded additional costs of $223,000 associated with
unanticipated required maintenance and future undiscounted lease
termination costs associated with the closed centers. The
Company expects to complete its plan within fiscal 2003.

Also during fiscal 2002, the Company decided to
restructure its senior management team. Severance costs of
$428,000 were incurred in connection with the replacement of
three individuals. $74,000 representing the remaining unpaid
severance is currently included in accrued restructuring.

F-17



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13. Supplemental Cash Flow
Information:

|                                   |              |                |   |           |  |           |   |       |  |  |   |       | 
|---------------------------------- | ------------ | -------------- | - | --------- |  | --------- | - | ----- |  |  | - | ----- | 
|                                   |              | March 29,      |   | March 30, |  | March 31,
|                                   |              | 2002           |   | 2001      |  | 2000     
|                                   |              |                |   |           |  |          
|                                   |              |               
|                                   |              | (in thousands)
|Cash payments during the year for: |              |                |   |           |  |           |   |       |  |  |   |      
|                                   | Interest     |                | $ | 438       |  |           | $ | 1,003 |  |  | $ | 371   | 
|                                   | Income taxes |                | $ | 821       |  |           | $ | 2,265 |  |  | $ | 2,867 | 

In connection with the acquisition of certain
assets, the Company incurred debt of $1,732,500, and $6,283,500
in 2001 and 2000, respectively.

14. Book Overdrafts:

Book overdrafts represent unfunded checks drawn
on zero balance accounts that have not been presented for
funding to the Companys banks. The overdrafts are funded,
without bank finance charges, as soon as they are presented. The
aggregate book overdrafts for the year ended March 29, 2002
was $4,041,000 as compared to $2,806,000 for March 30, 2001.

15. Quarterly Data (unaudited):

The following table shows certain unaudited
financial information for the Company for the interim periods
indicated. As discussed in Note 2(k), the Company changed
its method of revenue recognition related to registration and
materials fees effective April 1, 2000. Accordingly, the
following unaudited quarterly operating results for the first
three quarters of the year ended March 30, 2001 have been
restated to reflect the impact of the change in accounting
method as if adopted on April 1, 2000. Additionally,
quarterly results may vary from year to year depending on the
timing and amount of revenues and costs associated with new
center development and acquisitions, as well as certain other
costs, including restructuring and impairment charges of
$4,000,000 and $1,447,000, respectively, during the last quarter
of fiscal 2001. In addition, during the second quarter of fiscal
2002, the Company recorded charges of $1,000,000 for bad debt
expenses, $1,300,000 for mold remediation expenses and $950,000
for legal settlement expenses associated with certain properties
that the Company decided not to develop. Finally, the Company
recorded impairment charges of $1,916,000 and severance costs of
$295,000 in the fourth quarter of 2002.






Quarterly Data


|                             |  |                                       |        |                 |  |                  |        |                |  |   |        |   |  |   |        | 
|---------------------------- |  | ------------------------------------- | ------ | --------------- |  | ---------------- | ------ | -------------- |  | - | ------ | - |  | - | ------ | 
|                             |  |                                      
|                             |  | Fiscal 2002                          
|                             |  |                                      
|                             |  | 12 Weeks Ended                        |        | 12 Weeks Ended  |  | 12 Weeks Ended   |        | 16 Weeks Ended
|                             |  | March 29, 2002                        |        | January 4, 2002 |  | October 12, 2001 |        | July 20, 2001 
|                             |  |                                       |        |                 |  |                  |        |               
|                             |  |                                      
|                             |  | (In thousands, except per share data)
|Revenue                      |  | $                                     | 32,740 |                 |  | $                | 30,979 |                |  | $ | 31,950 |   |  | $ | 46,730 | 
|Gross profit                 |  | $                                     | 2,361  |                 |  | $                | 2,529  |                |  | $ | 2,488  |   |  | $ | 5,836  | 
|Net income                   |  | $                                     | (2,468 | )               |  | $                | (544   | )              |  | $ | (2,427 | ) |  | $ | 1,404  | 
|Earnings per share  Diluted |  | $                                     | (0.47  | )               |  | $                | (0.10  | )              |  | $ | (0.46  | ) |  | $ | 0.27   | 

F-18



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

15. Quarterly Data
(unaudited)  (Continued)

|                                                                     |  |                                       |        |                 |  |                  |        |                |  |          |        |            |  |          |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------------------------- | ------ | --------------- |  | ---------------- | ------ | -------------- |  | -------- | ------ | ---------- |  | -------- | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | -
|                                                                     |  |                                      
|                                                                     |  | Quarterly Data  (Continued)         
|                                                                     |  |                                      
|                                                                     |  | Fiscal 2001                          
|                                                                     |  |                                      
|                                                                     |  |                                       |        |                 |  |                  |        |               
|                                                                     |  | 12 Weeks Ended                        |        | 12 Weeks Ended  |  | 12 Weeks Ended   |        | 16 Weeks Ended
|                                                                     |  | March 30, 2001                        |        | January 5, 2001 |  | October 13, 2000 |        | July 21, 2000 
|                                                                     |  |                                       |        |                 |  |                  |        |               
|                                                                     |  |                                       |        | As              |  |                  |        | As             |  |          |        | As         |  |         
|                                                                     |  | As                                    |        | Previously      |  | As               |        | Previously     |  | As       |        | Previously |  | As      
|                                                                     |  | Reported                              |        | Reported        |  | Adjusted         |        | Reported       |  | Adjusted |        | Reported   |  | Adjusted
|                                                                     |  |                                       |        |                 |  |                  |        |                |  |          |        |            |  |         
|                                                                     |  |                                      
|                                                                     |  | (In thousands, except per share data)
|Revenue                                                              |  | $                                     | 35,147 |                 |  | $                | 33,155 |                |  | $        | 33,191 |            |  | $        | 33,762 |  |  | $ | 33,353 |  |  | $ | 45,958 |  |  | $ | 46,152 |  
|Gross profit                                                         |  | $                                     | 3,782  |                 |  | $                | 3,732  |                |  | $        | 3,768  |            |  | $        | 3,433  |  |  | $ | 3,024  |  |  | $ | 5,806  |  |  | $ | 6,000  |  
|Cumulative effect of change in accounting
    principle (net of tax) |  | $                                     |       |                 |  | $                |       |                |  | $        |       |            |  | $        |       |  |  | $ |       |  |  | $ |       |  |  | $ | (275   | )
|Net income (loss)                                                    |  | $                                     | (2,741 | )               |  | $                | 669    |                |  | $        | 693    |            |  | $        | 603    |  |  | $ | 337    |  |  | $ | 1,251  |  |  | $ | 1,102  |  
|Earnings (loss) per share  Diluted                                  |  | $                                     | (0.52  | )               |  | $                | 0.13   |                |  | $        | 0.13   |            |  | $        | 0.12   |  |  | $ | 0.07   |  |  | $ | 0.25   |  |  | $ | 0.22   |  

16. Subsequent Events

On June 18, 2002, the Company submitted a
bid with the U.S. Bankruptcy Court of the Southern District of
Florida to purchase substantially all of the assets of Tutor
Time Learning Systems, Inc., for an aggregate purchase price of
$22 million plus the assumption of specified liabilities.
The Companys bid together with any other bid that may be
submitted, will be subject to a hearing, and possibly an
auction, currently scheduled for June 27, 2002.

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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS


|                                                                               |  |                      |     |          |  |            |       |            |  |        |   |  |  |   |      |   |  |   |     | 
|------------------------------------------------------------------------------ |  | -------------------- | --- | -------- |  | ---------- | ----- | ---------- |  | ------ | - |  |  | - | ---- | - |  | - | --- | 
|                                                                               |  |                     
|                                                                               |  | Additions Charged to
|                                                                               |  |                     
|                                                                               |  | Balance at           |     |          |  | Balance at
|                                                                               |  | Beginning            |     | Cost and |  | Other      |       |            |  | End of
|Description                                                                    |  | of Period            |     | Expenses |  | Accounts   |       | Deductions |  | Period
|                                                                               |  |                      |     |          |  |            |       |            |  |       
|                                                                               |  |                     
|                                                                               |  | (in thousands)      
|Fiscal year ended March 31, 2000, reserve
    for doubtful accounts and claims |  | $                    | 255 |          |  | $          | 385   |            |  | $      | 0 |  |  | $ | (345 | ) |  | $ | 295 | 
|                                                                               |  |                      |     |          |  |            |       |            |  |        |   |  |  |   |      |   |  |   |     | 
|Fiscal year ended March 30, 2001, reserve
    for doubtful accounts and claims |  | $                    | 295 |          |  | $          | 458   |            |  | $      | 0 |  |  | $ | (393 | ) |  | $ | 360 | 
|                                                                               |  |                      |     |          |  |            |       |            |  |        |   |  |  |   |      |   |  |   |     | 
|Fiscal year ended March 29, 2002, reserve
    for doubtful accounts and claims |  | $                    | 360 |          |  | $          | 1,324 |            |  | $      | 0 |  |  | $ | (991 | ) |  | $ | 693 | 
|                                                                               |  |                      |     |          |  |            |       |            |  |        |   |  |  |   |      |   |  |   |     | 

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##### Table of Contents








INDEX TO EXHIBITS


|        |       |  |  |   |  |                                                                                                                                                                                                                                                                                                    
|------- | ----- |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |  
|Number  |       |  |  |  
|        |       |  |  |  
|        | 3(i)  |  |  |  |  | Restated Articles of Incorporation of the
    Registrant, filed as Exhibit 3.2 to the Registrants
    Form S-1 Registration Statement (Registration
    No. 33-99596), are incorporated herein by reference.                                                                                      
|        | 3(ii) |  |  |  |  | Restated Bylaws of the Registrant, filed as
    Exhibit 3.4 to the Registrants Form S-1
    Registration Statement (Registration No. 33-99596), are
    incorporated herein by reference.                                                                                                         
|        | 4.1   |  |  |  |  | Common Stock Purchase Warrant between Security
    Pacific Business Credit Inc. (SPBC) and KD
    Acquisition Corporation (Acquisition), filed as
    Exhibit 4.1 to the Registrants Form S-1
    Registration Statement (Registration No. 33-99596), is
    incorporated herein by reference.
|        | 4.2   |  |  |  |  | First Amendment to Common Stock Purchase Warrant
    between SPBC and Acquisition dated as of December 28, 1995,
    filed as Exhibit 4.4 to the Registrants S-1
    Registration Statement (Registration No. 33-99596), is
    incorporated herein by reference.                                 
|        | 4.3   |  |  |  |  | Amended and Restated Credit Agreement dated as of
    January 31, 2002, between Childtime Childcare, Inc.
    (Childtime) and Bank One, Michigan, filed as
    Exhibit 4.1 to the Registrants Form 10-Q for the
    quarter ended January 4, 2002, is incorporated herein by
    reference.     
|        | 4.4   |  |  |  |  | First Amendment to Amended and Restated Credit
    Agreement dated as of April 1, 2002, between Childtime and
    Bank One, Michigan.                                                                                                                                                              
|        | 9     |  |  |  |  | Letter agreement dated July 6, 2000, among
    Childcare Associates, KD Partners II and Jacobson Partners,
    filed as Exhibit 9 to the Registrants Form 10-K
    for the year ended March 30, 2001, is incorporated herein
    by reference.                                                    
|        | 10.1  |  |  |  |  | Director Stock Option Plan, filed as
    Exhibit 10.1 to the Registrants Form S-1
    Registration Statement (Registration No. 33-99596), is
    incorporated herein by reference.                                                                                                                
|        | 10.2  |  |  |  |  | 1995 Stock Incentive Plan for Key Employees,
    filed as Exhibit 10.2 to the Registrants
    Form S-1 Registration Statement (Registration
    No. 33-99596), is incorporated herein by reference.                                                                                               
|        | 10.3  |  |  |  |  | First Amendment to 1995 Stock Incentive Plan for
    Key Employees, filed as Exhibit 10.3 to the
    Registrants Form 10-K for the year ended
    March 30, 2001, is incorporated herein by reference.                                                                                            
|        | 10.4  |  |  |  |  | Letter agreement dated July 6, 2000, between
    Registrant and Jacobson Partners, regarding management and
    financial consulting services, filed as Exhibit 10.4 to the
    Registrants Form 10-K for the year ended
    March 30, 2001, is incorporated herein by reference.                 
|        | 10.5  |  |  |  |  | Consulting Agreement dated January 16, 2001,
    between the Registrant and James Morgan, filed as
    Exhibit 10.1 to the Registrants Form 10-Q for
    the quarter ended January 5, 2001, is incorporated herein
    by reference.                                                              
|        | 10.6  |  |  |  |  | Consulting Agreement dated January 19, 2001,
    between the Registrant and Leonard C. Tylka, filed as
    Exhibit 10.2 to the Registrants Form 10-Q for
    the quarter ended January 5, 2001, is incorporated herein
    by reference.                                                          
|        | 10.7  |  |  |  |  | Employment Separation Agreement and Mutual
    Release dated February 14, 2001, among the Registrant,
    Childtime and Harold A. Lewis, filed as Exhibit 10.7
    to the Registrants Form 10-K for the year ended
    March 30, 2001, is incorporated herein by reference.                       
|        | 10.8  |  |  |  |  | Employment Separation Agreement and Mutual
    Release dated February 12, 2001, among the Registrant,
    Childtime and Michael M. Yeager, filed as Exhibit 10.8
    to the Registrants Form 10-K for the year ended
    March 30, 2001, is incorporated herein by reference.                     
|        | 10.9  |  |  |  |  | Option Agreement effective March 27, 2001,
    between the Registrant and Leonard Tylka.                                                                                                                                                                                                           

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##### Table of Contents



|        |       |  |  |   |  |                                                                                                                                                                                                                                                                    
|------- | ----- |  |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |  
|Number  |       |  |  |  
|        |       |  |  |  
|        | 10.10 |  |  |  |  | Letter agreement dated July 26, 2001,
    between Jacobson Partners, on behalf of the Registrant, and
    James J. Morgan, filed as Exhibit 10.1 to the
    Registrants Form 10-Q for the quarter ended
    October 12, 2001, is incorporated herein by reference.
|        | 10.11 |  |  |  |  | Employment Agreement dated August 14, 2001,
    between the Registrant and Alfred R. Novas, filed as
    Exhibit 10.2 to the Registrants Form 10-Q for
    the quarter ended October 12, 2001, is incorporated herein
    by reference.                           
|        | 10.12 |  |  |  |  | Option Agreement dated August 14, 2001,
    between the Registrant and Alfred R. Novas, filed as
    Exhibit 10.3 to the Registrants Form 10-Q for the
    quarter ended October 12, 2001, is incorporated herein by
    reference.                               
|        | 10.13 |  |  |  |  | Option Agreement dated August 14, 2001,
    between the Registrant and Alfred R. Novas, filed as
    Exhibit 10.4 to the Registrants Form 10-Q for the
    quarter ended October 12, 2001, is incorporated herein by
    reference.                               
|        | 10.14 |  |  |  |  | Option Agreement dated August 14, 2001,
    between the Registrant and Alfred  R. Novas, filed as
    Exhibit 10.5 to the Registrants Form 10-Q for the
    quarter ended October 12, 2001, is incorporated herein by
    reference.                              
|        | 10.15 |  |  |  |  | Option Agreement dated September 5, 2001,
    between the Registrant and Leonard C. Tylka.                                                                                                                                                                         
|        | 10.16 |  |  |  |  | Consulting Agreement dated as of
    February 20, 2002, between the Registrant and
    Leonard C. Tylka.                                                                                                                                                           
|        | 10.17 |  |  |  |  | Employment Agreement dated March 13, 2002,
    between Childtime and Karen R. Danner.                                                                                                                                                                              
|        | 10.18 |  |  |  |  | Employment Severance Agreement dated
    March 27, 2002, between the Registrant and Alfred R.
    Novas.                                                                                                                                                           
|        | 10.19 |  |  |  |  | Fee Agreement dated June 27, 2002 between
    the Registrant and Jacobson Partners.                                                                                                                                                                                
|        | 21    |  |  |  |  | List of Subsidiaries.                                                                                                                                                                                                                                              
|        | 23    |  |  |  |  | Consent of PricewaterhouseCoopers LLP, dated
    June 26, 2002.                                                                                                                                                                                                    

E-2