##### 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
    April 2, 2004                                            
| 
|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.)
|                                                                                                               
|21333 Haggerty Road, Suite 300, Novi,
    Michigan 48375(Address of principal executive
    offices) (Zip Code)

Registrants telephone number, including
area code: (248) 697-9000

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 No
o

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.  o

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Securities Exchange Act of
1934).  Yes
o No
x

The aggregate
market value of voting Common Stock held by non-affiliates of
the registrant as of October 10, 2003, computed by
reference to the last sale price for such stock on that date as
reported on The Nasdaq SmallCap Market, was approximately
$11,864,000.

At June 9,
2004, the number of shares outstanding of the registrants
Common Stock, no par value, was 19,809,010.

Portions of the
registrants Proxy Statement for its 2004 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 Registered Public Accounting Firm                    
|CONSOLIDATED BALANCE SHEETS                                                
|CONSOLIDATED STATEMENTS OF OPERATIONS                                      
|CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY                  
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|EXHIBIT INDEX                                                              
|Eighth Amendment to Amended/Restated Credit Agrmt.                         
|Code of Business Conduct and Ethics                                        
|Consent of PricewaterhouseCoopers LLP                                      
|Rule 13a-14(a) Certification by William D. Davis                           
|Rule 13a-14(a) Certification by Frank M. Jerneycic                         
|Certification Pursuant to Section 1350                                     
|Certification Pursuant to Section 1350                                     



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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. is one of the
largest publicly traded, for-profit providers of early childhood
care and educational services in the United States. Childtime
Learning Centers, Inc. conducts business through its
wholly-owned subsidiaries, Childtime Childcare, Inc., and Tutor
Time Learning Centers, L.L.C. (collectively, the
Company). The Company and its predecessors began
operations in 1967. The Company provides center-based
educational services and child care to children between the ages
of six weeks and 12 years under two distinct brand
identities: Childtime Learning Centers (Childtime)
and Tutor Time Child Care/ Learning Centers (Tutor
Time).

As of April 2, 2004, the Company operated or
franchised a total of 470 centers system-wide under three major
lines of business, and had system-wide licensed capacity capable
of serving over 50,000 children. The Companys three lines
of business are:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Childtime Learning Centers:269 centers operated by the Company,
    consisting of:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | 260 Childtime centers and                                  
|
| |  | 9 Childtime-branded centers operated for third
    parties;



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Tutor Time Learning Centers:64 Tutor Time centers operated by the
    Company; and
|
| |  | Tutor Time Franchise Operations:137 franchised Tutor Time centers.                

The Childtime and Tutor Time brands operate in
largely distinct market segments. Childtime centers are, on
average, smaller and less standardized in construction. They
appeal to parents who are looking for a homey feel
and more intimate experience for their child. Tutor Time centers
are larger, more standardized in layout, and designed to appeal
to parents who value a more structured educational and
developmental experience. Both brands place emphasis on
educational quality and content, with the Companys
Education Department developing proprietary content distinct to
each brand. With their larger size, Tutor Time centers generally
deliver the potential for higher economic returns per center.
However, Tutor Time centers also require higher investment and
are typically fitted with more expensive equipment and supplies
(e.g., telephones, intercoms and security cameras in each room,
and childrens computers).

The Companys primary objective is to
maximize the development and preparation of children for school.
To ensure achievement of this goal, the Company provides high
quality child care and a proprietary curriculum, based on
developmentally appropriate practices that align with nationally
recognized, early childhood educational standards. With over
7,500 employees, the quality, skills, and motivation of our
center staff is of paramount importance. The Company places a
great deal of emphasis on the recruitment, selection and ongoing
training of its child care center directors and area managers.

Childtime and Tutor Time corporate centers are
located throughout the United States (in 25 states), and Canada
(one location). The vast majority of these centers are operated
on leased premises, with typical lease terms ranging from 1 to
25 years. Thirty-eight of the Childtime centers are
operated on Company-owned premises.

The Company operates nine Childtime centers under
management contracts. Located throughout the U.S., these centers
serve hospitals, corporations and the federal government. Under
these contracts, the

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Company receives an annual operating fee and, in
some cases, is eligible to receive incentives for improving
revenues and/or managing costs. These contracts are typically up
for renewal on an annual basis.


Tutor Time franchise centers are also
predominantly located in the U.S., with 125 centers operating in
17 states. An additional 12 centers are operated in Canada,
Hong Kong, Indonesia, and the Philippines, mostly under master
franchise agreements. The Company is currently the primary
obligor or guarantor on leases for 59 of its franchise centers.
Tutor Time is currently one of the largest franchisors of child
care services based in the United States.

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 year ending
April 2, 2004 contained 53 weeks. The fiscal years
ending March 28, 2003 and March 29, 2002 contained
52 weeks. The first quarter for each of fiscal 2004, 2003
and 2002 contained 16 weeks, while the second and third
quarters contained 12 weeks. The fourth quarter of fiscal
2004 contained 13 weeks while the fourth quarters of fiscal 2003
and 2002 contained 12 weeks. All significant inter-company
transactions have been eliminated.

Mission, Vision, Values

The Company developed a new Mission, Vision, and
Values statement this year, helping to clarify corporate goals
and define a new corporate culture of service and professional
excellence.

Mission

We are an international leader in child education
and family solutions, which impact and inspire lifelong learning.

Vision

To develop innovative learning care solutions
which enable us to grow the number of children and families
served, and to be recognized as the premier child and family
education corporation in the world.

Through our leadership and passion, we will:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Provide a secure, caring and enriched environment
    that promotes learning and the development of the whole child.                                         
|
| |  | Develop lifelong relationships, create family
    solutions, and enhance the quality of life for our families.                                               
|
| |  | Provide a fun, challenging work environment that
    fosters teamwork, inspires professional excellence, and
    encourages contribution by all team members.
|
| |  | Leverage technology to develop innovative
    learning products and solutions.                                                                               
|
| |  | Provide superior levels of support and service to
    our franchisees.                                                                                       
|
| |  | Achieve the best financial performance in the
    industry, allowing us to fulfill our mission.                                                              

Values

Honesty, Trust, Passion for Excellence, Love of
Learning and Innovation.

Business Strategy

The Companys business strategy is to:



| |     |                                                                                          
| | --- | -----------------------------------------------------------------------------------------
| | (1) | focus on excellent operational execution and
    profitability for our corporate centers;
|
| | (2) | develop a culture of dedication to customer
    service excellence;                      
|
| | (3) | provide value-added support to Tutor Time
    franchisees;                               

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| |     |                                                                        
| | --- | -----------------------------------------------------------------------
| | (4) | create the infrastructure to achieve excellence;
    and               
|
| | (5) | improve the Companys hiring, training, and
    retention capabilities.

Management believes that focus in these areas
will help create value in the near-term, and position the
Company for profitable growth in the medium to long-term.

Excellent
Operational Execution and Profitability for Corporate
Centers

Happy children, satisfied parents, and positive
word-of-mouth are the most critical tests of how well the
Company is managing the business and its ability to capture a
price premium. They are a reflection of the many factors that
determine the overall quality of the program in any given
center. Based on experience, the most important of these factors
include: the skills, and often, the longevity of center
directors and staff; the differentiation and quality of the
educational offering; the condition of facilities; and the
degree to which the Company is perceived as service-oriented and
values-driven.

To improve corporate operations, management has
targeted the following initiatives:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Tightened management of center operations by
    corporate and field staff, supported by more timely, accurate,
    and relevant data and analysis to manage the business.                      
|
| |  | Intense focus on driving enrollments and pricing
    appropriate to the market, inclusive of new marketing tools and
    techniques.                                                            
|
| |  | Development of new training programs to enhance
    lead management, selling skills, and performance management.                                                                                
|
| |  | Improved scheduling and labor management tools to
    optimize labor hours, by far the largest cost item (often
    greater than 50% of total revenues).                                        
|
| |  | Centralization of purchasing and facilities
    management to maximize buying power, reduce costs, and improve
    the quality of our centers.                                                  
|
| |  | Standardization and communication of operating
    policies and procedures including best practices.                                                                                          
|
| |  | Ongoing analysis on under-performing centers to
    determine the reasons for poor performance with appropriate
    action plans to turn around each center or remove it from the
    portfolio.
|
| |  | Improved quality and differentiation of
    curriculum for both brands through enhanced content development
    and consistent implementation at the center level.                              

Focus on
Service Excellence

The Company is taking steps to focus all
employees on providing timely and responsive customer service,
and on delivering a top-quality product to every customer at all
times, whether they are children, parents, center staff, Center
Directors, Area Managers, the corporate or franchise operations
team, etc. Service excellence also includes developing standards
for service delivery and a service environment that can be
measured and tracked. The Company is driving this initiative
through dedicated customer service training initiatives
including service recovery, and an evaluation of current
performance through feedback mechanisms such as center visits
and mystery phone shops.

Value-added
Support for Franchisees

Franchising represents an important component of
the Companys current Tutor Time business and is a primary
growth opportunity for the Company going forward. The Company is
focused on further strengthening franchise relations by
providing superior support to franchisees through its franchise
district management team, with additional support from key roles
in the regional management structure, including regional
training and human resource managers, and marketing support. In
addition, the Education, Technology and Marketing Departments
have improved their value delivery and support infrastructures,
and continue to bolster their respective contributions to the
Companys franchisees. Support has also been expanded by
providing products

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and services to franchisees at the corporate
rates. Additionally, the Franchise Operations group is expanding
its role to include business advisory and performance
benchmarking in order to help franchisees improve their
individual results, and is building the tools and infrastructure
necessary to fuel future growth.


Create
Infrastructure to Achieve Excellence

In order to improve performance, the right
systems and people must be in place to ensure quality, create
excellence, and maximize productivity. In an effort to improve
the timeliness and accuracy of information, as well as to
streamline workload at the center level, the Company is
installing a new financial reporting system and a new HR
management system, as well as developing a new center-level
application to track leads, attendance, billing, and cash.

Improved
Hiring, Training, and Retention Capabilities

Understanding the significant impact that a
Center Director has on the quality and performance of a center,
the Company is executing a plan to identify the competencies it
takes to ensure success at that level. A comprehensive Center
Director job analysis and new selection tools will help
determine desirable candidates. In addition, a complete training
program is being created based on the required competencies to
improve the skills of current and future directors. Retaining
valuable employees at all levels is also critical to the success
of a center and can play a key role in retaining current
customers, as well as ensuring the quality of our product. The
Company is in the process of measuring and analyzing current
turnover, and will develop a comprehensive retention strategy
including selection, training, compensation, and employee
satisfaction.

Growth Strategy

The following table illustrates the number of
centers in operation (acquired or otherwise opened) as well as
those which were closed during the periods indicated. Figures
include Tutor Time franchise centers.

|                                |                                      |                        |     |     |           |  |     |           |     |  |     |     |   | 
|------------------------------- | ------------------------------------ | ---------------------- | --- | --- | --------- |  | --- | --------- | --- |  | --- | --- | - | 
|                                |                                      |                       
|                                |                                      | Fiscal Years Ended     |    
|                                |                                      |                        |    
|                                |                                      | April 2,               |     |     | March 28, |  |     | March 29, |    
|                                |                                      | 2004                   |     |     | 2003      |  |     | 2002      |    
|                                |                                      |                        |     |     |           |  |     |           |    
|Number of centers in operation: |                                      |                        |     |     |           |  |     |           |     |  |     |    
|Beginning of period             |                                      |                        | 474 |     |           |  | 286 |           |     |  | 304 |    
|                                | Additions during period:             |                        |     |     |           |  |     |           |     |  |     |     |  
|                                |                                      | Acquisitions and other |     |     | 1         |  |     |           | 182 |  |     |     | 1 | 
|                                |                                      | New center openings    |     |     | 6         |  |     |           | 21  |  |     |     | 3 | 
|                                |                                      |                        |     |     |           |  |     |           |    
|                                | Total additions                      |                        |     | 7   |           |  |     | 203       |     |  |     | 4   |  
|                                | Closings/ Terminations during period |                        |     | (11 | )         |  |     | (15       | )   |  |     | (22 | )
|                                |                                      |                        |     |     |           |  |     |           |    
|End of period                   |                                      |                        | 470 |     |           |  | 474 |           |     |  | 286 |    
|                                |                                      |                        |     |     |           |  |     |           |    

In fiscal 2004, the Company opened four new
franchise and two new corporate Tutor Time centers. The Company
also transferred one corporate center to a franchise owner.
During the year, the Company chose to discontinue operations for
seven of its corporate Childtime locations that were not
performing or whose contracts expired. Three franchise centers
were also closed during 2004.

In addition to the current development pipeline,
which is comprised of additional sites for existing Tutor Time
franchisees, the Company is actively seeking new franchisees, as
well as new sites to satisfy the demand from current franchise
owners. Current plans are to open sites within existing
franchise and corporate geographies. The Company will prioritize
adding units in its existing markets in order to increase market
concentration and to leverage administrative and advertising
expenses. The Company continues to experience a large number of
inquiries from qualified candidates interested in franchise
opportunities, as well as ongoing demand from its existing base
of franchisees. The majority of inquiries are for U.S.-based
opportunities. The Company has also received inquiries for
international opportunities, presenting an attractive long-term
growth

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option for the Company. Additionally, the Company
will also entertain growth in its Childtime portfolio through
viable acquisitions, and will continue to research sites for
additional corporate Tutor Time centers.


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 including: the percentage of children
under age six; the population density within a three-mile radius
surrounding a proposed site; and the average household income.
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.

In addition to acquiring or building centers in
residential areas, the Company obtains 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 also 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 offering of
such benefits.

The Companys expansion activity is limited
to child care centers in market areas showing strong growth
potential, and to sites which the Company believes can conform
to its standard facility and educational format. The Company
utilizes prototype building designs in its build-to-suit centers.

The Company continuously reviews its existing
center portfolio in an effort to ensure all centers meet minimum
performance standards. Centers become candidates for closure
when they fail to meet certain demographic or financial criteria.

Going forward, there are no assurances that the
Company will be able to continue to develop or acquire new sites
in a manner that will meet its requirements.

Educational Programs

The Companys educational programs stress
the process of learning through discovery. The staff is trained
to support children in their active exploration, and 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 proprietary educational curriculum, modeled on
national standards for early childhood care and learning, and
the centers ongoing dialogue with parents in providing a
learning environment for their children that meets or exceeds
their expectations.

Tutor Time centers use an in-house proprietary
curriculum overseen by Richard Cohen, M.A., Vice President of
Education. The curriculum emphasizes developmentally appropriate
activities, drawing on best practices from traditional,
progressive and Montessori teaching approaches. Utilizing a
building block methodology, Tutor Times curriculum,
Planned Readiness Education Program (Tutor Time
P.R.E.P®.), introduces new concepts at each stage of a
childs development. Beginning with infancy, P.R.E.P.incorporates developmentally appropriate aspects of the core
curriculum. By the time a child reaches preschool, the
curriculum expands to include Tutor Time® Phonics
Express, Math Magic, and Handwriting Helpers.

In each Childtime center, the Company has
historically utilized The Creative Curriculum® For Early
Childhood, a nationally recognized educational curriculum
development guide 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 Creative
Curriculum® provides a philosophy for the development
of appropriate curriculum, and the Companys Education
Department uses it as a framework for the creation of detailed
daily lesson plans.

The Education Department places an emphasis on
keeping the materials for Childtime and Tutor Time distinct from
each other and from competitors offerings in the market.
Examples include Tutor Time Fitness

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for Life , a
program designed to help children and families learn how to live
healthy lifestyles, and Tutor Time Creating
Character, which encourages a childs positive
social and emotional skill development.


Children are placed into groups according to
their age and developmental stage. Each group has specific
learning goals that enable the staff to create activities and
structure daily programs, and to assess each childs growth
and development. At designated times during the year, an
informal developmental assessment is prepared for each child and
reviewed with the childs parents.

Generally speaking, the Companys classrooms
under both brands 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 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 home
    base to support the toddlers conflicting need for
    independence and comfort.

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 manipulating toys and blocks. The daily schedule includes
    many activities for large muscle development. Stories and books
    are read every day to increase familiarity with letters and
    words, to foster emerging literacy and make reading a
    pleasurable activity.

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Preschool 2
(4  5 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom organization and the daily schedule
    provide increased opportunities for independent and small group
    play in interest centers. This 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.
    Caregivers focus special attention in order to promote
    kindergarten readiness.

Kindergarten
(5  6 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Kindergarten programs are designed to
    successfully transition children to first grade, and are aligned
    with local school district goals and assessment requirements.
    Classroom organization, materials and activities support
    children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.

School-age
(6  12 years)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Classroom space, equipment and materials are
    organized to support childrens 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,
    enhance coordination of large and small muscles and learn to
    work with others. The environment is designed to engage children
    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 interaction focuses on
    helping children set reasonable goals and manageable tasks,
    guiding them to think about the consequences of their words and
    actions to foster a sense of community. Special time is allotted
    for children to complete their homework assignments.

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, the Companys
curriculum, the Center Director, as well as the 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 on
obtaining accreditation for many of its centers by the National
Association for the Education of Young Children
(NAEYC) or the National Early Childhood Program
Accreditation (NECPA). NAEYC and NECPA are national
organizations that have established comprehensive criteria for
providing quality child care. Both organizations have developed
and implemented a voluntary and rigorous accreditation process
through which child care providers have their programs formally
evaluated by trained NAEYC or NECPA verifiers and the families
served by the providers. Centers which earn such national
accreditation status demonstrate a commitment to excellence by
operating centers of the highest quality for the children they
serve. The Company believes that the process of earning
accreditation assists in the Companys efforts to
continually improve its programs, training and facilities. The
Company

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shares NAEYCs and NECPAs commitment
to provide the highest quality child care and, thus, continues
to pursue an aggressive accreditation schedule.


Products and Services

General.The
Companys corporate centers are under the leadership of a
Vice President of Corporate Operations and are organized into
four regions based on geography. Each region is managed by a
Regional Operations Manager and is supported by a team that
includes a Regional Facilities Manager, a Regional Human
Resource Manager and a Regional Training Manager. The regions
are further divided into areas headed by an Area Manager who is
responsible for ten to 16 centers. Each individual center has a
dedicated Center Director and a staff generally 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 ten hours a day, five days per
week, at a center.

The Companys current weekly tuition for
full-day service typically ranges from approximately $100 to
$300 depending on the location of the center, the age of the
child, and whether it is a Childtime or Tutor Time center.
Tuition is generally paid in advance on a weekly basis. The
Company also charges additional registration and materials fees,
which vary by brand and location. The Company generally reviews
its tuition rates on a regular basis to determine whether rates
at a particular center should be changed in light of that
centers competitive environment and financial results.

The Companys franchise operations are
headed by a Vice President of Franchise Operations. The Vice
President oversees District Franchise Managers, who in turn are
the main point of contact between franchisees and the Company.
The District Franchise Managers provide support and training to
franchisees and their center staff, and also ensure that
franchisee operations are in compliance with Company standards.

Both the regional corporate operations teams and
the franchise district managers can draw on additional resources
within the Company to bring in expert advice on specific topics
including marketing, curriculum, human resources, training,
finance and business management, licensing, new center openings,
state and federal grants, government relations, real estate and
facilities management.

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 and Regional HR Manager from a
pool of candidates who have undergone an initial psychological
profile screen, a reference check, and a criminal background
check. In addition, candidates are screened for the appropriate
skills and abilities necessary for success in the position. 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 a licensed child care
facility. Many Directors are recruited from within the Company
and have served as teachers 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 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 teachers.

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

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discounts and to retain financial controls.
Direct expenditures by the centers are limited to miscellaneous
operating expenses.


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 Center Directors on such subjects as interpersonal
and business skills, curriculum, health and safety, 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 are required to participate in
orientation and training sessions. The Company divides
operations into regions, 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 teachers to meet the
Companys internal standards and applicable state licensing
requirements. All new Center Directors participate in a two-week
training program immediately upon hire, followed by
three-and-a-half days spent in our Director Academy within their
first 120 days.

Safety.The Company
is committed to the health and safety of the children in its
care. To prevent unauthorized persons from entering the center,
virtually all centers are equipped with front door security
systems requiring card keys, security codes, or other forms of
access control. In addition, most centers use a double door
entrance 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 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 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 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 Managers and
Center Directors in the formulation and implementation of the
budget for each center. 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 a
financial incentive program for meeting or exceeding
pre-approved budget goals.

Facilities.Most of
the Companys centers are freestanding structures leased or
owned 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 for Childtime
centers generally contain between 7,900 to 9,000 square feet in
a one story, air-conditioned building; Tutor Time centers are
typically larger with prototype centers averaging over 10,000
square feet.

The interiors primarily consist of closed
classrooms bordering a central hallway. This design allows
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
designed to accommodate the grouping of children by age or
development level. Two unique features of Tutor Time centers are
the Tutor Towne Village® and self-contained
classrooms. The Tutor Towne Village® is a common
room outfitted with a child-sized post office, firehouse, and
other facades that create a

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play and learning environment imitating a small
town. Use of the room is purposefully integrated into the Tutor
Time curriculum in a way that enables staff to teach children
through guided socio-dramatic play. Each classroom is
self-contained, with its own areas for play, learning, eating,
crafts and diaper changing. Teachers and children do not need to
leave the room, except for other special activities such as use
of playgrounds or the Tutor Towne Village®.
Childtime centers do not have the same level of standardization
of features due to the varying age of centers and the fact that
many were acquired. However, most centers have unique and
appealing features in line with the educational and
developmental philosophy of the Company.


As of April 2, 2004, the Company operated
333 Company-owned centers and franchised 137 centers. Aggregate
licensed capacity for these centers was over 50,000 children.
The capacity of centers differs from state to state because of
various licensing requirements.

Management Contracts.As of April 2, 2004, the Company
also had contracts to manage nine child care centers. Many of
these centers 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. Historically, public agencies
and hospitals have been the principal employers providing or
otherwise arranging for child care services for their employees.

Marketing

The Company believes that the quality of a
centers director, staff and center location, supported by
consistent national and localized marketing and sales efforts,
are the key components to a successful, profitable center. The
Marketing Department is responsible for implementing two
separate marketing strategies to support both the individual
development of the Childtime and Tutor Time brands, as well as
providing marketing and sales training and support for both
corporate and franchise centers.

The core marketing strategy for the Company is to
focus on developing cost-efficient programs that drive
enrollments, especially during the peak periods of Back to
School, Summer Camp, and Winter Enrollment. The Companys
primary year-long advertising strategy is Yellow Pages, the top
source of new enrollments each year. Other year-long marketing
initiatives include: media relations, community events, customer
referrals, collateral material development and Internet
marketing. Peak enrollment period advertising strategies consist
of using several mediums in each centers area to saturate
the marketplace during a set time period and may consist of:
direct mail, radio, Val-Pak, ADVO, and ads in local
publications. All marketing materials are customized with the
nearest centers information as well as a toll-free number and
Website address where interested customers can obtain more
information about the Company or their nearest center.

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
revenues, gross profit and operating results for the first
quarter are favorably impacted by the additional four weeks
included in that quarter. Periodically, as was the case in
fiscal 2004, due to the Companys closing the fiscal year
on the Friday closest to March 31, the Company will have
five weeks in the thirteenth period of its fiscal year.

Due to the impact of summer vacation, 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. In addition, the Company typically
experiences revenue declines in the months of November and
December due to the impact of several major holidays. To
partially offset these declines, the Company has successfully
implemented and marketed both a summer camp program with a new
theme and focus each year, as well as a December holiday camp.

New enrollments are generally highest in
September and January; accordingly, August and December are
traditionally the best months to open new centers. Total
enrollments (and, accordingly, the Companys

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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. Among the larger providers of for-profit child care and
preschool education are KinderCare Learning Centers, Inc., La
Petite Academy, Inc., and Knowledge Learning Corporation. Bright
Horizons Family Solutions, Inc. is the largest competitor in the
at-work/management contract segment. Major competitors in the
franchise segment include Goddard Schools, Primrose Schools, and
Kiddie Academy.

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 occupancy costs than
the Company and may receive donations or other funding to cover
operating expenses. Consequently, operators of such centers may
charge tuition rates that are less than the Companys
rates. In addition, fees for home-based and not-for-profit care
are normally lower than fees for center-based care, because
these providers are often not regulated and, thus, not required
to satisfy the same health, safety, insurance or state
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, well-equipped facilities,
and trained staff and supervisory personnel. In addition, the
Company provides a range of enrichment programs, including
foreign language, dance, music and karate. The Company also
provides drop in service, and the transportation between the
Companys child care centers and schools of children
enrolled in the Companys before and after school program.

Personnel

As of April 2, 2004, the Company employed
approximately 7,500 persons (including part-time and substitute
caregivers), of which 100 are employed at the corporate
headquarters in Michigan, 19 are employed at regional offices
and 33 are employed as Area Managers or Franchise District
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 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 favorable.

Regulation

Child care centers are subject to numerous state
and local regulations and detailed state 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

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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 April 2, 2004,
approximately 22% of 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 that 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 35% 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. For 2002, 2003 and 2004 the tax credit ranges
from 20% to 35% of qualifying child care expenses and is limited
to $3,000 for one child and $6,000 for two or more children.
Therefore, the maximum credits 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 2003 and 2002, the
Companys policies for workers compensation had a
deductible of $250,000 per occurrence. For fiscal 2004, the
workers compensation did not have a deductible. The commercial
general liability policy has a $1,000,000 limit per occurrence,
with a $3,000,000 general aggregate limit per location. There is
a separate limit for sexual abuse and molestation coverage of
$1,000,000 for each occurrence and $3,000,000 in the aggregate,
with defense limits of $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 sexual/physical 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.

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Item 2. Properties

The following table shows the locations of the
Companys centers, including those operated under
management contracts, as of April 2, 2004 (the numbers
reflect the number of centers in that state or country):

|               |       |           |    |            |           |  |    |           |  |  |       |     |  |  |    |     | 
|-------------- | ----- | --------- | -- | ---------- | --------- |  | -- | --------- |  |  | ----- | --- |  |  | -- | --- | 
|               |       |           |    |            |           | 
|               |       |           |    | Tutor Time |           |  |   
|               |       |           |    |            |           |  |   
|               |       | Childtime |    |            | Corporate |  |    | Franchise |  |  | Total |    
|               |       |           |    |            |           |  |    |           |  |  |       |    
|Arizona        |       |           | 21 |            |           |  | 0  |           |  |  | 18    |     |  |  | 39 |    
|California     |       |           | 33 |            |           |  | 6  |           |  |  | 28    |     |  |  | 67 |    
|Connecticut    |       |           | 0  |            |           |  | 1  |           |  |  | 5     |     |  |  | 6  |    
|Delaware       |       |           | 0  |            |           |  | 1  |           |  |  | 1     |     |  |  | 2  |    
|Florida        |       |           | 12 |            |           |  | 2  |           |  |  | 11    |     |  |  | 25 |    
|Georgia        |       |           | 15 |            |           |  | 0  |           |  |  | 2     |     |  |  | 17 |    
|Illinois       |       |           | 6  |            |           |  | 10 |           |  |  | 2     |     |  |  | 18 |    
|Indiana        |       |           | 0  |            |           |  | 0  |           |  |  | 1     |     |  |  | 1  |    
|Iowa           |       |           | 3  |            |           |  | 0  |           |  |  | 0     |     |  |  | 3  |    
|Kansas         |       |           | 0  |            |           |  | 2  |           |  |  | 0     |     |  |  | 2  |    
|Maryland/ DC   |       |           | 12 |            |           |  | 0  |           |  |  | 0     |     |  |  | 12 |    
|Massachusetts  |       |           | 0  |            |           |  | 1  |           |  |  | 0     |     |  |  | 1  |    
|Michigan       |       |           | 17 |            |           |  | 17 |           |  |  | 1     |     |  |  | 35 |    
|Minnesota      |       |           | 0  |            |           |  | 0  |           |  |  | 8     |     |  |  | 8  |    
|Mississippi    |       |           | 1  |            |           |  | 0  |           |  |  | 0     |     |  |  | 1  |    
|Missouri       |       |           | 4  |            |           |  | 0  |           |  |  | 3     |     |  |  | 7  |    
|Nevada         |       |           | 7  |            |           |  | 0  |           |  |  | 0     |     |  |  | 7  |    
|New Jersey     |       |           | 5  |            |           |  | 3  |           |  |  | 7     |     |  |  | 15 |    
|New York       |       |           | 25 |            |           |  | 14 |           |  |  | 25    |     |  |  | 64 |    
|North Carolina |       |           | 12 |            |           |  | 0  |           |  |  | 5     |     |  |  | 17 |    
|Ohio           |       |           | 22 |            |           |  | 1  |           |  |  | 1     |     |  |  | 24 |    
|Oklahoma       |       |           | 8  |            |           |  | 0  |           |  |  | 0     |     |  |  | 8  |    
|Pennsylvania   |       |           | 1  |            |           |  | 3  |           |  |  | 2     |     |  |  | 6  |    
|Texas          |       |           | 43 |            |           |  | 1  |           |  |  | 5     |     |  |  | 49 |    
|Virginia       |       |           | 13 |            |           |  | 0  |           |  |  | 0     |     |  |  | 13 |    
|Washington     |       |           | 8  |            |           |  | 1  |           |  |  | 0     |     |  |  | 9  |    
|Wisconsin      |       |           | 1  |            |           |  | 0  |           |  |  | 0     |     |  |  | 1  |    
|Canada         |       |           | 0  |            |           |  | 1  |           |  |  | 1     |     |  |  | 2  |    
|Hong Kong      |       |           | 0  |            |           |  | 0  |           |  |  | 2     |     |  |  | 2  |    
|Indonesia      |       |           | 0  |            |           |  | 0  |           |  |  | 7     |     |  |  | 7  |    
|Philippines    |       |           | 0  |            |           |  | 0  |           |  |  | 2     |     |  |  | 2  |    
|               |       |           |    |            |           |  |    |           |  |  |       |    
|               | Total |           |    | 269        |           |  |    | 64        |  |  |       | 137 |  |  |    | 470 | 
|               |       |           |    |            |           |  |    |           |  |  |       |    

As of April 2, 2004, the Company operated
269 Childtime centers and 64 Tutor Time corporate centers. Of
the Childtime centers, 222 were operated under lease or
operating agreements, 38 were owned and nine were operated under
management contracts. Of the Tutor Time corporate centers, all
64 were under lease agreements. Both the Childtime and Tutor
Time 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. In addition, the Company
serves as guarantor on 59 franchise leases.

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As of April 2, 2004, 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 |    
|               |       |                               |    
|2004-2005      |       |                               | 27  | *  
|2006-2007      |       |                               | 50  |    
|2008-2011      |       |                               | 81  |    
|2012 and later |       |                               | 131 |    
|               |       |                               |    
|               | Total |                               |     | 289 | 
|               |       |                               |    






|  |                                                                          
|- | -------------------------------------------------------------------------
|* | Includes one U.S. Government operating contract
    with indefinite terms

Item 3. Legal Proceedings

Various legal actions and other claims are
pending or could be asserted against the Company including
pending claims relating to exposure to mold and other
contaminants resulting from the condition of one of the
Companys centers. In addition, the Company has and will
continue to vigorously protect its rights against parties that
violate franchise agreements or infringe on its intellectual
property rights. 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 beyond amounts already accrued.

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 and Issuer Purchases of Equity
    Securities

The following table sets forth the high and low
bid prices of the Companys Common Stock for the fiscal
years ended April 2, 2004 and March 28, 2003
(beginning October 11, 2002), as reported on The Nasdaq
SmallCap Market, and the high and low sales prices, as reported
on The Nasdaq Market System through October 10, 2002. These
quotations represent prices between dealers and do not include
retail mark-ups, mark-downs or other fees or commissions and may
not represent actual transactions.

|             |             |              |   |      |     |  |   |      | 
|------------ | ----------- | ------------ | - | ---- | --- |  | - | ---- | 
|             |             |             
|             |             | Common Stock |  
|             |             | Bid Prices   |  
|             |             |              |  
|             |             | High         |   |      | Low | 
|             |             |              |   |      |     | 
|Fiscal 2004: |             |              |   |      |     |  |   |     
|             | 1st Quarter |              | $ | 2.93 |     |  | $ | 0.50 | 
|             | 2nd Quarter |              | $ | 2.50 |     |  | $ | 1.58 | 
|             | 3rd Quarter |              | $ | 2.55 |     |  | $ | 0.01 | 
|             | 4th Quarter |              | $ | 2.42 |     |  | $ | 1.60 | 
|Fiscal 2003: |             |              |   |      |     |  |   |     
|             | 1st Quarter |              | $ | 3.70 |     |  | $ | 2.56 | 
|             | 2nd Quarter |              | $ | 3.00 |     |  | $ | 1.16 | 
|             | 3rd Quarter |              | $ | 1.80 |     |  | $ | 0.98 | 
|             | 4th Quarter |              | $ | 1.28 |     |  | $ | 0.32 | 

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 23, 2004, there were
approximately 820 holders of the Companys Common
Stock (including individual participants in security position
listings).

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##### Table of Contents



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 April 2, 2004 appearing
elsewhere in this Report.

Childtime Learning Centers, Inc. and
Consolidated Subsidiaries

|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |         |       |      |   |         |       |       | 
|---------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ----- | --------- | - | ------- | --------- | ------- | - | --------- | ------ | ------ | --------- | ------- | ----- | ---- | - | ------- | ----- | ----- | 
|                                                           |                                                                                                                            | April 2,                              |         |       | March 28, |   |         | March 29, |         |   | March 30, |        |        | March 31, |        
|                                                           |                                                                                                                            | 2004                                  |         |       | 2003      |   |         | 2002      |         |   | 2001      |        |        | 2000      |        
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           |                                                                                                                            |                                      
|                                                           |                                                                                                                            | (In thousands, except per share data) |        
|Revenue from Learning Center Operations                    |                                                                                                                            | $                                     | 199,393 |       |           | $ | 171,818 |           |         | $ | 139,602   |        |        | $         | 144,167 |       |      | $ | 125,905 |      
|Revenue from Franchise Operations                          |                                                                                                                            |                                       | 6,715   |       |           |   | 3,763   |           |         |   |          |        |        |           |        |       |      |   |        |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|Revenue, net                                               |                                                                                                                            |                                       | 206,108 |       |           |   | 175,581 |           |         |   | 139,602   |        |        |           | 144,167 |       |      |   | 125,905 |      
|Operating expenses of Learning Centers                     |                                                                                                                            |                                       | 179,542 |       |           |   | 155,938 |           |         |   | 123,126   |        |        |           | 124,836 |       |      |   | 107,733 |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|Gross profit                                               |                                                                                                                            |                                       | 26,566  |       |           |   | 19,643  |           |         |   | 16,476    |        |        |           | 19,331  |       |      |   | 18,172  |      
|Provision for doubtful accounts                            |                                                                                                                            |                                       | 1,317   |       |           |   | 1,240   |           |         |   | 1,299     |        |        |           | 399     |       |      |   | 381     |      
|General and administrative expenses                        |                                                                                                                            |                                       | 18,951  |       |           |   | 16,561  |           |         |   | 11,996    |        |        |           | 8,825   |       |      |   | 7,598   |      
|Depreciation and amortization expenses(1)                  |                                                                                                                            |                                       | 4,063   |       |           |   | 3,509   |           |         |   | 4,719     |        |        |           | 4,723   |       |      |   | 3,379   |      
|Exit and closure expenses                                  |                                                                                                                            |                                       | 251     |       |           |   | 1,051   |           |         |   | 578       |        |        |           | 4,000   |       |      |   |        |      
|Mold remediation expense                                   |                                                                                                                            |                                       |        |       |           |   |        |           |         |   | 1,005     |        |        |           |        |       |      |   |        |      
|Failed merger costs                                        |                                                                                                                            |                                       |        |       |           |   |        |           |         |   | 952       |        |        |           |        |       |      |   |        |      
|Intangible asset impairment charges(2)                     |                                                                                                                            |                                       |        |       |           |   | 4,181   |           |         |   | 1,693     |        |        |           | 1,447   |       |      |   |        |      
|Fixed asset impairment charges(2)                          |                                                                                                                            |                                       |        |       |           |   | 3,401   |           |         |   | 223       |        |        |           |        |       |      |   | 282     |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           |                                                                                                                            | Operating income (loss)               |         |       | 1,984     |   |         |           | (10,300 | ) |           |        | (5,989 | )         |         |       | (63  | ) |         |       | 6,532 | 
|Interest expense, net                                      |                                                                                                                            |                                       | 2,127   |       |           |   | 2,577   |           |         |   | 458       |        |        |           | 966     |       |      |   | 428     |      
|Other (income) expense, net                                |                                                                                                                            |                                       | (92     | )     |           |   | (84     | )         |         |   | (63       | )      |        |           | (242    | )     |      |   | (274    | )    
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           | Income (loss) before income taxes, discontinued
    operations and cumulative effect of change in
    accounting principle |                                       |         | (51   | )         |   |         | (12,793   | )       |   |           | (6,384 | )      |           |         | (787  | )    |   |         | 6,378 |      
|Income tax provision (benefit)                             |                                                                                                                            |                                       | 93      |       |           |   | (227    | )         |         |   | (2,369    | )      |        |           | 43      |       |      |   | 2,398   |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           | Income (loss) before discontinued operations and
    cumulative effect of change in accounting principle                   |                                       |         | (144  | )         |   |         | (12,566   | )       |   |           | (4,015 | )      |           |         | (830  | )    |   |         | 3,980 |      
|Discontinued operations, net of taxes                      |                                                                                                                            |                                       | (779    | )     |           |   | (618    | )         |         |   | (20       | )      |        |           | 496     |       |      |   | 349     |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           | Income (loss) before cumulative effect of change
    in accounting principle                                               |                                       |         | (923  | )         |   |         | (13,184   | )       |   |           | (4,035 | )      |           |         | (334  | )    |   |         | 4,329 |      
|Cumulative effect of change in
    accounting principle(2) |                                                                                                                            |                                       |        |       |           |   | (4,967  | )         |         |   |          |        |        |           | (275    | )     |      |   |        |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           |                                                                                                                            | Net income (loss)                     |         | $     | (923      | ) |         | $         | (18,151 | ) |           | $      | (4,035 | )         |         | $     | (609 | ) |         | $     | 4,329 | 
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|Earnings (loss) per share:                                 |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |         |       |      |   |         |      
|                                                           | Basic income (loss) before discontinued
    operations and cumulative effect of change in
    accounting principle         |                                       | $       | (0.01 | )         |   | $       | (2.34     | )       |   | $         | (0.77  | )      |           | $       | (0.16 | )    |   | $       | 0.76  |      
|                                                           | Discontinued operations, net                                                                                               |                                       |         | (0.04 | )         |   |         | (0.12     | )       |   |           | (0.00  | )      |           |         | 0.09  |      |   |         | 0.06  |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           | Basic income (loss) before cumulative effect of
    change in accounting principle                                         |                                       | $       | (0.05 | )         |   | $       | (2.46     | )       |   | $         | (0.77  | )      |           | $       | (0.07 | )    |   | $       | 0.82  |      
|                                                           | Cumulative effect of change in
    accounting principle                                                                    |                                       |         |      |           |   |         | (0.93     | )       |   |           |       |        |           |         | (0.05 | )    |   |         |      |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        
|                                                           | Net income (loss)                                                                                                          |                                       | $       | (0.05 | )         |   | $       | (3.39     | )       |   | $         | (0.77  | )      |           | $       | (0.12 | )    |   | $       | 0.82  |      
|                                                           |                                                                                                                            |                                       |         |       |           |   |         |           |         |   |           |        |        |           |        

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|                                     |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |        |       |   |   |        |      | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ----- | --------- | - | ------ | --------- | - | - | --------- | ----- | - | --------- | ------ | ----- | - | - | ------ | ---- | 
|                                     |                                                                                                                      | April 2,                              |        |       | March 28, |   |        | March 29, |   |   | March 30, |       |   | March 31, |       
|                                     |                                                                                                                      | 2004                                  |        |       | 2003      |   |        | 2002      |   |   | 2001      |       |   | 2000      |       
|                                     |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |       
|                                     |                                                                                                                      |                                      
|                                     |                                                                                                                      | (In thousands, except per share data) |       
|                                     | Diluted income (loss) before discontinued
    operations and cumulative effect of change in
    accounting principle |                                       | $      | (0.01 | )         |   | $      | (2.34     | ) |   | $         | (0.77 | ) |           | $      | (0.16 | ) |   | $      | 0.76 | 
|                                     | Discontinued operations, net                                                                                         |                                       |        | (0.04 | )         |   |        | (0.12     | ) |   |           | (0.00 | ) |           |        | 0.09  |   |   |        | 0.06 | 
|                                     |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |       
|                                     | Diluted income (loss) before cumulative effect of
    change in accounting principle                                 |                                       | $      | (0.05 | )         |   | $      | (2.46     | ) |   | $         | (0.77 | ) |           | $      | (0.07 | ) |   | $      | 0.82 | 
|                                     | Cumulative effect of change in
    accounting principle                                                              |                                       |        |      |           |   |        | (0.93     | ) |   |           |      |   |           |        | (0.05 | ) |   |        |     | 
|                                     |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |       
|                                     | Net income (loss)                                                                                                    |                                       | $      | (0.05 | )         |   | $      | (3.39     | ) |   | $         | (0.77 | ) |           | $      | (0.12 | ) |   | $      | 0.82 | 
|                                     |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |       
|Weighted average shares outstanding  |                                                                                                                      |                                       | 17,820 |       |           |   | 5,362  |           |   |   | 5,234     |       |   |           | 5,102  |       |   |   | 5,271  |     
|                                     |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |       
|Selected Balance Sheet Data:         |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |        |       |   |   |        |     
|Total Assets                         |                                                                                                                      | $                                     | 85,619 |       |           | $ | 83,945 |           |   | $ | 74,115    |       |   | $         | 74,111 |       |   | $ | 71,174 |     
|Total long-term debt                 |                                                                                                                      | $                                     | 8,397  |       |           | $ | 29,631 |           |   | $ | 3,196     |       |   | $         | 4,224  |       |   | $ | 4,214  |     
|Total shareholders equity           |                                                                                                                      | $                                     | 37,006 |       |           | $ | 25,813 |           |   | $ | 43,482    |       |   | $         | 47,236 |       |   | $ | 44,939 |     
|Selected Operating Data:             |                                                                                                                      |                                       |        |       |           |   |        |           |   |   |           |       |   |           |        |       |   |   |        |     
|Number of centers (at end of period) |                                                                                                                      |                                       | 333    |       |           |   | 339    |           |   |   | 286       |       |   |           | 304    |       |   |   | 293    |     



|    |                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with the provisions of SFAS
    No. 142, Goodwill and Other Intangible Assets, the
    Company did not amortize goodwill for the fiscal years ended
    April 2, 2004 and March 28, 2003. If goodwill
    amortization had not been recorded for the prior periods, net
    income (loss) and earnings (loss) per share as shown above would
    have been as follows:

|     |  |               |      |   |                 |   |       |  
|---- |  | ------------- | ---- | - | --------------- | - | ----- | -
|     |  | Net Income    |      |   | Earnings (Loss) |  
|     |  | (Loss)        |      |   | Per Share       |  
|     |  |               |      |   |                 |  
|     |  | (In millions) |      |   |                
|2002 |  | $             | (2.9 | ) |                 | $ | (0.55 | )
|2001 |  | $             | 0.8  |   |                 | $ | 0.15  |  
|2000 |  | $             | 5.2  |   |                 | $ | 0.99  |  



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During the second quarter of 2003, the Company
    completed the implementation of SFAS No. 142, Goodwill
    and Other Intangible Assets. Under SFAS No. 142,
    goodwill is no longer amortized. Instead, goodwill and
    indefinite-lived intangible assets are tested for impairment in
    accordance with the provisions of SFAS No. 142. The Company
    completed its impairment test and recorded an impairment loss of
    $5.0 million (net of a tax benefit of $0.9 million) as
    a cumulative effect of a change in accounting principle. In
    addition, as a result of continuing weakening economic
    conditions, the Company tested for goodwill impairment as of
    October 11, 2002, and recorded an impairment loss during
    the second quarter of $4.2 million. Due to the continuing
    weakening economic conditions, the Company also tested for
    long-lived asset impairment, which consists primarily of
    equipment, leasehold improvements and other assets, as of
    October 11, 2002, in accordance with the provisions of SFAS
    No. 144, Accounting for the Impairment or Disposal of
    Long-Lived Assets. The Company employed a cash flow analysis
    in conducting its impairment test. The Company completed its
    impairment test and recorded an impairment loss of
    $3.5 million, including $0.1 million in discontinued
    operations, which impacted the Childtime reporting segment.



| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The impairment charges shown for fiscal years
    ended March 2002, 2001 and 2000 reflect charges for the
    write-down of goodwill and fixed assets determined in accordance
    with the provisions of SFAS No. 121, Accounting for the
    Impairment of Long-Lived Assets and for Long-Lived Assets to be
    Disposed of.

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

General

The Company utilizes a 52-53 week fiscal
year ending on the Friday closest to March 31. Fiscal 2004
ended April 2, 2004 and contained 53 weeks. Fiscal
2003 ended March 28, 2003 and contained 52 weeks.
Results of Operations comparisons will be impacted by the
additional week in fiscal 2004.

The results of Learning Centers opened, acquired
or disposed of are included in the Companys condensed
consolidated financial statements from the date of opening or
acquisition and through the date of disposition, except for
those centers treated as discontinued operations in accordance
with SFAS 144. The timing of such new openings,
acquisitions or dispositions could influence comparisons of year
over year results. These comparisons were particularly
influenced by the Companys acquisition of substantially
all of the assets of Tutor Time Learning Systems, Inc., a
Florida Corporation, on July 19, 2002.

In fiscal 2004, the Company opened four new
franchise and two new corporate Tutor Time centers. The Company
also transferred one corporate center to a franchise owner.
During the year, the Company chose to discontinue operations for
seven of its corporate Childtime locations that were not
performing or whose contracts expired. Three franchise centers
were also closed during 2004. During fiscal 2003, the Company
added 63 Learning Centers, which included the 58 Tutor Time
Learning Centers acquired at the end of the first quarter of
2003, closed ten and transferred two Learning Centers to
franchisees. The Company also closed nine centers during fiscal
2003, whose leases were rejected as part of the Tutor Time
purchase transaction. Also during fiscal 2003, the Company
acquired the Tutor Time franchise business, consisting of 124
franchise centers, franchised 15 additional centers, terminated
three franchise centers and took over the operations of one
franchise center.

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

Childtime prepares its financial statements in
conformity with accounting principles generally accepted in the
United States of America. 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 the consolidation of variable interest entities.

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, including record keeping requirements, 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 and
franchise royalties and fees. Tuition revenue is recognized as
services are performed. In some centers, the Company receives
payment in advance of services being rendered, in which case,
revenue is deferred until the services have been provided.
Franchise fees and site development fees are recognized as
revenue at the time the franchise center opens. Royalty income
related to franchise operations is recognized as revenue is
earned by franchisees.

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##### Table of Contents



Accounts Receivable.The Company generates accounts
receivable primarily from fees charged to governmental agencies,
franchisees 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 Intangible and Long-lived Assets
under SFAS 142 and SFAS 144.During
the second quarter of 2003, the Company completed the
implementation of SFAS 142, Goodwill and Other Intangible
Assets.Under SFAS 142, goodwill is no longer amortized.
Instead, goodwill and intangible assets with indefinite lives
are tested for impairment in accordance with the provisions of
SFAS 142. The Company employed a discounted cash flow analysis
to compute fair value in conducting its impairment tests under
SFAS 142. The Company also tests for long-lived asset
impairment, which consists primarily of equipment, leasehold
improvements and other assets, as of October 11, 2002, in
accordance with the provisions of SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.The Company
employed a cash flow analysis in conducting its impairment test.
At the end of fiscal 2003 and 2004, the Company again tested for
impairment using the discounted, forecasted cash flows for the
three segments of the Company  Childtime corporate, Tutor
Time corporate and Franchise operations. These cash flows were
compared to the fair value of intangible and long-lived assets
for each segment, and it was determined that there was no
further impairment. Assumptions and estimates about future cash
flows are subjective in nature and can be affected by a variety
of factors, such as the economy, regulatory changes and changes
in state mandated programs. There is a potential for impairment
charges in future years that would reduce operating income and
asset values on our balance sheet.

Liability for Workers Compensation Insurance
Obligations.The Company has
self-insured a significant portion of its workers compensation
insurance plans except during fiscal 2004. 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 effect on the Companys
financial results.

Consolidation of Variable Interest Entities.During fiscal 2004 the Company
implemented FIN 46, Consolidation of Variable Interest
Entities. In accordance with FIN 46, the Company has
determined that some of its franchise operations are variable
interest entities (VIE) and the Company has variable
interests in these entities including royalty payments and in
some cases debt, leasing arrangements and lease guarantees. The
Company has evaluated, and will continue to evaluate, these
relationships. Two franchise have been identified in which the
Company is the primary beneficiary and these two franchises have
been included in the 2004 consolidated financial statements.

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##### Table of Contents



Results of Operations

Fiscal 2004
Compared to Fiscal 2003

|                                            |                         |               |         |       |          |  |        |                |  |   |          |         |   |              |        |       |   |   |        |        | 
|------------------------------------------- | ----------------------- | ------------- | ------- | ----- | -------- |  | ------ | -------------- |  | - | -------- | ------- | - | ------------ | ------ | ----- | - | - | ------ | ------ | 
|                                            |                         | Fiscal Year   |         |       | Percent  |  |        | Fiscal Year    |  |   | Percent  |         |   | Change       |       
|                                            |                         | Ended         |         |       | of       |  |        | Ended          |  |   | of       |         |   | Amount       |       
|                                            |                         | April 2, 2004 |         |       | Revenues |  |        | March 28, 2003 |  |   | Revenues |         |   | (in Dollars) |       
|                                            |                         |               |         |       |          |  |        |                |  |   |          |         |   |              |       
|Revenue from Learning Center
    Operations |                         | $             | 199,393 |       |          |  | 96.7%  |                |  | $ | 171,818  |         |   |              | 97.9%  |       |   | $ | 27,575 |       
|Revenue from Franchise Operations           |                         |               | 6,715   |       |          |  | 3.3%   |                |  |   | 3,763    |         |   |              | 2.1%   |       |   |   | 2,952  |       
|                                            |                         |               |         |       |          |  |        |                |  |   |          |         |   |              |       
|Revenue, net                                |                         |               | 206,108 |       |          |  | 100.0% |                |  |   | 175,581  |         |   |              | 100.0% |       |   |   | 30,527 |       
|Operating expenses of Learning Centers      |                         |               | 179,542 |       |          |  | 87.1%  |                |  |   | 155,938  |         |   |              | 88.8%  |       |   |   | 23,604 |       
|                                            |                         |               |         |       |          |  |        |                |  |   |          |         |   |              |       
|Gross profit                                |                         |               | 26,566  |       |          |  | 12.9%  |                |  |   | 19,643   |         |   |              | 11.2%  |       |   |   | 6,923  |       
|Provision for doubtful accounts             |                         |               | 1,317   |       |          |  | 0.6%   |                |  |   | 1,240    |         |   |              | 0.7%   |       |   |   | 77     |       
|General and administrative expenses         |                         |               | 18,951  |       |          |  | 9.2%   |                |  |   | 16,561   |         |   |              | 9.4%   |       |   |   | 2,390  |       
|Depreciation and amortization expenses      |                         |               | 4,063   |       |          |  | 2.0%   |                |  |   | 3,509    |         |   |              | 2.0%   |       |   |   | 554    |       
|Exit and closure expense                    |                         |               | 251     |       |          |  | 0.1%   |                |  |   | 1,051    |         |   |              | 0.6%   |       |   |   | (800   | )     
|Intangible asset impairment charges         |                         |               |        |       |          |  | 0.0%   |                |  |   | 4,181    |         |   |              | 2.4%   |       |   |   | (4,181 | )     
|Fixed asset impairment charges              |                         |               |        |       |          |  | 0.0%   |                |  |   | 3,401    |         |   |              | 1.9%   |       |   |   | (3,401 | )     
|                                            |                         |               |         |       |          |  |        |                |  |   |          |         |   |              |       
|                                            | Operating Income (loss) |               |         | 1,984 |          |  |        | 1.0%           |  |   |          | (10,300 | ) |              |        | (5.9% | ) |   |        | 12,284 | 
|                                            |                         |               |         |       |          |  |        |                |  |   |          |         |   |              |       

Revenues, net.Net
revenues for fiscal 2004 increased $30.5 million, or 17.4%,
from fiscal 2003 to $206.1 million. Of this increase,
$4.1 million, or 13.4% was a result of the additional week
in fiscal 2004. Learning Center revenues increased
$27.6 million or 16.1%, of which $22.1 million was
contributed by Tutor Time Learning Centers. This was primarily a
result of Tutor Time being acquired at the end of the first
quarter of fiscal 2003 and having a full year of operating
results in fiscal 2004. Childtime Learning Centers revenues
increased $4.2 million, with comparable Childtime center
revenues (centers opened more than 18 months) increasing
1.1%. Revenue attributable to the consolidation of 2 franchise
arrangements considered variable interest entities (see Note 19
to the Companys Notes to Consolidated Financial
Statements) accounted for $1.2 million of the 2004
increase. Franchise Operations revenues increased
$2.9 million, primarily a result of Tutor Time being
acquired at the end of the first quarter of fiscal 2003.

Operating expenses of Learning Centers.Operating expenses for fiscal 2004
increased $23.6 million, or 15.1%, from fiscal 2003 to
$179.5 million. The increase was primarily a result of
additional operating expenses (including personnel and center
supplies) attributable to increased Learning Center enrollments.
Operating expenses as a percentage of revenue from Learning
Center Operations decreased to 87.1% for fiscal 2004, from 88.8%
for fiscal 2003. This decrease was a result of Franchise
Operations revenues increasing as a percentage of total
revenues, improved labor efficiency, and a reduction in start-up
costs that were incurred with new center openings in fiscal
2003, partially offset by increased occupancy costs of newly
opened Tutor Time centers.

Gross profit.Gross
profit for fiscal 2004 increased $6.9 million, or 35.2%,
from fiscal 2003 to $26.6 million. This increase was a
result of a $4.0 million increase in Learning Center Operations
and a $2.9 million increase in Franchise Operations gross
profits. The increase in Learning Center gross profit was
primarily a result of increased revenues and improved labor
efficiency. The increase in Franchise Operations gross profit
was a result of increased revenues. Gross profit percentages for
fiscal 2004 by segment were 12.4% for Childtime centers (as
compared to 11.6% for fiscal 2003), 3.5% for Tutor Time centers
(as compared to (0.8)% for fiscal 2003) and 100.0% for Franchise
Operations for both years. The increase in the Childtime centers
gross profit is attributable to improved labor efficiency. The
increase in Tutor Time centers gross profit is attributable to
improved labor efficiency and a reduction in start-up costs that
were incurred with new center openings in fiscal 2003, partially
offset by increased occupancy costs of newly opened Tutor Time
centers.

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Provision for doubtful accounts.Provision for doubtful accounts for
fiscal 2004 was $1.3 million, compared to $1.2 million
in fiscal 2003. The increase was a result of increased
receivables, partially offset by improved Franchise Operations
collections.

General and administrative expenses.General and administrative expenses
for fiscal 2004 increased $2.4 million, or 14.4%, from
fiscal 2003 to $19.0 million. The increase was primarily a
result of increased expenses associated with a full year of
supporting the Tutor Time centers. As a percentage of net
revenue, however, general and administrative expenses have
decreased from 9.4% for fiscal 2003 to 9.2% for fiscal 2004 as a
result of higher revenues in the current year and the reduction
of certain Tutor Time expenses after integration.

Depreciation and amortization expense.Depreciation and amortization expenses
for fiscal 2004 increased $0.6 million from fiscal 2003 to
$4.1 million. This increase was primarily a result of
depreciation and amortization expenses associated with a full
year of operations associated with the Tutor Time centers.

Exit and closure expenses.For fiscal 2004, the Company recorded
exit and closure expenses of $0.3 million compared to
$1.1 million in fiscal 2003. The expenses for fiscal 2004
were to increase reserves. Of the expenses for fiscal 2003,
$0.7 million related to the closure of three centers closed
during the year and the remaining $0.4 million was to
increase reserves. The reserve adjustments related to previously
closed centers and were made as a result of current real estate
market conditions. During fiscal 2004 and fiscal 2003, the
Company made cash payments of $1.0 million and
$0.9 million, respectively, related to lease termination
costs.

Impairment charges.During fiscal 2003, the Company
incurred an expense of $4.2 million as a result of an
evaluation done under SFAS No. 142, Goodwill and Other
Intangible Assets. During fiscal 2003, the Company incurred
an expense of $3.5 million, including $0.1 million in
discontinued operations as a result of an evaluation done under
SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. There were no charges for these items
in fiscal 2004.

Operating income/(loss).As a result of the foregoing changes,
the Companys operating income was $2.0 million for
fiscal 2004, compared to operating losses of ($10.3) million for
fiscal 2003.

Interest expense.Interest expense for fiscal 2004 was
$2.1 million, compared to $2.6 million for fiscal
2003. This decrease was a result of the issuance of common stock
to repay long term debt through the Companys Rights
Offering in fiscal 2003.

Income tax provision/(benefit).Income tax provision for fiscal 2004
was $0.1 million, all of which relates to state and local
taxes, compared to a benefit of ($0.2) million for fiscal 2003.
The tax benefit for 2003 is a result of carrying back net
operating losses to prior years net of the establishment of
valuation reserves.

Discontinued operations, net of taxes.Discontinued operations, net of taxes,
for fiscal 2004 was ($0.8) million, compared to ($0.6) million
for fiscal 2003. The additional losses for fiscal 2004 were a
result of operating losses and lease termination costs
associated with closed centers.

Cumulative effect of change in accounting
principle.An adjustment of $5.0
million as the cumulative effect of goodwill impairment under
SFAS 142, Goodwill and Other Intangibles,was made for
fiscal 2003. This amount was reduced by a tax benefit of
$0.9 million, which has been reduced by a valuation
reserve. There was no charge for this item in fiscal 2004.

Net loss.As a
result of the foregoing changes, net loss for fiscal 2004 was
($0.9) million, compared to net a loss of ($18.2) million for
fiscal 2003.

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Fiscal 2003
Compared to Fiscal 2002

|                                        |                         |                |         |         |          |  |        |                |   |   |          |        |   |              |        |       |   |   |        |        |  
|--------------------------------------- | ----------------------- | -------------- | ------- | ------- | -------- |  | ------ | -------------- | - | - | -------- | ------ | - | ------------ | ------ | ----- | - | - | ------ | ------ | -
|                                        |                         | Fiscal Year    |         |         | Percent  |  |        | Fiscal Year    |   |   | Percent  |        |   | Change       |       
|                                        |                         | Ended          |         |         | of       |  |        | Ended          |   |   | of       |        |   | Amount       |       
|                                        |                         | March 28, 2003 |         |         | Revenues |  |        | March 29, 2002 |   |   | Revenues |        |   | (in Dollars) |       
|                                        |                         |                |         |         |          |  |        |                |   |   |          |        |   |              |       
|Revenue from Learning Center Operations |                         | $              | 171,818 |         |          |  | 97.9%  |                |   | $ | 139,602  |        |   |              | 100.0% |       |   | $ | 32,216 |       
|Revenue from Franchise Operations       |                         |                | 3,763   |         |          |  | 2.1%   |                |   |   |         |        |   |              | 0.0%   |       |   |   | 3,763  |       
|                                        |                         |                |         |         |          |  |        |                |   |   |          |        |   |              |       
|Revenue, net                            |                         |                | 175,581 |         |          |  | 100.0% |                |   |   | 139,602  |        |   |              | 100.0% |       |   |   | 35,979 |       
|Operating expenses of Learning Centers  |                         |                | 155,938 |         |          |  | 88.8%  |                |   |   | 123,126  |        |   |              | 88.2%  |       |   |   | 32,812 |       
|                                        |                         |                |         |         |          |  |        |                |   |   |          |        |   |              |       
|Gross profit                            |                         |                | 19,643  |         |          |  | 11.2%  |                |   |   | 16,476   |        |   |              | 11.8%  |       |   |   | 3,167  |       
|Provision for doubtful accounts         |                         |                | 1,240   |         |          |  | 0.7%   |                |   |   | 1,299    |        |   |              | 0.9%   |       |   |   | (59    | )     
|General and administrative expenses     |                         |                | 16,561  |         |          |  | 9.4%   |                |   |   | 11,996   |        |   |              | 8.6%   |       |   |   | 4,565  |       
|Depreciation and amortization expenses  |                         |                | 3,509   |         |          |  | 2.0%   |                |   |   | 4,719    |        |   |              | 3.4%   |       |   |   | (1,210 | )     
|Exit and closure expense                |                         |                | 1,051   |         |          |  | 0.6%   |                |   |   | 578      |        |   |              | 0.4%   |       |   |   | 473    |       
|Mold remediation expense                |                         |                |        |         |          |  | 0.0%   |                |   |   | 1,005    |        |   |              | 0.7%   |       |   |   | (1,005 | )     
|Failed merger costs                     |                         |                |        |         |          |  | 0.0%   |                |   |   | 952      |        |   |              | 0.7%   |       |   |   | (952   | )     
|Intangible asset impairment charges     |                         |                | 4,181   |         |          |  | 2.4%   |                |   |   | 1,693    |        |   |              | 1.2%   |       |   |   | 2,488  |       
|Fixed asset impairment charges          |                         |                | 3,401   |         |          |  | 1.9%   |                |   |   | 223      |        |   |              | 0.2%   |       |   |   | 3,178  |       
|                                        |                         |                |         |         |          |  |        |                |   |   |          |        |   |              |       
|                                        | Operating income (loss) |                |         | (10,300 | )        |  |        | (5.9%          | ) |   |          | (5,989 | ) |              |        | (4.3% | ) |   |        | (4,311 | )
|                                        |                         |                |         |         |          |  |        |                |   |   |          |        |   |              |       

Revenues, net.Net
revenues for fiscal 2003 increased $36.0 million, or 25.8%,
from fiscal 2002 to $175.6 million. The increase was the
result of additional revenues of $32.2 million contributed
by Tutor Time centers and $3.8 million contributed by Franchise
Operations. Childtime center revenues were substantially
unchanged, with continuing center revenue increases of $2.9
million offset by the loss of revenues from closed centers of
$2.9 million. Comparable Childtime center revenues (centers
opened more than 18 months) increased $1.8 million or
1.3%. Revenues from closed centers relate to centers closed in
fiscal 2002 or fiscal 2003 that would not be considered under
the scope of SFAS 142 and therefore are not included in
discontinued operations.

Operating expenses of Learning Centers.Operating expenses for fiscal 2003
increased $32.8 million, or 26.6%, from fiscal 2002 to
$155.9 million. The increase was a result of additional
operating expenses of $32.4 million for Tutor Time centers
and an increase of operating expenses of $0.4 million for
Childtime centers. The operating expenses increase for Childtime
centers was primarily in personnel, where wage increases were
implemented prior to tuition increases, and occupancy costs that
rose with inflation on comparable revenues. These costs were
partially offset by other operating costs, which decreased. For
fiscal 2003, operating expenses as a percentage of revenue from
Learning Center Operations increased to 88.8%, from 88.2% for
fiscal 2002. This increase was a result of higher operating
costs in the acquired Tutor Time centers, costs incurred in
center openings and closings, and higher Childtime center costs.

Gross profit.Gross
profit for fiscal 2003 increased $3.2 million, or 19.2%,
from fiscal 2002 to $19.6 million. The increase was
attributable to $3.8 million contributed by Franchise Operations
offset by ($0.3) million contributed by Tutor Time centers and a
($0.3) million decrease by Childtime centers. Gross profit
percentages for fiscal 2003 by segment were 11.6% for Childtime
centers (as compared to 11.8% for fiscal 2002), (0.8)% for Tutor
Time centers and 100.0% for Franchise Operations. The decrease
in the Childtime centers gross profit is attributable to
increased personnel costs, where wage increases were implemented
prior to tuition increases, and occupancy costs that rose with
inflation on comparable revenues.

Provision for doubtful accounts.Provision for doubtful accounts for
fiscal 2003 was $1.2 million, as compared to
$1.3 million in fiscal 2002.

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General and administrative expenses.General and administrative expenses
for fiscal 2003 increased $4.6 million, or 38.2%, from
fiscal 2002 to $16.6 million. This increase was a result of
$4.1 million of general and administrative costs incurred
by Tutor Time operations and higher costs associated with the
establishment of regional offices.

Depreciation and amortization expense.Depreciation and amortization expenses
for fiscal 2003 decreased $1.2 million from fiscal 2002 to
$3.5 million. This was primarily a result of a reduction of
amortization expense of $1.9 million for Childtime centers
for fiscal 2003, which was partially offset by depreciation and
amortization of $0.7 million attributable to Tutor Time
centers.

Exit and closure expenses.The Company instituted a restructuring
program in fiscal 2001 and incurred a charge of
$4.0 million 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 28, 2003, 18 of the under-performing
centers had been closed. One center was operating profitably and
the Company has decided not to close this center. Approximately
200 employees were involuntarily terminated in connection with
the closures of Oxford Learning Centers of America and the 18
under-performing Childtime centers. For fiscal 2003, the Company
recorded exit and closure expenses of $1.1 million. Of this
amount, $0.7 million related to the closure of three
additional centers not included in the 2001 restructuring
program. The remaining $0.4 million was to increase
reserves related to the 2001 restructuring program, as a result
of current real estate market conditions. During fiscal 2003,
the Company made cash payments of $0.9 related to lease
termination costs.

Impairment charges.During fiscal 2003, the Company
incurred an expense of $4.2 million as a result of an
evaluation done under SFAS No. 142, Goodwill and Other
Intangible Assets. During fiscal 2003, the Company incurred
an expense of $3.5 million, including $0.1 million in
discontinued operations as a result of an evaluation done under
SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. There were no charges for these items
in fiscal 2002.

Operating (loss).As
a result of the foregoing changes, the Companys operating
losses were ($10.3) million for fiscal 2003 compared to
operating losses of ($6.0) million for fiscal 2002.

Interest expense.Interest expense for fiscal 2003 was
$2.6 million compared to $0.5 million for fiscal 2002.
This increase was a result of indebtedness incurred in
connection with the acquisition of Tutor Time, partially offset
by the reduction of interest rates on variable rate indebtedness.

Income tax benefit.Income tax benefit for fiscal 2003 was
$0.2 million compared to $2.4 million for fiscal 2002.
The effective tax rate was 1.8% for fiscal 2003 compared to
37.1% for fiscal 2002. The tax benefits and rates for fiscal
2003 were reduced due to the establishment of valuation reserves.

Discontinued operations, net of taxes.Discontinued operations, net of taxes,
for fiscal 2003 was ($0.6) million, compared to ($0.0) million
for fiscal 2002. The additional losses for fiscal 2003 were a
result of operating losses, lease termination costs and SFAS
No. 142 and SFAS No. 144 impairments.

Cumulative effect of change in accounting
principle.An adjustment of $5.0
million as the cumulative effect of goodwill impairment under
SFAS 142, Goodwill and Other Intangibles,was made for
fiscal 2003. This amount was reduced by a tax benefit of
$0.9 million, which has been reduced by a valuation
reserve. There was no charge for this item in fiscal 2002.

Net loss.As a
result of the foregoing changes, net loss for fiscal 2003 was
($18.1) million, compared to net a loss of ($4.0) million for
fiscal 2002.

Liquidity and Capital Resources

The Companys primary cash requirements
currently consist of its funding of losses from operations,
expenses associated with planned center openings, repayment of
debt, maintenance and capital improvement of existing centers,
and funding lease termination costs in conjunction with its
restructuring program. The Company expects to fund cash needs
through the revolving credit facility, described below, and cash
generated from operations. The Company has also funded cash
needs through sale leaseback transactions, as described in

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Note 7 of the Companys Notes to
Consolidated Financial Statements. The Company may evaluate
alternative forms of funding and new arrangements may be entered
into in the future. The Company experiences decreased liquidity
during the calendar year-end holidays due to decreased
attendance. While new enrollments are generally highest during
the traditional fall back to school period and after
the calendar year-end holidays, enrollment generally decreases
during the summer months and calendar year-end holidays. Should
cash flow generated from operations and borrowings available
under the revolving credit facility not be adequate to provide
for its working capital and debt service needs, the Company will
attempt to make other arrangements to provide needed liquidity.
No assurance can be given that such sources of capital will be
sufficient.


On January 31, 2002, the Company entered
into an Amended and Restated Credit Agreement. This agreement,
as further amended, provides a $13.7 million revolving line
of credit that will mature on June 30, 2005. It is
collateralized by the Companys receivables, equipment and
real estate, with interest payable at a variable rate, at the
Companys option, based on either the prime rate or the
Eurodollar rate. There were outstanding borrowings of
$5.4 million at April 2, 2004, and outstanding
borrowings of $13.0 million at March 28, 2003.
Outstanding letters of credit reduced the availability under the
line of credit in the amount of $2.1 million at
April 2, 2004, and $2.5 million at March 28, 2003 (see
Note 5 of the Companys Notes to Consolidated Financial
Statements). As of April 2, 2004 and March 28, 2003,
unused amounts available for borrowing under this line of credit
were $6.2 million and $2.0 million, respectively.

Under this agreement, the Company is required to
maintain certain financial ratios and other financial
conditions. In addition, there are restrictions on the
incurrence of additional indebtedness, disposition of assets and
transactions with affiliates. During the second quarter of
fiscal 2004, the Company had not maintained minimum consolidated
EBITDA levels. The Companys lender provided waivers for
this non-compliance. The Amended and Restated Credit Agreement
was further amended and the Company was in compliance with the
agreement as of April 2, 2004.

Net cash provided (used) by operating
activities was ($1.8) million for fiscal 2004 compared to
$1.5 million for fiscal 2003. During fiscal 2004, financing
activities totaled $4.5 million and consisted primarily of
the issuance of shares net of issuance cost of
$12.0 million, proceeds from sale leaseback of
$10.1 million, the issuance of subordinated notes of
$3.5 million and a $1.6 million increase in drafts
payable, offset by repayments of long-term debt of
$15.1 million and repayments on the line of credit of
$7.6 million. During fiscal 2003, financing activities
totaled $22.4 million and consisted primarily of net
borrowings on the revolving line of credit of
$10.5 million, the issuance of long-term debt of
$14.0 million, and a $0.9 million increase in drafts
payable. Investing activities were $3.8 million for fiscal
2004, of which $4.0 million was used for capital spending
which was partially offset by $0.2 million of proceeds from
asset sales. Investing activities were $26.2 million for
fiscal 2003, of which $21.7 million was associated with the
purchase of Tutor Time, and $5.0 million was used for
capital spending which was partially offset by $0.6 million
of proceeds from asset sales. Net accounts receivable increased
to $9.4 million at April 2, 2004, from $8.1 at
March 28, 2003. This increase was primarily due to the
slower collection of receivables from various state child
child-care assistance agencies.

On May 16, 2003, the Company completed a
Rights Offering under which it issued 100,000 units at
$158.52 per unit. Total proceeds from the offering were
$15.9 million, of which $12.4 million
($11.6 million net of expenses) was for the issuance of
14.1 million shares of common stock and $3.5 million
was Subordinated Debt. The proceeds of the offering were used to
pay off the balance, which included accrued interest, or the
Subordinated Debt to Jacobson Partner Group.

On July 19, 2002, the Company acquired the
assets of Tutor Time Learning Systems, Inc., for an aggregate
purchase price of approximately $22.8 million, including
acquisition costs, plus the assumption of certain liabilities.
The assets acquired by the Company consisted of substantially
all of the operating assets and contract rights used by Tutor
Time in its child care operations, which were comprised of 198
company-owned and franchised child care centers operating in 23
states and internationally, and were purchased to improve the
range of the Companys product offering and to enter the
child care franchise business. The Tutor Time acquisition was
financed, in part, through the Companys $17.5 million
secured bank credit facility as well as

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the issuance of $14 million of subordinated
loans. The subordinated loans were extended by the JP
Acquisition Fund Group (see Related Party
Transactions below) to fund the balance of the Tutor Time
acquisition purchase price and to provide related working
capital. The related subordinated notes had an original maturity
of December 31, 2004 and bore interest at 15%, of which 7%
was payable in cash, with the balance payable in kind by the
issuance of additional subordinated notes.


During fiscal 2003, the Company entered into
interest rate swap contracts to manage its exposure to
fluctuations in interest rates relating to the revolving line of
credit. Swap contracts fix the interest payments of floating
rate debt instruments. As of April 2, 2004, contracts
representing $5.0 million of notional amount were
outstanding with maturity dates of November 2005 and January
2006. These contracts provide for the Company to pay interest at
an average fixed rate of 2.98% in return for receiving interest
at a floating rate of three month LIBOR, which is reset in three
month intervals. The fair value of interest rate swap agreements
is subject to changes in value due to changes in interest rates.
During fiscal 2003, the Company recognized a loss of
$0.1 million as a result of a decline in the market value
of the outstanding interest rate contracts. The value of these
contracts was substantially unchanged in fiscal 2004.

Contractual Obligations and
Commitments

At April 2, 2004, aggregate principal
payments due on short and long-term debt and operating leases
over the next five fiscal years and thereafter are as follows:

|                           |       |                |         |           |        |   |        |        |  |     |        |        |         |       |        |        |  |   |         |         | 
|-------------------------- | ----- | -------------- | ------- | --------- | ------ | - | ------ | ------ |  | --- | ------ | ------ | ------- | ----- | ------ | ------ |  | - | ------- | ------- | 
|                           |       |                |         | Less Than |        |   | 1-3    |        |  | 4-5 |        |        | After 5 |      
|                           |       | Total          |         |           | 1 Year |   |        | Years  |  |     | Years  |        |         | Years |       
|                           |       |                |         |           |        |   |        |        |  |     |        |        |         |       |       
|                           |       |               
|                           |       | (In thousands) |        
|Short-term debt            |       | $              | 3,328   |           |        | $ | 3,328  |        |  | $   |       |        |         | $     |       |        |  | $ |        |        
|Long-term debt             |       |                | 8,397   |           |        |   |       |        |  |     | 4,854  |        |         |       | 3,543  |        |  |   |        |        
|Sale leaseback obligations |       |                | 10,157  |           |        |   | 19     |        |  |     | 88     |        |         |       | 125    |        |  |   | 9,925   |        
|Operating leases           |       |                | 283,451 |           |        |   | 31,148 |        |  |     | 57,350 |        |         |       | 47,585 |        |  |   | 147,368 |        
|                           |       |                |         |           |        |   |        |        |  |     |        |        |         |       |       
|                           | Total |                | $       | 305,333   |        |   | $      | 34,495 |  |     | $      | 62,292 |         |       | $      | 51,253 |  |   | $       | 157,293 | 
|                           |       |                |         |           |        |   |        |        |  |     |        |        |         |       |       

Included in operating leases above, are
obligations totaling $5.7 million related to closed
centers. The Company has accrued as of April 2, 2004,
$0.4 million in exit and closure expenses related to these
lease payments. The Company is primarily liable on approximately
$0.8 million for lease assignments (included in the
$5.7 million for closed centers) already negotiated in
connection with certain lease terminations resulting from the
fiscal 2001 restructuring program. The Company expects to assign
the remaining amounts to a third party or negotiate reductions
with the landlord (see Note 13 of the Companys Notes
to Consolidated Financial Statements).

A subsidiary of the Company is primarily or
contingently liable for many of the leases of Tutor Times
franchisees. In an effort to build its franchisee network, Tutor
Time either leased the prospective site for a franchisee, with a
subsequent sublease of the site to the franchisee, or provided a
lease guarantee to the landlord for the benefit of the
franchisee in exchange for a monthly lease guarantee fee payable
by the franchisee that is based upon the monthly rent expense of
the guaranteed lease. The payments the Company could be required
to pay related to leases and guarantees aggregates
$89.4 million and $20.5 million, respectively, in case
of default by the franchisee. Should the Company be required to
make payments under these leases, it may assume obligations for
operating the center. Should the center not be economically
viable, the Company will make provision for the lease
termination at that time. The Company has taken over operations
for a center previously operated by a franchisee as a result of
a default under the franchisees lease and intends to
continue to operate this center. Additionally, the Company has
been notified by the landlords of five locations that the
franchisee is in default and the approximate liability for these
defaults is $0.3 million. Other than with respect to the
foregoing locations, the Company does not anticipate that it
will be required to make payments under any of these leases or
guarantees, does not believe that any payments are likely and has

26



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##### Table of Contents



not recorded any related liability. At
April 2, 2004, aggregate potential payments on leases and
guarantees over the next five fiscal years and thereafter are as
follows:


|                            |       |                |        |           |        |   |       |       |  |     |        |        |         |       |        |        |  |   |        |        | 
|--------------------------- | ----- | -------------- | ------ | --------- | ------ | - | ----- | ----- |  | --- | ------ | ------ | ------- | ----- | ------ | ------ |  | - | ------ | ------ | 
|                            |       |                |        | Less Than |        |   | 1-3   |       |  | 4-5 |        |        | After 5 |      
|                            |       | Total          |        |           | 1 Year |   |       | Years |  |     | Years  |        |         | Years |       
|                            |       |                |        |           |        |   |       |       |  |     |        |        |         |       |       
|                            |       |               
|                            |       | (In thousands) |       
|Franchise Lease Guarantees  |       | $              | 20,494 |           |        | $ | 2,171 |       |  | $   | 4,308  |        |         | $     | 2,736  |        |  | $ | 11,279 |       
|Franchise Lease Commitments |       |                | 89,419 |           |        |   | 7,543 |       |  |     | 22,274 |        |         |       | 13,613 |        |  |   | 45,989 |       
|                            |       |                |        |           |        |   |       |       |  |     |        |        |         |       |       
|                            | Total |                | $      | 109,913   |        |   | $     | 9,714 |  |     | $      | 26,582 |         |       | $      | 16,349 |  |   | $      | 57,268 | 
|                            |       |                |        |           |        |   |       |       |  |     |        |        |         |       |       

Related Party Transactions

In July 2000, the Company retained Jacobson
Partners to provide management and financial consulting
services. Jacobson Partners is a private equity firm of which
Benjamin R. Jacobson, the Chairman of the Board of the Company,
is the managing general partner, and James J. Morgan, a director
and former Chairman of the Board and Interim Chief Executive
Officer, and Paula L. Gavin, a director of the Company and a
member of the Compensation Committee, are partners. As
consideration for the provision of such services to the Company
and its Board of Directors, Jacobson Partners is entitled to
receive an annual fee of $250,000, plus reimbursement of
reasonable out-of-pocket expenses. The agreement will continue
in effect until terminated by either party upon six months
prior written notice. As additional consideration for the
provision of such services, Jacobson Partners acquired 294,117
shares pursuant to a stock option granted in 2002. Such shares
are subject to registration rights until July 2007.

On June 26, 2002, in connection with the
Companys acquisition of substantially all of the assets of
Tutor Time Learning Systems, Inc., the Company entered into an
investment advisory agreement with Jacobson Partners. Upon
consummation of the acquisition, Jacobson Partners earned a fee
consisting of a cash payment of $333,334 and the issuance of
175,438 shares of the Companys common stock.

In July 2002, to provide a majority of the
funding to finance the Companys acquisition of
substantially all of the assets of Tutor Time Learning Systems,
Inc., and to provide related working capital, the JP Acquisition
Fund Group, a group of lenders organized by Jacobson Partners,
loaned the Company an aggregate of $14,000,000. The loans were
evidenced by subordinated notes which bore interest at the rate
of 15% per annum (of which only 7% was payable in cash unless
certain conditions were met, with the rest payable in kind with
the issuance of additional subordinated debt) and had an
original maturity of December 31, 2004. Lenders included JP
Acquisition Fund II, L.P. and JP Acquisition Fund III,
L.P., entities controlled and managed by affiliates of Jacobson
Partners, Mr. Jacobson, Mr. Morgan and Mr. George
Kellner, a former Chairman and Vice Chairman of the Board of
Directors.

Also in July 2002, certain members of the JP
Acquisition Fund Group (the Optionees) agreed to
arrange for the Company to obtain a standby purchase commitment
in connection with the Companys proposed rights offering.
As consideration for such commitment, a Special Committee of the
Board of Directors approved the grant to the Optionees of
options (the Standby Commitment Options) to
purchase, in the aggregate, up to 400,000 shares of common
stock, until July 19, 2006, at an exercise price of $5.00 per
share (approximately 171% of the five-day average of the daily
closing prices of the common stock on The Nasdaq National Market
System as of July 19, 2002, the date of the agreement). All
shares acquired by the Optionees would be subject to
registration rights, pursuant to which, until July 6, 2007,
the Optionees would have the right to cause the Company to
register, at its expense, their shares of common stock, whenever
the Company is otherwise registering shares (except in certain
circumstances). The option grant to the Optionees was approved
by the Companys shareholders and became effective, and
fully vested, upon consummation of the rights offering in May
2003. Optionees receiving Standby Commitment Options included
Mr. Jacobson (options for 4,790 shares, including 473
shares reflecting his proportionate interest in options
beneficially owned by Jacobson Partners), Mr. Kellner
(options for 6,401 shares) and Mr. Morgan (options for
5,303 shares, including 5 shares reflecting his proportionate
interest in options beneficially owned by Jacobson Partners).

27



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##### Table of Contents



In February 2003, prior to the commencement of
the Companys rights offering, the JP Acquisition Fund
Group entered into a Standby Securities Purchase Agreement
pursuant to which the Group agreed to purchase the securities to
be offered as part of the rights offering, which were not
subscribed for by shareholders, at the same price to be made
available to the Companys shareholders under the rights
offering ($158.52 per unit). In May 2003, upon consummation of
the rights offering and the purchases contemplated under the
Standby Securities Purchase Agreement, the JP Acquisition Fund
Group acquired an aggregate of 76,023 units, consisting of
10,719,243 shares of common stock and $2,660,805 principal
amount of subordinated notes. Of such amounts, Mr. Jacobson
acquired 887,525 shares and $220,308 of subordinated notes
(including 11,069 shares and $2,748 of subordinated notes
reflecting his proportionate interest in securities beneficially
owned by Jacobson Partners), Mr. Kellner and his spouse
acquired 665,802 shares and $165,270 of subordinated notes, and
Mr. Morgan acquired 226,569 shares and $56,241 of
subordinated notes (including 123 shares and $31 of subordinated
notes reflecting his proportionate interest in securities
beneficially owned by Jacobson Partners).

Proceeds of the Companys rights offering
were used to repay the balance of $15.8 million, including
accrued interest, of the debt incurred in connection with our
Tutor Time acquisition. The subordinated notes issued as part of
the rights offering bear interest at 15% per annum, payable
quarterly, and are due May 15, 2008. Subject to applicable
subordination provisions, these notes may be redeemed, at the
Companys option, at any time and must be redeemed
following the occurrence of a change of control. In
either case, the redemption price is 100% of the principal
balance of the notes, plus accrued and unpaid interest on such
principal balance to the date of redemption.

During fiscal 2004, the subordinated notes issued
to those lenders related to Jacobson Partners (including notes
issued to fund the Companys Tutor Time acquisition)
accrued interest in the following amounts: JP Acquisition
Fund II, L.P. and JP Acquisition Fund III, L.P. 
$998,000; Mr. Jacobson  $11,000;
Mr. Kellner and his spouse  $16,600; and
Mr. Morgan  $21,400.

Contingencies

Various legal actions and other claims are
pending or could be asserted against the Company including
pending claims relating to exposure to mold and other
contaminants resulting from the condition of one of the
Companys centers. In addition, the Company has and will
continue to vigorously protect its rights against parties that
violate franchise agreements or infringe on its intellectual
property rights. 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 beyond amounts already accrued.

New Accounting Pronouncements

During May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.SFAS 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity
and requires that those instruments be classified as liabilities
in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150
is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. The Companys adoption of SFAS 150
has not had a significant impact on its operating results or
financial position.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin (ARB) 51.FIN 46 addresses the consolidation of entities for
which control is achieved through means other than through
voting rights (variable interest entities or
VIE) by clarifying the application of ARB
No. 51, Consolidated Financial Statements,to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 provides guidance on how to determine
when and which business enterprise (the primary

28



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##### Table of Contents



beneficiary) should consolidate the VIE. In
addition, FIN 46 requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a
VIE make additional disclosures. On December 23, 2003, the
FASB issued FIN 46R, which replaced FIN 46. Among other
things, FIN 46R clarified and changed the definition and
application of a number of provisions of FIN 46 including de
facto agents, variable interests and variable interest entity
(VIE). FIN 46R also expanded instances when FIN
46 should not be applied. FIN 46R is effective for the
Companys reporting period ended April 2, 2004. See
Note 19 of the Companys Notes to Consolidated
Financial Statements.


Wage Increases

Expenses for center-level salaries, wages and
benefits represented approximately 52% of net revenues for
fiscal 2004, as compared to approximately 53% of net revenues in
fiscal 2003. Management believes that, through increases in
tuition rates, the Company can offset any future center-level
wage increases caused by adjustments to the federal, state or
county minimum wage rates or other market adjustments. However,
no assurance can be given that rates can be increased
sufficiently to cover such increased costs. The Company
continually evaluates its wage structure and may implement
changes at targeted local levels.

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 7A. Quantitative and
Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may
impact the Companys consolidated financial position,
results of operations or cash flow. The Company is exposed to
market risk due to changes in interest rates and foreign
currency exchange rates.

Interest Rates.The
Company has exposure to market risk for changes in interest
rates related to its debt obligations. The Company does not have
cash flow exposure due to rate changes on its 15% Subordinated
Notes in the amount of $3.5 million at April 2, 2004.
The Company has cash flow exposure on the revolving line of
credit, with an outstanding balance of $5.4 million and its
notes payable, with an outstanding balance of $2.8 million,
each as of April 2, 2004. These exposures have been
partially offset by the Company entering into $5.0 million
notional amount of interest rate swap contracts. Accordingly, a
2% (200 basis points) change in the LIBOR rate or the prime rate
would have resulted in interest expense changing by
approximately $0.2 million for fiscal 2004.

Foreign Currency Exchange Rates.The Companys exposure to foreign
currency exchange rates is limited to revenues for one
company-owned center and royalties for 12 international
franchised centers. Based upon the relative size of its foreign
operations, the Company does not believe that the reasonably
possible near-term change in the related exchange rate would
have a material effect on its financial position, results of
operations and cash flows.

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-25, attached hereto
and found following the signature page of this Report.

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

None.

Item 9A. Controls and
Procedures

Under the supervision and with the participation
of the Companys management, including our Chief Executive
Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation

29



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##### Table of Contents



of our disclosure controls and procedures within
90 days of the filing date of this Report, and, based on
their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that these controls and
procedures are effective. There were no significant changes in
the Companys internal controls or in other factors that
could significantly affect these controls subsequent to the date
of their evaluation.


Disclosure controls and procedures are the
Companys controls and other procedures that are designed
to ensure that information required to be disclosed by us in the
reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange
Commissions rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
the Company in the reports that we file under the Exchange Act
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.

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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 officers of the Company.

|                   |  |     |    |  |          |                                                   
|------------------ |  | --- | -- |  | -------- | --------------------------------------------------
|Name               |  | Age |    |  | Position
|                   |  |     |    |  |         
|William D. Davis   |  |     | 54 |  |          | President and Chief Executive Officer and Director
|Kathryn L. Myers   |  |     | 48 |  |          | Vice President and Chief Operating Officer        
|Frank M. Jerneycic |  |     | 55 |  |          | Chief Financial Officer and Treasurer             
|Scott W. Smith     |  |     | 46 |  |          | Vice President of Human Resources                 
|Ira L. Young       |  |     | 44 |  |          | Secretary and General Counsel                     

William D. Davishas
served as the President and Chief Executive Officer of the
Company since July 22, 2002, and as a Director since August
2002. Mr. Davis was formerly President and Chief Executive
Officer of Tutor Time Learning Systems, Inc., from March 2002
until the Companys acquisition of Tutor Time in July 2002.
Tutor Time filed Chapter 11 bankruptcy in May 2002. Prior
to joining Tutor Time, Mr. Davis served as Chief Executive
Officer of Waterbury Holdings, a holding company located in
Burlington, Vermont, from March 1995 through January 1998.
During his association with Waterbury Holdings, Mr. Davis
held the position of Partner and Chief Executive Officer of
Waterburys affiliates, including McKenzie LLC, All
Seasons Kitchen LLC, Franklin County Cheese Corporation,
Waterbury Fresh Foods LLC, Rondele LLC, and Frank Hahn
Incorporated. In December 1998, Mr. Davis, along with other
investors, purchased Rondele Foods LLC from Waterbury Holdings,
and he became Chairman of the newly-formed company, Rondele
Specialty Foods, based in Wausau, Wisconsin. Mr. Davis also
served as the President and Chief Executive Officer of
ChefExpress.Net Inc., an Internet-based virtual warehouse
providing ingredients and specialty food, from January 2000
through June 2001. Mr. Davis is also a board member of
Green Mountain Coffee Roasters Inc., where he serves as Chairman
of the Audit Committee.

Kathryn L. Myershas
served as the Chief Operating Officer since September 16, 2003.
Mrs. Myers previously served for 23 years at Borders
Group Inc., most recently as a member of the Executive Committee
and the President of Merchandising and Distribution.
Mrs. Myers held various positions at Borders, including
President, Borders Group Stores, President, Waldenbooks Stores
and Senior Vice President, Store Operations Waldenbooks.
Mrs. Myers holds a BS from the University of Michigan.

Frank M. Jerneycichas served as the Chief Financial
Officer and Treasurer since August 30, 2002.
Mr. Jerneycic previously served for six years as the Senior
Vice President and Chief Financial Officer of Decision
Consultants, Inc., a software services company located in
Southfield, Michigan.

Scott W. Smithhas
served as Vice President of 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 eight years, most recently serving as the Vice
President of Human Resources. Mr. Smith holds a BS from
Central Michigan University.

Ira L. Younghas
served as General Counsel and Secretary of the Company since
July 22, 2002. Prior to assuming this position with the
Company, Mr. Young served as General Counsel of Tutor Time
Learning Systems, Inc. from February 1999 and Corporate
Secretary of Tutor Time from June 1999. Mr. Young joined
Tutor Time as Litigation Counsel in March 1998, having
previously served as an associate attorney with Mandel, Weisman
& Kirschner, of Boca Raton, Florida, since 1993.

Additional information required by this Item will
be contained in the 2004 Proxy Statement of the Company under
the captions, Election of Directors, Other
Information Relating to Directors and Nominees,
Meetings and Committees of the Board of Directors,
Code of Business Conduct and Ethics and
Section 16(a) Beneficial Ownership Reporting
Compliance, and is incorporated herein by reference.

31



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Item 11. Executive
Compensation

Information required by this Item will be
contained in the 2004 Proxy Statement of the Company under the
captions, Compensation of Executive Officers and
Compensation of Directors, and is incorporated
herein by reference.



|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters

Information required by this Item will be
contained in the 2004 Proxy Statement of the Company under the
captions, Election of Directors, Voting
Securities and Principal Holders and Amendment of
the 2003 Equity Compensation Plan, and is incorporated
herein by reference.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information required by this Item will be
contained in the 2004 Proxy Statement under the captions,
Certain Relationships of Related Party Transactions
and Compensation Committee Interlocks and Insider
Participation, and is incorporated herein by reference.
Additionally, see Note 9 of the Companys Notes to
Consolidated Financial Statements and Related Party
Transactions under Item 7 of this Report.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information required by this Item will be
contained in the 2004 Proxy Statement under the Caption
Independent Accountants and is incorporated herein
by reference.

32



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PART IV




|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules, 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 Statement
Schedules



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

(b) Reports on Form 8-K



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | 1) On February 17, 2004, the Company
    issued a press release announcing its operating results for the
    third quarter of fiscal 2004.

33



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##### Table of Contents








SIGNATURES


Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on June 30, 2004.



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



| |     |                       
| | --- | ----------------------
| | By: | /s/ FRANK M. JERNEYCIC

| |                                      
| | -------------------------------------
| |                                      
| | Frank M. Jerneycic,                  
| | Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated, on June 30, 2004.

|                                             |  |                                                                                       
|-------------------------------------------- |  | --------------------------------------------------------------------------------------
|Signature                                    |  | Title                                                                                 
|                                             |  |                                                                                       
|/s/ WILLIAM D. DAVISWilliam D. Davis         |  | President, Chief Executive Officer and
    Director
    (Principal Executive Officer) 
|                                            
|/s/ FRANK M. JERNEYCICFrank M. Jerneycic     |  | Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)
|                                            
|/s/ JASON K. FELDJason K. Feld               |  | Director                                                                              
|                                            
|/s/ PAULA L. GAVINPaula L. Gavin             |  | Director                                                                              
|                                            
|/s/ BENJAMIN R. JACOBSONBenjamin R. Jacobson |  | Director                                                                              
|                                            
|/s/ KENNETH JOHNSSONKenneth Johnsson         |  | Director                                                                              
|                                            
|/s/ JAMES J. MORGANJames J. Morgan           |  | Director                                                                              
|                                            
|/s/ JERRY KANEJerry Kane                     |  | Director                                                                              
|                                            
|/s/ BRETT D. SHEVACKBrett D. Shevack         |  | Director                                                                              

34



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##### Table of Contents



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 Registered Public
    Accounting Firm                                                         |                                                               |       | F-2 |     
|                                                                                                                   
|Financial Statements:                                                                                               |                                                               |       |     |     
|                                                                                                                   
|                                                                                                                    | Consolidated Balance Sheets                                   |       |     | F-3  | 
|                                                                                                                   
|                                                                                                                    | Consolidated Statements of Operations                         |       |     | F-4  | 
|                                                                                                                   
|                                                                                                                    | Consolidated Statement of Changes in
    Shareholders Equity |       |     | F-5  | 
|                                                                                                                   
|                                                                                                                    | Consolidated Statements of Cash Flows                         |       |     | F-6  | 
|                                                                                                                   
|                                                                                                                    | Notes to Consolidated Financial Statements                    |       |     | F-24 | 
|                                                                                                                   
|The following consolidated financial statement
    schedule of Childtime Learning Centers, Inc. is included herein: |                                                               |       |     |     
|                                                                                                                   
|                                                                                                                    | Schedule II  Valuation and
    qualifying accounts           |       |     | F-25 | 

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



---



##### Table of Contents








Report of Independent Registered Public
Accounting Firm


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

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
income, shareholders equity and cash flows present fairly,
in all material respects, the financial position of Childtime
Learning Centers, Inc. and its subsidiaries at April 2,
2004 and March 28, 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended April 2, 2004 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 on page F-1 presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
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.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan

June 30, 2004


F-2



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |        |        |        |         |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------------- | ------------------------------------------ | ------ | --------- | ------ | ------ | ------ | ------- | ------ | 
|                                                                                                                                                                    |                                           |                                                
|                                                                                                                                                                    |                                           | Fiscal Years Ended                              |                                           
|                                                                                                                                                                    |                                           |                                                 |                                           
|                                                                                                                                                                    |                                           | April 2,                                        |                                            |        | March 28, |       
|                                                                                                                                                                    |                                           | 2004                                            |                                            |        | 2003      |       
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                
|                                                                                                                                                                    |                                           | (In thousands)                                  |                                           
|ASSETS                                                                                                                                                             
|Current assets:                                                                                                                                                     |                                           |                                                 |                                            |        |           |        |        |       
|                                                                                                                                                                    | Cash and cash equivalents                 |                                                 | $                                          | 1,377  |           |        | $      | 2,499  |        
|                                                                                                                                                                    | Accounts receivable, net                  |                                                 |                                            | 9,379  |           |        |        | 8,112  |        
|                                                                                                                                                                    | Prepaid expenses and other current assets |                                                 |                                            | 5,435  |           |        |        | 1,771  |        
|                                                                                                                                                                    | Income tax receivable                     |                                                 |                                            |       |           |        |        | 1,965  |        
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | Total current assets                       |        |           | 16,191 |        |        |         | 14,347 | 
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|Land, buildings and equipment:                                                                                                                                      |                                           |                                                 |                                            |        |           |        |        |       
|                                                                                                                                                                    | Land                                      |                                                 |                                            | 9,347  |           |        |        | 9,362  |        
|                                                                                                                                                                    | Buildings                                 |                                                 |                                            | 20,443 |           |        |        | 19,924 |        
|                                                                                                                                                                    | Leasehold improvements                    |                                                 |                                            | 12,462 |           |        |        | 10,304 |        
|                                                                                                                                                                    | Vehicles, furniture and equipment         |                                                 |                                            | 13,599 |           |        |        | 13,202 |        
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | 55,851                                     |        |           |        | 52,792 |       
|                                                                                                                                                                    |                                           | Less: accumulated depreciation and amortization |                                            |        | (19,128   | )      |        |        | (16,663 | )     
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | 36,723                                     |        |           |        | 36,129 |       
|Other noncurrent assets:                                                                                                                                            |                                           |                                                 |                                            |        |           |        |        |       
|                                                                                                                                                                    | Intangible assets, net                    |                                                 |                                            | 30,064 |           |        |        | 30,812 |        
|                                                                                                                                                                    | Refundable deposits and other             |                                                 |                                            | 2,641  |           |        |        | 2,657  |        
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | 32,705                                     |        |           |        | 33,469 |       
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | Total assets                               |        | $         | 85,619 |        |        | $       | 83,945 | 
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                               
|Current liabilities:                                                                                                                                                |                                           |                                                 |                                            |        |           |        |        |       
|                                                                                                                                                                    | Accounts and drafts payable               |                                                 | $                                          | 6,810  |           |        | $      | 5,929  |        
|                                                                                                                                                                    | Accrued wages and benefits                |                                                 |                                            | 7,531  |           |        |        | 6,491  |        
|                                                                                                                                                                    | Current portion of long-term debt         |                                                 |                                            | 3,328  |           |        |        | 1,280  |        
|                                                                                                                                                                    | Exit and closure expense accrual          |                                                 |                                            | 448    |           |        |        | 1,270  |        
|                                                                                                                                                                    | Other current liabilities                 |                                                 |                                            | 10,016 |           |        |        | 12,110 |        
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | Total current liabilities                  |        |           | 28,133 |        |        |         | 27,080 | 
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|Long-term debt, net of current portion                                                                                                                              |                                           |                                                 | 8,397                                      |        |           |        | 29,631 |       
|Deferred rent liability & minority interest                                                                                                                         |                                           |                                                 | 1,945                                      |        |           |        | 1,421  |       
|Obligations under sale leaseback transactions                                                                                                                       |                                           |                                                 | 10,138                                     |        |           |        |       |       
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | Total Liabilities                          |        |           | 48,613 |        |        |         | 58,132 | 
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|Commitments & Contingencies (See Note 10)                                                                                                                           |                                           |                                                 |                                            |        |           |        |        |       
|SHAREHOLDERS EQUITY                                                                                                                                               
|Common Stock, 40,000,000 shares authorized, no
    par value; 19,809,010 and 5,416,210 issued and outstanding at
    April 2, 2004 and March 28, 2003, respectively |                                           |                                                 | 43,781                                     |        |           |        | 31,665 |       
|Preferred Stock, 100,000 shares authorized, no
    par value; no shares issued or outstanding                                                                       |                                           |                                                 |                                           |        |           |        |       |       
|Retained earnings (accumulated deficit)                                                                                                                             |                                           |                                                 | (6,775                                     | )      |           |        | (5,852 | )     
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | Total shareholders equity                 |        |           | 37,006 |        |        |         | 25,813 | 
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       
|                                                                                                                                                                    |                                           |                                                 | Total liabilities and shareholders equity |        | $         | 85,619 |        |        | $       | 83,945 | 
|                                                                                                                                                                    |                                           |                                                 |                                            |        |           |       

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

F-3



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |   |   |         |        |  
|------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | --------- | - | ------- | --------- | - | - | ------- | ------ | -
|                                                                                                                               |                                                                                                                     |                                      
|                                                                                                                               |                                                                                                                     | Fiscal Years Ended                    |        
|                                                                                                                               |                                                                                                                     |                                       |        
|                                                                                                                               |                                                                                                                     | April 2,                              |         |        | March 28, |   |         | March 29, |  
|                                                                                                                               |                                                                                                                     | 2004                                  |         |        | 2003      |   |         | 2002      |  
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               |                                                                                                                     |                                      
|                                                                                                                               |                                                                                                                     | (In thousands, except per share data) |        
|Revenue from Learning Center Operations                                                                                        |                                                                                                                     | $                                     | 199,393 |        |           | $ | 171,818 |           |   | $ | 139,602 |       
|Revenue from Franchise Operations                                                                                              |                                                                                                                     |                                       | 6,715   |        |           |   | 3,763   |           |   |   |        |       
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|Revenue, net                                                                                                                   |                                                                                                                     |                                       | 206,108 |        |           |   | 175,581 |           |   |   | 139,602 |       
|Operating expenses of Learning Centers                                                                                         |                                                                                                                     |                                       | 179,542 |        |           |   | 155,938 |           |   |   | 123,126 |       
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | Gross profit                                                                                                        |                                       |         | 26,566 |           |   |         | 19,643    |   |   |         | 16,476 |  
|Provision for doubtful accounts                                                                                                |                                                                                                                     |                                       | 1,317   |        |           |   | 1,240   |           |   |   | 1,299   |       
|General and administrative expenses                                                                                            |                                                                                                                     |                                       | 18,951  |        |           |   | 16,561  |           |   |   | 11,996  |       
|Depreciation and amortization expenses                                                                                         |                                                                                                                     |                                       | 4,063   |        |           |   | 3,509   |           |   |   | 4,719   |       
|Exit and closure expenses                                                                                                      |                                                                                                                     |                                       | 251     |        |           |   | 1,051   |           |   |   | 578     |       
|Mold remediation expense                                                                                                       |                                                                                                                     |                                       |        |        |           |   |        |           |   |   | 1,005   |       
|Failed merger costs                                                                                                            |                                                                                                                     |                                       |        |        |           |   |        |           |   |   | 952     |       
|Goodwill impairment charges                                                                                                    |                                                                                                                     |                                       |        |        |           |   | 4,181   |           |   |   | 1,693   |       
|Fixed asset impairment charges                                                                                                 |                                                                                                                     |                                       |        |        |           |   | 3,401   |           |   |   | 223     |       
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | Operating income (loss)                                                                                             |                                       |         | 1,984  |           |   |         | (10,300   | ) |   |         | (5,989 | )
|Interest expense, net                                                                                                          |                                                                                                                     |                                       | 2,127   |        |           |   | 2,577   |           |   |   | 458     |       
|Other (income), net                                                                                                            |                                                                                                                     |                                       | (92     | )      |           |   | (84     | )         |   |   | (63     | )     
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | (Loss) before income taxes, discontinued
    operations and cumulative effect of change in accounting
    principle |                                       |         | (51    | )         |   |         | (12,793   | ) |   |         | (6,384 | )
|Income tax provision (benefit)                                                                                                 |                                                                                                                     |                                       | 93      |        |           |   | (227    | )         |   |   | (2,369  | )     
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | (Loss) before discontinued operations and
    cumulative effect of change in accounting principle                   |                                       |         | (144   | )         |   |         | (12,566   | ) |   |         | (4,015 | )
|Discontinued operations, net of taxes                                                                                          |                                                                                                                     |                                       | (779    | )      |           |   | (618    | )         |   |   | (20     | )     
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | (Loss) before cumulative effect of change in
    accounting principle                                               |                                       |         | (923   | )         |   |         | (13,184   | ) |   |         | (4,035 | )
|Cumulative effect of change in accounting
    principle, net of taxes                                                          |                                                                                                                     |                                       |        |        |           |   | (4,967  | )         |   |   |        |       
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | Net (loss)                                                                                                          |                                       | $       | (923   | )         |   | $       | (18,151   | ) |   | $       | (4,035 | )
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|Earnings (loss) per share:                                                                                                     |                                                                                                                     |                                       |         |        |           |   |         |           |   |   |         |       
|Basic and diluted-income (loss) before
    discontinued operations and cumulative effect of change in
    accounting principle |                                                                                                                     | $                                     | (0.01   | )      |           | $ | (2.34   | )         |   | $ | (0.77   | )     
|Discontinued operations, net                                                                                                   |                                                                                                                     |                                       | (0.04   | )      |           |   | (0.12   | )         |   |   | (0.00   | )     
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|Basic and diluted-income (loss) before
    cumulative effect of change in accounting principle                                 |                                                                                                                     |                                       | (0.05   | )      |           |   | (2.46   | )         |   |   | (0.77   | )     
|Cumulative effect of change in accounting
    principle                                                                        |                                                                                                                     |                                       |        |        |           |   | (0.93   | )         |   |   |        |       
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|                                                                                                                               | Net income (loss)                                                                                                   |                                       | $       | (0.05  | )         |   | $       | (3.39     | ) |   | $       | (0.77  | )
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  
|Weighted average shares outstanding                                                                                            |                                                                                                                     |                                       | 17,820  |        |           |   | 5,362   |           |   |   | 5,234   |       
|                                                                                                                               |                                                                                                                     |                                       |         |        |           |   |         |           |  

The accompanying footnotes 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, 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  |  
|Shares issued            |  |                      | 175    |  |          |   | 482    |          |  |   |        |   |  |   | 482     |  
|Net income (loss)        |  |                      |       |  |          |   |       |          |  |   | (18,151 | ) |  |   | (18,151 | )
|                         |  |                      |        |  |          |   |        |          |  |   |         |  
|Balances, March 28, 2003 |  |                      | 5,416  |  |          | $ | 31,665 |          |  | $ | (5,852  | ) |  | $ | 25,813  |  
|Shares issued            |  |                      | 290    |  |          |   | 418    |          |  |   |        |   |  |   | 418     |  
|Stock compensation       |  |                      |       |  |          |   | 103    |          |  |   |        |   |  |   | 103     |  
|Rights Offering          |  |                      | 14,063 |  |          |   | 11,595 |          |  |   |        |   |  |   | 11,595  |  
|Net income (loss)        |  |                      |       |  |          |   |       |          |  |   | (923    | ) |  |   | (923    | )
|                         |  |                      |        |  |          |   |        |          |  |   |         |  
|Balances, April 2, 2004  |  |                      | 19,769 |  |          | $ | 43,781 |          |  | $ | (6,775  | ) |  | $ | 37,006  |  
|                         |  |                      |        |  |          |   |        |          |  |   |         |  

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

F-5



---



##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |         |        |       |        |        |        |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------- | --------- | ------ | ------ | --------- | ------- | ------ | ----- | ------ | ------ | ------ | -
|                                                        |                                                                                       |                                                                                                                                          
|                                                        |                                                                                       | Fiscal Years Ended                                                                                                                        |                                                             
|                                                        |                                                                                       |                                                                                                                                           |                                                             
|                                                        |                                                                                       | April 2,                                                                                                                                  |                                                              |         | March 28, |        |        | March 29, |        
|                                                        |                                                                                       | 2004                                                                                                                                      |                                                              |         | 2003      |        |        | 2002      |        
|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |        
|                                                        |                                                                                       |                                                                                                                                          
|                                                        |                                                                                       | (In thousands)                                                                                                                            |                                                             
|Operating activities:                                   |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |         |        |       |       
|                                                        | Net (loss)                                                                            |                                                                                                                                           | $                                                            | (923    | )         |        | $      | (18,151   | )       |        | $     | (4,035 | )     
|                                                        | Adjustments to reconcile net loss to cash
    provided(used) by operating activities: |                                                                                                                                           |                                                              |         |           |        |        |           |         |        |       |        |       
|                                                        |                                                                                       | Depreciation and amortization                                                                                                             |                                                              |         | 4,088     |        |        |           | 3,540   |        |       |        | 4,789  |       
|                                                        |                                                                                       | Interest capitalized as part of subordinated notes                                                                                        |                                                              |         |          |        |        |           | 513     |        |       |        |       |       
|                                                        |                                                                                       | Intangible and fixed asset impairment charges
    (includes $5,877 classified as cumulative effect of change
    in accounting principle) |                                                              |         |          |        |        |           | 13,532  |        |       |        | 1,916  |       
|                                                        |                                                                                       | Provision for doubtful accounts                                                                                                           |                                                              |         | 1,314     |        |        |           | 1,276   |        |       |        | 1,323  |       
|                                                        |                                                                                       | Stock compensation expense                                                                                                                |                                                              |         | 103       |        |        |           |        |        |       |        | 159    |       
|                                                        |                                                                                       | Deferred rent liability                                                                                                                   |                                                              |         | 490       |        |        |           | 454     |        |       |        | (68    | )     
|                                                        |                                                                                       | Minority interest in variable interest entities                                                                                           |                                                              |         | 33        |        |        |           |        |        |       |        |       |       
|                                                        |                                                                                       | Deferred income taxes                                                                                                                     |                                                              |         |          |        |        |           | 645     |        |       |        | (619   | )     
|                                                        |                                                                                       | (Gain)loss on sale of assets                                                                                                              |                                                              |         | (81       | )      |        |           | 27      |        |       |        | 327    |       
|                                                        |                                                                                       | Changes in operating assets and liabilities:                                                                                              |                                                              |         |           |        |        |           |         |        |       |        |        |       
|                                                        |                                                                                       |                                                                                                                                           | Accounts receivable                                          |         |           | (2,581 | )      |           |         | (704   | )     |        |        | (1,863 | )
|                                                        |                                                                                       |                                                                                                                                           | Prepaid expenses and other current assets                    |         |           | (3,665 | )      |           |         | 1,770  |       |        |        | (2,066 | )
|                                                        |                                                                                       |                                                                                                                                           | Income tax receivable                                        |         |           | 1,965  |        |           |         |       |       |        |        |       |  
|                                                        |                                                                                       |                                                                                                                                           | Accounts payable, accruals and other current
    liabilities |         |           | (1,746 | )      |           |         | (1,877 | )     |        |        | 3,084  |  
|                                                        |                                                                                       |                                                                                                                                           | Exit and closure expense accrual                             |         |           | (822   | )      |           |         | 441    |       |        |        | (1,581 | )
|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |        
|                                                        |                                                                                       | Net cash provided (used) by operating
    activities                                                                                      |                                                              |         | (1,825    | )      |        |           | 1,466   |        |       |        | 1,366  |       
|Investing activities:                                   |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |         |        |       |       
|                                                        | Acquisition of Tutor Time (net of cash of $614)                                       |                                                                                                                                           |                                                              |        |           |        |        | (21,689   | )       |        |       |       |       
|                                                        | Capital spending                                                                      |                                                                                                                                           |                                                              | (4,024  | )         |        |        | (5,016    | )       |        |       | (4,101 | )     
|                                                        | Expenditures from reimbursable construction costs                                     |                                                                                                                                           |                                                              |        |           |        |        |          |         |        |       | (939   | )     
|                                                        | Proceeds from sale of assets                                                          |                                                                                                                                           |                                                              | 172     |           |        |        | 595       |         |        |       | 539    |       
|                                                        | Payments for refundable deposits and other assets                                     |                                                                                                                                           |                                                              | 16      |           |        |        | (134      | )       |        |       |       |       
|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |        
|                                                        |                                                                                       | Net cash used in investing activities                                                                                                     |                                                              |         | (3,836    | )      |        |           | (26,244 | )      |       |        | (4,501 | )     
|Financing activities:                                   |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |         |        |       |       
|                                                        | Net borrowings on revolving line of credit                                            |                                                                                                                                           |                                                              | (7,573  | )         |        |        | 10,451    |         |        |       | 2,500  |       
|                                                        | Repayments under long-term debt                                                       |                                                                                                                                           |                                                              | (15,112 | )         |        |        | (1,207    | )       |        |       | (1,216 | )     
|                                                        | Issuance of subordinated notes                                                        |                                                                                                                                           |                                                              | 3,500   |           |        |        | 14,000    |         |        |       |       |       
|                                                        | Changes in drafts payable                                                             |                                                                                                                                           |                                                              | 1,573   |           |        |        | (858      | )       |        |       | 1,237  |       
|                                                        | Proceeds from sale leaseback                                                          |                                                                                                                                           |                                                              | 10,138  |           |        |        |          |         |        |       |       |       
|                                                        | Repayments of reimbursable construction costs                                         |                                                                                                                                           |                                                              |        |           |        |        |          |         |        |       | 2,004  |       
|                                                        | Issuance of common shares (net of issuance costs)                                     |                                                                                                                                           |                                                              | 12,013  |           |        |        |          |         |        |       | 122    |       
|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |        
|                                                        |                                                                                       | Net cash provided by financing activities                                                                                                 |                                                              |         | 4,539     |        |        |           | 22,386  |        |       |        | 4,647  |       
|Net increase(decrease) in cash and cash
    equivalents |                                                                                       |                                                                                                                                           | (1,122                                                       | )       |           |        | (2,392 | )         |         |        | 1,512 |       
|Cash and cash equivalents, beginning of year            |                                                                                       |                                                                                                                                           | 2,499                                                        |         |           |        | 4,891  |           |         |        | 3,379 |       
|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |        
|Cash and cash equivalents, end of period                |                                                                                       | $                                                                                                                                         | 1,377                                                        |         |           | $      | 2,499  |           |         | $      | 4,891 |       
|                                                        |                                                                                       |                                                                                                                                           |                                                              |         |           |        |        |           |        

The accompanying footnotes 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 April 2, 2004, the Company
provides for-profit child care through 470 corporate and
franchise child care centers.

2. Summary of Significant Accounting
Policies:

a. Fiscal Year: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 year ended April 2, 2004
contained 53 weeks. The fiscal years ended March 28,
2003 and March 29, 2002 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. Accounts Receivable:The Company
generates accounts receivable primarily from fees charged to
governmental agencies, franchisees 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.

e. Intangible Assets:Intangible
assets represent principally goodwill and identifiable
intangible assets related to franchise agreements, trademarks
and curriculum and beginning in fiscal 2003 are accounted for in
accordance with SFAS 142, Goodwill and Other Intangible
Assets. Under SFAS 142, goodwill is no longer amortized.
Instead, goodwill and intangible assets with indefinite lives
are tested annually for impairment in accordance with the
provisions of SFAS 142. Intangible assets with a determinable
life are amortized on a straight-line basis over the estimated
period benefited, ranging from five to twenty years. Prior to
fiscal 2003, the Company had amortized all intangible assets,
including goodwill, over the estimated period of benefit over
various periods, but primarily over 15 years, with such
amortization expense included in depreciation and amortization
expenses. (See Note 15)

f.  Impairment of Long-Lived Assets:Long-lived assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable in
accordance with SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets. 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. Once the Company
has utilized its resources in order to make the center
profitable, without success, and future cash flows fail to
recover 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.

g. Liability for Workers Compensation
Insurance Obligations:For fiscal 2003 and 2002, the Company
self-insured a significant portion of its workers compensation
insurance plans. The full extent of certain

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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)


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.

h. 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 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. Valuation allowances are provided when it is more
likely than not that a deferred tax asset will not be recovered
through future taxable income.

i.  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.

j.  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 2004, 2003 and 2002, federal assistance
revenues were approximately $43.4 million
(22 percent), $40.4 million (24 percent) and
$31.0 million (22 percent), respectively. For fiscal
2004, 2003 and 2002, federal assistance accounts receivable were
approximately $6.8 million (73 percent),
$5.6 million (69 percent) and $4.8 million
(91 percent), respectively.

k. Stock-Based Compensation: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
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 in thousands:

|                                                                   |  |             |      |                    |        |   |           |   |         |           |      |   |        |  
|------------------------------------------------------------------ |  | ----------- | ---- | ------------------ | ------ | - | --------- | - | ------- | --------- | ---- | - | ------ | -
|                                                                   |  |             |      |                   
|                                                                   |  |             |      | Fiscal Years Ended |       
|                                                                   |  |             |      |                    |       
|                                                                   |  |             |      | April 2,           |        |   | March 28, |   |         | March 29, |     
|                                                                   |  |             |      | 2004               |        |   | 2003      |   |         | 2002      |     
|                                                                   |  |             |      |                    |        |   |           |   |         |           |     
|Net loss                                                           |  | As reported |      | $                  | (923   | ) |           | $ | (18,151 | )         |      | $ | (4,035 | )
|                                                                   |  | Pro forma   |      | $                  | (1,711 | ) |           | $ | (18,431 | )         |      | $ | (4,128 | )
|Net loss per share                                                 |  |             |      |                    |        |   |           |   |         |           |      |   |        |  
|Basic and diluted                                                  |  | As reported |      | $                  | (0.05  | ) |           | $ | (3.39   | )         |      | $ | (0.77  | )
|                                                                   |  | Pro forma   |      | $                  | (0.09  | ) |           | $ | (3.44   | )         |      | $ | (0.79  | )
|Weighted average fair value of options granted
    during the year |  | $           | 1.78 |                    |        | $ | 0.90      |   |         | $         | 3.54 |  
|                                                                   |  |             |      |                    |        |   |           |   |        

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

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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)


weighted average assumptions for fiscal 2004,
2003 and 2002, respectively: no dividend yield; expected
volatility of 52.1, 56.4 and 35.5 percent; risk free
interest rate of 3.4, 3.2 and 4.3; and expected holding periods
of 4.0 years for fiscal 2004, 2003 and 2002.

l.  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:

|                                         |  |                                               |        |  |                |  |       |                |  |  |       | 
|---------------------------------------- |  | --------------------------------------------- | ------ |  | -------------- |  | ----- | -------------- |  |  | ----- | 
|                                         |  |                                              
|                                         |  | Calculation of Incremental Shares Outstanding |       
|                                         |  |                                               |       
|                                         |  | April 2, 2004                                 |        |  | March 28, 2003 |  |       | March 29, 2002 | 
|                                         |  |                                               |        |  |                |  |       |                | 
|Basic shares (based on weighted average) |  |                                               | 17,820 |  |                |  | 5,362 |                |  |  | 5,234 | 
|Stock options                            |  |                                               |       |  |                |  |      |                |  |  |      | 
|                                         |  |                                               |        |  |                |  |       |                | 
|Diluted shares                           |  |                                               | 17,820 |  |                |  | 5,362 |                |  |  | 5,234 | 
|                                         |  |                                               |        |  |                |  |       |                | 

Incremental shares from assumed conversion of
options of 1,923,936, 646,903 and 605,251 in fiscal 2004, 2003
and 2002, respectively, have been excluded from shares used in
computing diluted earnings (loss) per share as the effect
would be anti-dilutive.

m. 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, including
record keeping requirements, 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 centers, the
Company receives revenue in advance of services being rendered,
in which case, revenue is deferred until the services have been
provided. Franchise fees are recognized as revenue at the time
the franchise center opens. Royalty income related to franchise
operations is recognized as revenue is earned by franchisees.

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

o. 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 $2.6 million,
$1.5 million and $1.2 million during fiscal 2004, 2003
and 2002, respectively.

p. 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.

q. 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.

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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)

r.  Reclassifications:Certain
amounts for the fiscal years ended March 28, 2003 and
March 29, 2002 have been reclassified to conform to the
presentation adopted in fiscal 2004.

s.  Segment Reporting:The
Company has three reportable segments: Childtime, Tutor Time and
Franchise Operations. Childtime operates child care centers
primarily under the Childtime Learning Centers brand name, Tutor
Time operates child care centers under the Tutor Time brand name
and Franchise Operations licenses and provides developmental and
administrative support to franchises operating under the Tutor
Time brand name. The accounting polices of the segments are the
same as those described in the summary of significant accounting
policies. The Companys reportable segments are reported
separately because the Companys chief operating decision
maker uses the segment information in determining the allocation
of resources among segments and appraising the performance of
the segments. (See Note 16)

t.  New Accounting
Pronouncements:

During May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.SFAS 150
clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that
those instruments be classified as liabilities in statements of
financial position. Previously, many of those financial
instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The
Companys adoption of SFAS 150 has not had a
significant impact on its operating results or financial
position.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin
(ARB) 51. FIN 46 addresses the consolidation of
entities for which control is achieved through means other than
through voting rights (variable interest entities or
VIE) by clarifying the application of ARB
No. 51, Consolidated Financial Statements,to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 provides guidance on how to determine
when and which business enterprise (the primary
beneficiary) should consolidate the VIE. In addition, FIN
46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make
additional disclosures. On December 23, 2003, the FASB
issued FIN 46R, which replaced FIN 46. Among other things, FIN
46R clarified and changed the definition and application of a
number of provisions of FIN 46 including de facto agents,
variable interests and variable interest entity
(VIE). FIN 46R also expanded instances when FIN 46
should not be applied. FIN 46R is effective for the
Companys reporting period ended April 2, 2004 (see
Note 19).

3. Acquisition and Pro Forma
Information:

On July 19, 2002, the Company acquired
substantially all of the assets of Tutor Time Learning Systems,
Inc., a Florida corporation (Tutor Time), for an
aggregate purchase price of approximately $22.8 million,
including acquisition costs, plus the assumption of certain
liabilities. In consideration for providing investment advisory
services with respect to the acquisition, Jacobson Partners was
paid an advisory fee consisting of a cash payment of $333,336
and the issuance of 175,438 shares of common stock. These costs
have been capitalized as part of the acquisition costs. Jacobson
Partners is the management and financial consultant to the
Company of which Benjamin R. Jacobson, the Companys
Chairman of the Board is the managing general partner, James J.
Morgan, the Companys former Chairman of the Board and
interim Chief Executive Officer, is a partner and Paula L.
Gavin, a director of the Company is a partner. George A.
Kellner, a former Chairman and Vice Chairman of the Board of
Directors, is a special advisor to Jacobson Partners.

F-10



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



3. Acquisition and Pro Forma
Information  (Continued)


The Tutor Time acquisition was financed, in part,
by Bank One, NA through its secured revolving line of credit
with the Company. Subordinated loans (the Subordinated
Notes) in the aggregate amount of $14 million were
provided by a group of lenders organized by Jacobson Partners to
fund the balance of the Tutor Time acquisition purchase price
and to provide related working capital. (See Note 5) Although
Jacobson Partners received no consideration for arranging this
financing, lenders included JP Acquisition Fund II, L.P. and JP
Acquisition Fund III, L.P., entities controlled and managed by
affiliates of Jacobson Partners (for an aggregate of
$10,497,154), and three directors of the Company at the time of
the loans (Mr. Jacobson, Mr. Morgan and
Mr. Kellner) and trusts for the benefit of their children
(for an aggregate of $545,132).

In connection with the Tutor Time acquisition, JP
Acquisition Fund II, L.P., JP Acquisition Fund III, L.P., and
certain of their co-investors (collectively, the
Optionees), including Messrs. Jacobson, Morgan
and Kellner, agreed to arrange for the Company to obtain a
standby purchase commitment in connection with the
Companys Rights Offering. As consideration for obtaining
such commitment, a Special Committee of the Board of Directors
approved the grant to the Optionees of options to purchase, in
the aggregate, up to 400,000 shares of common stock, until
July 19, 2006, at an exercise price of $5.00 per share.

Pro forma unaudited information for the Company
and Tutor Time follows (in thousands, except per share data):

|                 |                                                                                                                     |                    |         |         |           |   |         |         |  
|---------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------- | --------- | - | ------- | ------- | -
|                 |                                                                                                                     |                   
|                 |                                                                                                                     | Fiscal Years Ended |        
|                 |                                                                                                                     |                    |        
|                 |                                                                                                                     | March 28,          |         |         | March 29, |  
|                 |                                                                                                                     | 2003               |         |         | 2002      |  
|                 |                                                                                                                     |                    |         |         |           |  
|Revenue, net     |                                                                                                                     | $                  | 193,443 |         |           | $ | 191,452 |        
|Operating (loss) |                                                                                                                     |                    | (9,256  | )       |           |   | (18,331 | )      
|                 | (Loss) before income taxes, discontinued
    operations and cumulative effect of change in accounting
    principle |                    | $       | (12,559 | )         |   | $       | (25,823 | )
|                 | (Loss) before cumulative of change effect in
    accounting principle                                               |                    | $       | (12,950 | )         |   | $       | (21,641 | )
|                 | Net (loss)                                                                                                          |                    | $       | (17,917 | )         |   | $       | (21,641 | )
|                 | Net (loss) per share                                                                                                |                    | $       | (3.34   | )         |   | $       | (4.13   | )
|                 |                                                                                                                     |                    |         |         |           |  

The above pro forma information includes the
effect had the Company consolidated in prior years certain
variable interest entities as described in Note 19. In
connection with the Tutor Time Learning Systems, Inc. bankruptcy
proceedings, Tutor Time, at the request of the Company, was able
to reject numerous leases and franchise agreements. The
preceding pro forma information includes only the revenues and
costs from those Tutor Time centers and franchises that were not
rejected as part of the bankruptcy proceedings. No pro forma
adjustments were made to the historical Tutor Time corporate
overhead expenses ($2.0 million and $16.6 million for
the 52 weeks ended March 28, 2003 and March 29, 2002,
respectively), other than to include estimates related to
certain franchisees that were consolidated by the Company during
2004 in accordance with FIN 46. Additional interest expense was
included in the pro forma results based upon the additional debt
incurred to finance the Tutor Time acquisition.

F-11



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4. Other Current Assets and
Liabilities:

Other current assets and liabilities are composed
of the following:

|                                           |                                                                                                                                                                       |                |        |       |           |   |        |       | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------ | ----- | --------- | - | ------ | ----- | 
|                                           |                                                                                                                                                                       | April 2,       |        |       | March 28, |  
|                                           |                                                                                                                                                                       | 2004           |        |       | 2003      |  
|                                           |                                                                                                                                                                       |                |        |       |           |  
|                                           |                                                                                                                                                                       |               
|                                           |                                                                                                                                                                       | (In thousands) |       
|Prepaid expenses and other current assets: |                                                                                                                                                                       |                |        |       |           |   |        |      
|                                           | Prepaid rent                                                                                                                                                          |                | $      | 2,607 |           |   | $      | 38    | 
|                                           | Prepaid insurance                                                                                                                                                     |                |        | 1,144 |           |   |        | 317   | 
|                                           | Prepaid property taxes                                                                                                                                                |                |        | 809   |           |   |        | 760   | 
|                                           | Rights offering costs                                                                                                                                                 |                |        | 0     |           |   |        | 442   | 
|                                           | Other                                                                                                                                                                 |                |        | 875   |           |   |        | 214   | 
|                                           |                                                                                                                                                                       |                |        |       |           |  
|                                           |                                                                                                                                                                       | $              | 5,435  |       |           | $ | 1,771  |      
|                                           |                                                                                                                                                                       |                |        |       |           |  
|Other current liabilities:                 |                                                                                                                                                                       |                |        |       |           |   |        |      
|                                           | Unearned revenue                                                                                                                                                      |                | $      | 2,731 |           |   | $      | 2,172 | 
|                                           | Accrued Rent                                                                                                                                                          |                |        | 367   |           |   |        | 113   | 
|                                           | Accrued property taxes                                                                                                                                                |                |        | 796   |           |   |        | 803   | 
|                                           | Ad fund                                                                                                                                                               |                |        | 636   |           |   |        | 471   | 
|                                           | Deposits                                                                                                                                                              |                |        | 412   |           |   |        | 1,037 | 
|                                           | Accrued interest on subordinated notes                                                                                                                                |                |        |      |           |   |        | 1,048 | 
|                                           | Franchise obligations                                                                                                                                                 |                |        | 605   |           |   |        | 972   | 
|                                           | Accrued workers compensation expenses (net
    of $928 and $602 of advance deposits held by insurance company
    at April 2, 2004 and March 28, 2003, respectively) |                |        | 1,542 |           |   |        | 2,743 | 
|                                           | Accrued utilities                                                                                                                                                     |                |        | 319   |           |   |        | 321   | 
|                                           | Other                                                                                                                                                                 |                |        | 2,608 |           |   |        | 2,430 | 
|                                           |                                                                                                                                                                       |                |        |       |           |  
|                                           |                                                                                                                                                                       | $              | 10,016 |       |           | $ | 12,110 |      
|                                           |                                                                                                                                                                       |                |        |       |           |  

F-12



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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:

|                                                                                                                                                                                                                                                                                                                                       |  |                |        |  |           |   |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ |  | --------- | - | ------ | 
|                                                                                                                                                                                                                                                                                                                                       |  | April 2,       |        |  | March 28, |  
|                                                                                                                                                                                                                                                                                                                                       |  | 2004           |        |  | 2003      |  
|                                                                                                                                                                                                                                                                                                                                       |  |                |        |  |           |  
|                                                                                                                                                                                                                                                                                                                                       |  |               
|                                                                                                                                                                                                                                                                                                                                       |  | (In thousands) |       
|Revolving line of credit, due June 2005 interest
    at prime plus 0.75% (4.75%) at April 2, 2004 and prime plus
    1.5% (5.75%) at March 28, 2003 and Eurodollar plus 3.50%
    (4.60%) at April 2, 2004 and Eurodollar plus 3.75% (5.16%)
    at March 28, 2003                                                                     |  | $              | 5,378  |  |           | $ | 12,951 | 
|Subordinated Debt to Jacobson Partners Group with
    interest at 15%, of which 7% was payable in cash, refinanced
    with the proceeds from the rights offering                                                                                                                                                                      |  |                |       |  |           |   | 14,513 | 
|Subordinated Debt with a maturity of May 15,
    2008, interest at 15% payable quarterly and principal due upon
    maturity                                                                                                                                                                                                           |  |                | 3,500  |  |           |   |       | 
|Note payable (collateralized by a letter of
    credit) to a corporation resulting from an acquisition, interest
    at prime (4.00% and 4.25% at April 2, 2004 and
    March 28, 2003, respectively), quarterly principal payments
    of $100,000 plus interest, remaining balance payable January 2005                              |  |                | 400    |  |           |   | 700    | 
|Notes payable (non-collateralized) to
    corporations resulting from an acquisition, interest at prime
    (4.00% and 4.25% at April 2, 2004 and March 28, 2003,
    respectively), principal and interest due in full April 2004                                                                                                     |  |                | 2,100  |  |           |   | 2,016  | 
|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 |  |                | 347    |  |           |   | 731    | 
|                                                                                                                                                                                                                                                                                                                                       |  |                |        |  |           |  
|                                                                                                                                                                                                                                                                                                                                       |  |                | 11,725 |  |           |   | 30,911 | 
|Less current maturities of long-term debt                                                                                                                                                                                                                                                                                              |  |                | 3,328  |  |           |   | 1,280  | 
|                                                                                                                                                                                                                                                                                                                                       |  |                |        |  |           |  
|                                                                                                                                                                                                                                                                                                                                       |  | $              | 8,397  |  |           | $ | 29,631 | 
|                                                                                                                                                                                                                                                                                                                                       |  |                |        |  |           |  

At April 2, 2004, aggregate principal
payments due on long-term debt over the next five fiscal years
and thereafter are as follows:

|           |       |                |       |        | 
|---------- | ----- | -------------- | ----- | ------ | 
|           |       | (In thousands) |      
|2005       |       | $              | 3,328 |       
|2006       |       |                | 4,777 |       
|2007       |       |                | 77    |       
|2008       |       |                | 3,543 |       
|2009       |       |                |      |       
|Thereafter |       |                |      |       
|           |       |                |      
|           | Total |                | $     | 11,725 | 
|           |       |                |      

On May 16, 2003, the Company completed a
Rights Offering under which it issued 100,000 units at $158.52
per unit. Total proceeds from the offering were
$15.9 million, of which $12.4 million was for the
issuance of 14.1 million shares of common stock and
$3.5 million, of which $2.7 million were acquired by
the Jacobson Partners group was new subordinated notes
(New Subordinated Notes). The proceeds of the
offering were used to pay off the balance, which included
accrued interest, on the Subordinated Notes. The New
Subordinated Notes bear interest at 15%, payable quarterly, and
are due May 15, 2008. Subject to the applicable
subordination provisions, these New Subordinated Notes may be
redeemed, at the option of the Company, at any time and must be
redeemed following the occurrence of a change of
control. In either

F-13



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



5. Financing Arrangements 
(Continued)


case, the redemption price is 100% of the
principal balance of the Notes, plus accrued and unpaid interest
on such principal balance to the date of redemption.

On January 31, 2002, the Company entered
into an Amended and Restated Credit Agreement. This agreement,
as further amended, provides a $13.7 million revolving line
of credit that will mature on June 30, 2005. It is
collateralized by the Companys receivables, equipment and
real estate, with interest payable at a variable rate, at the
Companys option, based on either the prime rate or the
Eurodollar rate. There were outstanding borrowings of
$5.4 million at April 2, 2004, and outstanding
borrowings of $13.0 million at March 28, 2003.
Outstanding letters of credit reduced the availability under the
line of credit in the amount of $2.1 million at
April 2, 2004, and $2.5 million at March 28, 2003. As
of April 2, 2004, unused amounts available for borrowing
under this line of credit were $6.2 million.

Under this agreement, the Company is required to
maintain certain financial ratios and other financial
conditions. In addition, there are restrictions on the
incurrence of additional indebtedness, disposition of assets and
transactions with affiliates. During the second quarter of
fiscal 2004, the Company had not maintained minimum consolidated
EBITDA levels. The Companys lender provided waivers for
this non-compliance. The Amended and Restated Credit Agreement
was further amended and the Company was in compliance with the
agreement as of April 2, 2004.

6. Income Taxes:

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

|          |                 |                |    |    |           |   |        |           |   |   |        |        |  
|--------- | --------------- | -------------- | -- | -- | --------- | - | ------ | --------- | - | - | ------ | ------ | -
|          |                 | April 2,       |    |    | March 28, |   |        | March 29, |  
|          |                 | 2004           |    |    | 2003      |   |        | 2002      |  
|          |                 |                |    |    |           |   |        |           |  
|          |                 |               
|          |                 | (In thousands) |   
|Current:  |                 |                |    |    |           |   |        |           |   |   |        |       
|          | Federal         |                | $  |   |           |   | $      | (2,543    | ) |   | $      | (1,645 | )
|          | State and local |                |    | 93 |           |   |        | (28       | ) |   |        | (117   | )
|          |                 |                |    |    |           |   |        |           |  
|          |                 |                | 93 |    |           |   | (2,571 | )         |   |   | (1,762 | )     
|          |                 |                |    |    |           |   |        |           |  
|Deferred: |                 |                |    |    |           |   |        |           |   |   |        |       
|          | Federal         |                |    |   |           |   |        | 2,438     |   |   |        | (458   | )
|          | State and local |                |    |   |           |   |        | (95       | ) |   |        | (50    | )
|          |                 |                |    |    |           |   |        |           |  
|          |                 |                |   |    |           |   | 2,343  |           |   |   | (508   | )     
|          |                 |                |    |    |           |   |        |           |  
|          |                 | $              | 93 |    |           | $ | (228   | )         |   | $ | (2,270 | )     
|          |                 |                |    |    |           |   |        |           |  

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:

|                                                                  |  |                |      |   |           |   |        |           |  |   |        |  
|----------------------------------------------------------------- |  | -------------- | ---- | - | --------- | - | ------ | --------- |  | - | ------ | -
|                                                                  |  | April 2,       |      |   | March 28, |   |        | March 29, | 
|                                                                  |  | 2004           |      |   | 2003      |   |        | 2002      | 
|                                                                  |  |                |      |   |           |   |        |           | 
|                                                                  |  |               
|                                                                  |  | (In thousands) |     
|Income tax provision (benefit) at the statutory
    federal level |  | $              | (299 | ) |           | $ | (6,192 | )         |  | $ | (2,182 | )
|State and local taxes, net of federal tax benefit                 |  |                | 93   |   |           |   | (81    | )         |  |   | (110   | )
|Valuation allowance                                               |  |                | 316  |   |           |   | 5,124  |           |  |   |       |  
|Other                                                             |  |                | (17  | ) |           |   | 921    |           |  |   | 22     |  
|                                                                  |  |                |      |   |           |   |        |           | 
|                                                                  |  | $              | 93   |   |           | $ | (228   | )         |  | $ | (2,270 | )
|                                                                  |  |                |      |   |           |   |        |           | 

F-14



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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:

|                               |                                                |                                    |        |       |           |  |        |       |   | 
|------------------------------ | ---------------------------------------------- | ---------------------------------- | ------ | ----- | --------- |  | ------ | ----- | - | 
|                               |                                                | April 2,                           |        |       | March 28, | 
|                               |                                                | 2004                               |        |       | 2003      | 
|                               |                                                |                                    |        |       |           | 
|                               |                                                |                                   
|                               |                                                | (In thousands)                     |       
|Deferred tax asset:            |                                                |                                    |        |       |           |  |        |      
|                               | Allowance for doubtful accounts                |                                    | $      | 731   |           |  | $      | 462   |  
|                               | Vested and non-vested vacation balance         |                                    |        | 556   |           |  |        | 583   |  
|                               | Workers compensation accrual                   |                                    |        | 940   |           |  |        | 1,372 |  
|                               | Section 197 amortization                       |                                    |        |      |           |  |        | 4,351 |  
|                               | Gain on sale-leaseback                         |                                    |        | 2,183 |           |  |        |      |  
|                               | Capital loss carryforwards                     |                                    |        |      |           |  |        | 177   |  
|                               | NOL carryforward                               |                                    |        | 294   |           |  |        | 1,005 |  
|                               | Provision for restructuring charges            |                                    |        | 164   |           |  |        | 457   |  
|                               | Straight-line rent                             |                                    |        | 1,008 |           |  |        | 568   |  
|                               | Deferred registration fees                     |                                    |        | 319   |           |  |        | 273   |  
|                               | All other                                      |                                    |        | 118   |           |  |        | 59    |  
|                               |                                                |                                    |        |       |           | 
|                               |                                                |                                    | 9,788  |       |           |  | 9,307  |      
|                               |                                                |                                    |        |       |           | 
|Deferred tax liability:        |                                                |                                    |        |       |           |  |        |      
|                               | Basis and depreciation differences of property |                                    |        | 2,844 |           |  |        | 2,703 |  
|                               |                                                |                                    |        |       |           | 
|Deferred tax asset (liability) |                                                |                                    | 6,944  |       |           |  | 6,604  |      
|Valuation allowance            |                                                |                                    | (6,944 | )     |           |  | (6,604 | )    
|                               |                                                |                                    |        |       |           | 
|                               |                                                | Net deferred tax asset (liability) |        | $     |          |  |        | $     |  | 
|                               |                                                |                                    |        |       |           | 

Due to continued losses and uncertainties, the
Company has determined that it is more likely than not that the
deferred tax assets will not be recovered through future taxable
income. As a result, a valuation reserve has been provided
reducing deferred tax assets to an amount recoverable through
the reversal of deferred tax liabilities or through carryback to
prior tax years.

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 April 2, 2004, March 28, 2003 and
March 29, 2002 was $31.3 million, $29.3 million
and $22.0 million, respectively. These amounts included
contingent rental expense of $0.8, $0.5 million and
$0.3 million for the years ended April 2, 2004,
March 28, 2003 and March 29, 2002, respectively.

During 2004, the Company sold 13 centers for
approximately $10.1 million to individual real estate
investors and then leased these centers back. These sales have
been accounted for as financing transactions and no gain or loss
was recorded for any of these sales. The Company will continue
to operate the centers that were sold in these transactions.

F-15



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7. Leases 
(Continued)

Future minimum rental commitments at
April 2, 2004 for all non-cancelable sale leaseback
obligations and operating leases are as follows:

|                                                                 |       |                |        |                  |             |   |         |              |  |   |       |       | 
|---------------------------------------------------------------- | ----- | -------------- | ------ | ---------------- | ----------- | - | ------- | ------------ |  | - | ----- | ----- | 
|                                                                 |       |                |        |                 
|                                                                 |       |                |        | Operating Leases |            
|                                                                 |       |                |        |                  |            
|                                                                 |       | Sale Leaseback |        |                  | Total      |   |         | Closed       | 
|                                                                 |       | Obligations    |        |                  | All Centers |   |         | Centers Only | 
|                                                                 |       |                |        |                  |             |   |         |              | 
|                                                                 |       |               
|                                                                 |       | (In thousands) |       
|Fiscal Year:                                                     |       |                |        |                  |             |   |         |              |  |   |       |      
|2005                                                             |       | $              | 996    |                  |             | $ | 31,148  |              |  | $ | 953   |      
|2006                                                             |       |                | 1,024  |                  |             |   | 29,865  |              |  |   | 842   |      
|2007                                                             |       |                | 1,004  |                  |             |   | 27,485  |              |  |   | 688   |      
|2008                                                             |       |                | 1,024  |                  |             |   | 24,895  |              |  |   | 534   |      
|2009                                                             |       |                | 1,040  |                  |             |   | 22,690  |              |  |   | 409   |      
|Thereafter                                                       |       |                | 19,382 |                  |             |   | 147,368 |              |  |   | 2,267 |      
|                                                                 |       |                |        |                  |             |   |         |              | 
|                                                                 | Total |                |        | 24,470           |             |   | $       | 283,451      |  |   | $     | 5,693 | 
|                                                                 |       |                |        |                  |             |   |         |              | 
|Less amounts representing interest                               |       |                | 14,313 |                  |             |   |         |              |  |   |       |      
|                                                                 |       |                |        |                  |             |   |         |              | 
|Present value of sale leaseback obligations at
    April 2, 2004 |       |                | 10,157 |                  |             |   |         |              |  |   |       |      
|Less current portion of sale leaseback obligations               |       |                | 19     |                  |             |   |         |              |  |   |       |      
|                                                                 |       |                |        |                  |             |   |         |              | 
|Long term portion of sale leaseback obligations                  |       | $              | 10,138 |                  |             |   |         |              |  |   |       |      
|                                                                 |       |                |        |                  |             |   |         |              | 

The Closed Centers Only column in the
table above represents the minimum lease payments in total for
all closed centers. The Company has accrued as of April 2,
2004, $0.4 million in exit and closure expenses related to
these lease payments. The Company is primarily liable on
approximately $0.8 million (included in the
$5.7 million closed centers total) for lease assignments
already negotiated in connection with certain lease terminations
resulting from the fiscal 2001 restructuring program. The
Company expects to assign the remaining amounts to a third party
or negotiate reductions with the landlord (see Note 13).

The net book value of property and building
improvements recorded under sale leaseback transactions were as
follows:

|                                                                              |  |                |        |  
|----------------------------------------------------------------------------- |  | -------------- | ------ | -
|                                                                              |  | April 2, 2004  |       
|                                                                              |  |                |       
|                                                                              |  | (In thousands) |       
|Land and Land Improvements under sale leaseback
    obligations               |  | $              | 3,784  |  
|Building and Building Improvements under sale
    leaseback obligations       |  |                | 5,944  |  
|                                                                              |  |                |       
|                                                                              |  |                | 9,728  |  
|Accumulated Depreciation                                                      |  |                | (1,850 | )
|                                                                              |  |                |       
|Net book value of property and equipment under
    sale leaseback obligations |  | $              | 7,878  |  
|                                                                              |  |                |       

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 a portion of employee
contributions up to a maximum Company contribution of one
percent of compensation. Employees may contribute up to
15 percent of compensation to the Plan. Amounts expensed
for the years ended April 2, 2004, March 28, 2003 and
March 29, 2002, were $129,000, $116,000 and $104,000,
respectively.

F-16



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

In July 2000, the Company retained Jacobson
Partners, of which Benjamin R. Jacobson, the Companys
Chairman of the Board, 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 granted stock options
to purchase 557,275 shares. Jacobson Partners has exercised
options totaling 294,117 shares at a cost of $2,500,000. The
remaining 263,158 shares expired 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. In
connection with the Tutor Time acquisition, Jacobson Partners
was paid an advisory fee consisting of $333,336 and the issuance
of 175,438 shares, and options were granted to certain related
parties to acquire up to 400,000 shares of the Companys
common stock (see Note 3). Total expenses incurred for Jacobson
Partners (exclusive of the Tutor Time fee) were $400,000,
$250,000 and $261,255 for fiscal 2004, 2003 and 2002,
respectively, and are included in general and administrative
expense in the accompanying Consolidated Statement of Operations.

The Companys former Chairman of the Board
and 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. 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.

The former 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.

10. Commitments and
Contingencies:

A subsidiary of the Company is primarily or
contingently liable for many of the leases of Tutor Times
franchisees. In an effort to build its franchisee network, Tutor
Time either leased the prospective site for a franchisee, with a
subsequent sublease of the site to the franchisee, or provided a
lease guarantee to the landlord for the benefit of the
franchisee in exchange for a monthly lease guarantee fee payable
by the franchisee that is based upon the monthly rent expense of
the guaranteed lease. The payments the Company could be required
to pay related to leases and guarantees aggregates
$89.4 million and $20.5 million, respectively, in case
of default by the franchisee. Should the Company be required to
make payments under these leases, it may assume obligations for
operating the center. Should the center not be economically
viable, the Company will make provision for the lease
termination at that time. The Company has taken over operations
for a center previously operated by a franchisee as a result of
a default under the franchisees lease and intends to
continue to operate this center. Additionally, the Company has
been notified by the landlords of five locations that the
franchisee is in default and the approximate liability for these
defaults is $0.3 million. Other than with respect to the
foregoing locations, the Company does not anticipate that it
will be required to make payments under any of these leases or
guarantees, does not believe that any payments are likely and
has not recorded any related liability.

Various legal actions and other claims are
pending or could be asserted against the Company including
pending claims relating to exposure to mold and other
contaminants resulting from the condition of one of the
Companys centers. In addition, the Company has and will
continue to vigorously protect its rights against parties that
violate franchise agreements or infringe on its intellectual
property rights. 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

F-17



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10. Commitments and
Contingencies  (Continued)


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 beyond amounts already accrued.

11. Accounts Receivable:

Accounts receivable is presented net of an
allowance for doubtful accounts. At April 2, 2004 and
March 28, 2003, the allowance for doubtful accounts was
$2.0 million and $2.7 million, respectively.

12. Drafts Payable:

Drafts payable represent unfunded checks drawn on
zero balance accounts that have not been presented for funding
to the Companys banks. The drafts are funded, without
finance charges, as soon as they are presented. At April 2,
2004 and March 28, 2003, the aggregate drafts payable were
$4.5 million and $3.2 million, respectively.

13. Exit and Closure Expenses:

The Company has made provisions for closed center
lease obligations and discontinued operations in connection with
the closing of under performing centers. For the fiscal years
ended April 2, 2004 and March 28, 2003, the Company
recorded exit and closure expenses of $0.7 million and
$1.4 million, respectively. A summary of the accrual is as
follows (in thousands):

Exit and Closure Expenses and Discontinued
operations Accrual Analysis

|                                          |       |                |     |       |          |   |      |          |        |         |               |       |  |   |     |     | 
|----------------------------------------- | ----- | -------------- | --- | ----- | -------- | - | ---- | -------- | ------ | ------- | ------------- | ----- |  | - | --- | --- | 
|                                          |       | Beginning      |     |       |          |   |      |          | Ending |        
|                                          |       | Accrual        |     |       |          |   | Cash |          |        | Accrual |              
|                                          |       | March 28, 2003 |     |       | Expenses |   |      | Payments |        |         | April 2, 2004 |      
|                                          |       |                |     |       |          |   |      |          |        |         |               |      
|Closed center lease obligations           |       | $              | 951 |       |          | $ | 251  |          |        | $       | 961           |       |  | $ | 241 |    
|Discontinued operations lease obligations |       |                | 319 |       |          |   | 468  |          |        |         | 580           |       |  |   | 207 |    
|                                          |       |                |     |       |          |   |      |          |        |         |               |      
|                                          | Total |                | $   | 1,270 |          |   | $    | 719      |        |         | $             | 1,541 |  |   | $   | 448 | 
|                                          |       |                |     |       |          |   |      |          |        |         |               |      

|                                      |       |                |     |     |          |   |       |          |        |         |                |     |  |   |     |       | 
|------------------------------------- | ----- | -------------- | --- | --- | -------- | - | ----- | -------- | ------ | ------- | -------------- | --- |  | - | --- | ----- | 
|                                      |       | Beginning      |     |     |          |   |       |          | Ending |        
|                                      |       | Accrual        |     |     |          |   | Cash  |          |        | Accrual |               
|                                      |       | March 29, 2002 |     |     | Expenses |   |       | Payments |        |         | March 28, 2003 |    
|                                      |       |                |     |     |          |   |       |          |        |         |                |    
|Continuing operations:                |       |                |     |     |          |   |       |          |        |         |                |     |  |   |     |      
|Lease costs                           |       | $              | 755 |     |          | $ | 1,051 |          |        | $       | 855            |     |  | $ | 951 |      
|Severance costs                       |       |                | 74  |     |          |   | (20   | )        |        |         | 54             |     |  |   |    |      
|                                      |       |                |     |     |          |   |       |          |        |         |                |    
|Continuing operations total           |       |                | 829 |     |          |   | 1,031 |          |        |         | 909            |     |  |   | 951 |      
|Discontinued operations  lease costs |       |                |    |     |          |   | 386   |          |        |         | 67             |     |  |   | 319 |      
|                                      |       |                |     |     |          |   |       |          |        |         |                |    
|                                      | Total |                | $   | 829 |          |   | $     | 1,417    |        |         | $              | 976 |  |   | $   | 1,270 | 
|                                      |       |                |     |     |          |   |       |          |        |         |                |    

The lease liability for the centers closed during
fiscal years ended April 2, 2004 and March 28, 2003
has been recorded at managements estimate of the amounts
of expected payments.

F-18



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14. Discontinued Operations:

The Consolidated Statements of Operations include
discontinued operations of five centers closed during fiscal
2004 and three centers closed during fiscal 2003. Prior year
amounts have been reclassified to reflect these changes. A
summary of discontinued operations was as follows, with dollars
in thousands:

|                                          |                                           |                    |       |      |           |   |       |           |   |   |       |     |  
|----------------------------------------- | ----------------------------------------- | ------------------ | ----- | ---- | --------- | - | ----- | --------- | - | - | ----- | --- | -
|                                          |                                           |                   
|                                          |                                           | Fiscal Years Ended |      
|                                          |                                           |                    |      
|                                          |                                           | April 2,           |       |      | March 28, |   |       | March 29, |  
|                                          |                                           | 2004               |       |      | 2003      |   |       | 2002      |  
|                                          |                                           |                    |       |      |           |   |       |           |  
|Revenues, net                             |                                           | $                  | 873   |      |           | $ | 2,386 |           |   | $ | 2,796 |    
|Operating expenses of Learning Centers    |                                           |                    | 1,109 |      |           |   | 2,490 |           |   |   | 2,734 |    
|                                          |                                           |                    |       |      |           |   |       |           |  
|Gross profit (loss)                       |                                           |                    | (236  | )    |           |   | (104  | )         |   |   | 62    |    
|Provision for doubtful accounts           |                                           |                    | 50    |      |           |   | 36    |           |   |   | 24    |    
|Depreciation and amortization expenses    |                                           |                    | 25    |      |           |   | 31    |           |   |   | 70    |    
|Exit and closure expenses                 |                                           |                    | 468   |      |           |   | 386   |           |   |   |      |    
|Intangible asset impairment charges       |                                           |                    |      |      |           |   | 10    |           |   |   |      |    
|Long lived fixed asset impairment charges |                                           |                    |      |      |           |   | 63    |           |   |   |      |    
|                                          |                                           |                    |       |      |           |   |       |           |  
|                                          | Discontinued operations before income tax |                    |       | (779 | )         |   |       | (630      | ) |   |       | (32 | )
|Income tax provision (benefit)            |                                           |                    |      |      |           |   | (12   | )         |   |   | (12   | )  
|                                          |                                           |                    |       |      |           |   |       |           |  
|                                          | Discontinued operations, net of tax       |                    | $     | (779 | )         |   | $     | (618      | ) |   | $     | (20 | )
|                                          |                                           |                    |       |      |           |   |       |           |  

15. Intangible Assets and Long-lived
Impairment:

During the second quarter of fiscal 2003, the
Company completed the implementation of SFAS 142, Goodwill
and Other Intangible Assets. Under SFAS 142, goodwill is no
longer amortized. Instead, goodwill and indefinite-lived
intangible assets are tested for impairment in accordance with
the provisions of SFAS 142. In accordance with its impairment
policy, the Company employed a discounted cash flow analysis in
conducting its impairment tests as of the beginning of fiscal
2003. The Company completed its impairment test and recorded an
impairment loss of $5.0 million (net of a tax benefit of
$0.9 million) as a cumulative effect of a change in
accounting principle. In addition, as a result of continuing
weakening economic conditions, the Company tested for goodwill
impairment as of October 11, 2002, and recorded an
impairment loss during the second quarter of $4.2 million.

In accordance with SFAS 142, the Company also
employed a discounted cash flow analysis in conducting its
impairment tests of goodwill and indefinitely-lived assets
impairment at the end of fiscal 2003 and 2004, and found that no
further impairment was indicated. The Company will continue to
perform such tests in the future and will record an impairment
should one be indicated.

In accordance with the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets, the
Company did not amortize goodwill for the fiscal years ended
April 2, 2004 and March 28, 2003. If goodwill
amortization had not been recorded for the prior period, net
income (loss) and earnings (loss) per share as shown
above would have been as follows:

|     |  |               |      |   |                 |   |       |  
|---- |  | ------------- | ---- | - | --------------- | - | ----- | -
|     |  | Net Income    |      |   | Earnings (Loss) |  
|     |  | (Loss)        |      |   | Per Share       |  
|     |  |               |      |   |                 |  
|     |  | (In millions) |      |   |                
|2002 |  | $             | (2.9 | ) |                 | $ | (0.55 | )

F-19



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



15. Intangible Assets and Long-lived
Impairment  (Continued)


The changes in the carrying amounts of goodwill
and other intangible assets for the fiscal years ended
April 2, 2004 and March 28, 2003 were as follows (in
thousands):

|                          |                              |         |        |        |           |         |            |   |              |   |         |        |  |   |             |     |  |   |        |        |  |  |            |  | 
|------------------------- | ---------------------------- | ------- | ------ | ------ | --------- | ------- | ---------- | - | ------------ | - | ------- | ------ |  | - | ----------- | --- |  | - | ------ | ------ |  |  | ---------- |  | 
|                          |                              |         |        |        |           | Pre-Tax |            |   |              |   |         |       
|                          |                              | Balance |        |        |           |         | Impairment |   |              |   | Balance |        |  |  
|                          |                              | 3/28/03 |        |        | Additions |         | Loss       |   | Amortization |   |         | 4/2/04 |  |   | Useful Life |    
|                          |                              |         |        |        |           |         |            |   |              |   |         |        |  |   |             |    
|Goodwill                  |                              | $       | 17,866 |        |           | $       |           |   |              | $ |        |        |  | $ |            |     |  | $ | 17,866 |        |  |  | Indefinite | 
|Franchise Agreements      |                              |         | 8,775  |        |           |         |           |   |              |   |        |        |  |   | 455         |     |  |   | 8,320  |        |  |  | 20         | 
|Trade Name and Trademarks |                              |         | 3,770  |        |           |         |           |   |              |   |        |        |  |   | 196         |     |  |   | 3,574  |        |  |  | 20         | 
|Curriculum                |                              |         | 396    |        |           |         |           |   |              |   |        |        |  |   | 92          |     |  |   | 304    |        |  |  | 5          | 
|Covenants                 |                              |         | 5      |        |           |         |           |   |              |   |        |        |  |   | 5           |     |  |   |       |        |  |  | 5          | 
|                          |                              |         |        |        |           |         |            |   |              |   |         |        |  |   |             |     |  |  
|                          | Total intangible assets, net |         | $      | 30,812 |           |         | $          |  |              |   | $       |       |  |   | $           | 748 |  |   | $      | 30,064 |  |  |            |  | 
|                          |                              |         |        |        |           |         |            |   |              |   |         |        |  |   |             |     |  |  

|                          |                              |         |        |        |           |         |            |        |  |   |              |         |  |         |     |     |             |   |        |        |  |  |            |  | 
|------------------------- | ---------------------------- | ------- | ------ | ------ | --------- | ------- | ---------- | ------ |  | - | ------------ | ------- |  | ------- | --- | --- | ----------- | - | ------ | ------ |  |  | ---------- |  | 
|                          |                              |         |        |        |           | Pre-Tax |            |        |  |   |              |         | 
|                          |                              | Balance |        |        |           |         | Impairment |        |  |   |              | Balance |  |         |    
|                          |                              | 3/29/02 |        |        | Additions |         |            | Loss   |  |   | Amortization |         |  | 3/28/03 |     |     | Useful Life |  
|                          |                              |         |        |        |           |         |            |        |  |   |              |         |  |         |     |     |             |  
|Goodwill                  |                              | $       | 17,273 |        |           | $       | 10,651     |        |  | $ | 10,058       |         |  | $       |    |     |             | $ | 17,866 |        |  |  | Indefinite | 
|Franchise Agreements      |                              |         |       |        |           |         | 9,090      |        |  |   |             |         |  |         | 315 |     |             |   | 8,775  |        |  |  | 20         | 
|Trade Name and Trademarks |                              |         |       |        |           |         | 3,905      |        |  |   |             |         |  |         | 135 |     |             |   | 3,770  |        |  |  | 20         | 
|Curriculum                |                              |         |       |        |           |         | 460        |        |  |   |             |         |  |         | 64  |     |             |   | 396    |        |  |  | 5          | 
|Covenants                 |                              |         | 52     |        |           |         |           |        |  |   |             |         |  |         | 47  |     |             |   | 5      |        |  |  | 5          | 
|                          |                              |         |        |        |           |         |            |        |  |   |              |         |  |         |     |     |             |  
|                          | Total intangible assets, net |         | $      | 17,325 |           |         | $          | 24,106 |  |   | $            | 10,058  |  |         | $   | 561 |             |   | $      | 30,812 |  |  |            |  | 
|                          |                              |         |        |        |           |         |            |        |  |   |              |         |  |         |     |     |             |  

Estimated amortization of intangible assets is
expected to be approximately $0.7 million for each of the
next five years.

16. Segment Information:

The Company has three reportable segments:
Childtime, Tutor Time and Franchise Operations. Childtime
operates child care centers primarily under the Childtime
Learning Centers brand name, Tutor Time operates child care
centers under the Tutor Time brand name and Franchise Operations
licenses and provides developmental and administrative support
to franchises operating under the Tutor Time brand name. The
accounting polices of the segments are the same as those
described in the summary of significant accounting policies. The
Companys reportable segments are reported separately
because the Companys chief operating decision maker uses
the segment information in determining the allocation of
resources among segments and appraising the performance of the
segments.

F-20



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16. Segment Information 
(Continued)

Information about the Companys operating
segments are presented below in thousands:

|                         |                                                   |                    |   |         |           |  |   |           |         |   |   |         |         |  
|------------------------ | ------------------------------------------------- | ------------------ | - | ------- | --------- |  | - | --------- | ------- | - | - | ------- | ------- | -
|                         |                                                   |                   
|                         |                                                   | Fiscal Years Ended |  
|                         |                                                   |                    |  
|                         |                                                   | April 2,           |   |         | March 28, |  |   | March 29, |        
|                         |                                                   | 2004               |   |         | 2003      |  |   | 2002      |        
|                         |                                                   |                    |   |         |           |  |   |           |        
|Revenues:                |                                                   |                    |   |         |           |  |   |           |         |   |   |        
|                         | Childtime                                         |                    | $ | 143,856 |           |  | $ | 139,629   |         |   | $ | 139,602 |        
|                         | Tutor Time                                        |                    |   | 54,288  |           |  |   | 32,189    |         |   |   |        |        
|                         | Franchise                                         |                    |   | 6,715   |           |  |   | 3,763     |         |   |   |        |        
|                         | Revenue associated with the consolidation of VIEs |                    |   | 1,249   |           |  |   |          |         |   |   |        |        
|                         |                                                   |                    |   |         |           |  |   |           |        
|                         |                                                   | Total              |   | $       | 206,108   |  |   | $         | 175,581 |   |   | $       | 139,602 |  
|                         |                                                   |                    |   |         |           |  |   |           |        
|Operating income (loss): |                                                   |                    |   |         |           |  |   |           |         |   |   |        
|                         | Childtime                                         |                    | $ | 16,732  |           |  | $ | 15,444    |         |   | $ | 15,177  |        
|                         | Tutor Time                                        |                    |   | 1,761   |           |  |   | (804      | )       |   |   |        |        
|                         | Franchise                                         |                    |   | 6,715   |           |  |   | 3,763     |         |   |   |        |        
|                         | Depreciation and amortization                     |                    |   | (4,063  | )         |  |   | (3,509    | )       |   |   | (4,719  | )      
|                         | Corporate and other                               |                    |   | (19,161 | )         |  |   | (25,194   | )       |   |   | (16,447 | )      
|                         |                                                   |                    |   |         |           |  |   |           |        
|                         |                                                   | Total              |   | $       | 1,984     |  |   | $         | (10,300 | ) |   | $       | (5,989  | )
|                         |                                                   |                    |   |         |           |  |   |           |        
|Goodwill:                |                                                   |                    |   |         |           |  |   |           |         |   |   |        
|                         | Childtime                                         |                    | $ | 7,215   |           |  | $ | 7,215     |         |   | $ | 17,273  |        
|                         | Tutor Time                                        |                    |   | 5,578   |           |  |   | 5,578     |         |   |   |        |        
|                         | Franchise                                         |                    |   | 5,073   |           |  |   | 5,073     |         |   |   |        |        
|                         |                                                   |                    |   |         |           |  |   |           |        
|                         |                                                   | Total              |   | $       | 17,866    |  |   | $         | 17,866  |   |   | $       | 17,273  |  
|                         |                                                   |                    |   |         |           |  |   |           |        
|All other assets:        |                                                   |                    |   |         |           |  |   |           |         |   |   |        
|                         | Childtime                                         |                    | $ | 46,242  |           |  | $ | 45,760    |         |   | $ | 56,842  |        
|                         | Tutor Time                                        |                    |   | 11,240  |           |  |   | 9,909     |         |   |   |        |        
|                         | Franchise                                         |                    |   | 10,164  |           |  |   | 10,410    |         |   |   |        |        
|                         | Assets associated with the consolidation of VIEs  |                    |   | 107     |           |  |   |          |         |   |   |        |        
|                         |                                                   |                    |   |         |           |  |   |           |        
|                         |                                                   | Total              |   | $       | 67,753    |  |   | $         | 66,079  |   |   | $       | 56,842  |  
|                         |                                                   |                    |   |         |           |  |   |           |        

17. 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 Shareholders 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 2003 of 295,000 were
granted at or above the market price and vest evenly over a

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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



17. Stock
Options  (Continued)


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 15,000,
7,500 and 12,500 options were granted under the plan during
fiscal 2004, 2003 and 2002, respectively.

In July 2003, the Company adopted the Childtime
Learning Centers, Inc. 2003 Equity Compensation Plan (the
2003 Plan). The 2003 Plan become effective
July 30, 2003, upon its adoption at the Companys 2003
Annual Meeting of Shareholders. The aggregate number of shares
that may be issued pursuant to the 2003 Plan is 1,500,000
shares. The 2003 Plan permits the granting of the following
awards: (1) stock options, including both
nonqualified options (at an exercise price of at least 50% of
the market price on the date of grant) and incentive options (at
an exercise price of at least 100% of the market price on the
date of grant), which may be for any term set by the
Companys Compensation Committee, (2) stock
appreciation rights, which may be granted either in conjunction
with a stock option or as an independent right,
(3) restricted stock and restricted stock units,
(4) performance shares (with the performance goal being
established in writing no later than the earlier of 90 days
after the start of a performance period or expiration of the
first 25% of the performance period and being based on certain
business criteria, such as free cash flow, cash flow return on
investment, stock price, market price, sales, revenues, earnings
per share, return on equity, total shareholder return, costs,
net income, working capital, turnover, inventory or receivable
turnover and/or margins of the Company), and (5) other
awards which are denominated or payable in, valued by reference
to, or otherwise based on common stock, including rights to make
an outright purchase of unrestricted or restricted stock.

Presented below is a summary of the status of the
stock options held by employees of the Company as of
April 2, 2004, March 28, 2003, and March 29, 2002:

|                                           |  |               |           |          |                |   |      |                |          |  |          |   |  |          |       |  |       |  |          |   |  |   |       | 
|------------------------------------------ |  | ------------- | --------- | -------- | -------------- | - | ---- | -------------- | -------- |  | -------- | - |  | -------- | ----- |  | ----- |  | -------- | - |  | - | ----- | 
|                                           |  |               |           |          |                |  
|                                           |  | April 2, 2004 |           |          | March 28, 2003 |   |      | March 29, 2002 |         
|                                           |  |               |           |          |                |   |      |                |         
|                                           |  |               |           | Weighted |                |   |      |                | Weighted |  |          |   |  | Weighted |      
|                                           |  |               |           | Average  |                |   |      |                | Average  |  |          |   |  | Average  |      
|                                           |  |               |           | Exercise |                |   |      |                | Exercise |  |          |   |  | Exercise |      
|Options                                    |  | Shares        |           |          | Price          |   |      | Shares         |          |  | Price    |   |  | Shares   |       |  | Price | 
|                                           |  |               |           |          |                |   |      |                |          |  |          |   |  |          |       |  |       | 
|Options outstanding at beginning of period |  |               | 464,403   |          |                | $ | 5.59 |                |          |  | 350,084  |   |  | $        | 9.96  |  |       |  | 401,450  |   |  | $ | 10.43 | 
|Granted                                    |  |               | 1,301,100 |          |                |   | 1.71 |                |          |  | 295,000  |   |  |          | 3.45  |  |       |  | 633,000  |   |  |   | 10.46 | 
|Exercised                                  |  |               | (292,800  | )        |                |   | 1.44 |                |          |  |         |   |  |          |      |  |       |  |         |   |  |   |      | 
|Forfeited/expired                          |  |               | (148,767  | )        |                |   | 5.07 |                |          |  | (180,681 | ) |  |          | 9.71  |  |       |  | (684,366 | ) |  |   | 10.62 | 
|                                           |  |               |           |          |                |   |      |                |          |  |          |   |  |          |       |  |       | 
|Options outstanding at end of period       |  |               | 1,323,936 |          |                | $ | 2.75 |                |          |  | 464,403  |   |  | $        | 5.59  |  |       |  | 350,084  |   |  | $ | 9.96  | 
|                                           |  |               |           |          |                |   |      |                |          |  |          |   |  |          |       |  |       | 
|Options exercisable                        |  |               | 136,191   |          |                | $ | 6.83 |                |          |  | 138,570  |   |  | $        | 10.09 |  |       |  | 278,760  |   |  | $ | 11.06 | 
|                                           |  |               |           |          |                |   |      |                |          |  |          |   |  |          |       |  |       | 

Of the 1,323,936 employee options outstanding at
April 2, 2004, 1,238,100 were exercisable at per share
prices ranging from $0.90 to $3.50, with a weighted average
exercise price of $2.21 and a weighted average remaining
contractual life of 5.0 years; 50,470 were exercisable at
per share prices ranging from $6.75 to $7.97, with a weighted
average exercise price of $7.5 and a weighted average remaining
contractual life of 2.5 years; and 35,366 were exercisable
at a per share price of 11.81 to $16.88 with a weighted average
exercise price of $14.8 and a weighted average remaining
contractual life of 0.5 years.

F-22



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

18. Financial Instrument:

During fiscal 2003, the Company entered into
interest rate swap contracts to manage its exposure to
fluctuations in interest rates relating to the revolving line of
credit. Swap contracts fix the interest payments of floating
rate debt instruments. As of April 2, 2004 and
March 28, 2003, contracts representing $5.0 million of
notional amount were outstanding with maturity dates of November
2005 and January 2006. These contracts provide for the Company
to pay interest at an average fixed rate of 2.98% in return for
receiving interest at a floating rate of three month LIBOR,
which is reset in three month intervals. The fair value of
interest rate swap agreements is subject to changes in value due
to changes in interest rates, and the fair value of
$(0.1) million and $(0.1) million is included in other
current liabilities as of April 2, 2004 and March 28,
2003, respectively. During fiscal 2004, the Company recognized
no income or loss as a result of a change in the market value of
the outstanding interest rate contracts. During fiscal 2003, the
Company recognized $0.1 million loss as a result of the
change in the market value of the outstanding interest rate
contracts.

19. Consolidation of Variable Interest
Entities:

During the fourth quarter of 2004 the Company
implemented FIN 46. The Company has concluded that some of its
franchise arrangements represent variable interest entities
which are subject to the provisions of FIN 46. The
Companys variable interest in these entities include
royalty fees and in some cases leasing arrangements, lease
guarantees and debt due to the Company from the franchisee. The
Company has analyzed these franchise agreements and has
determined that two franchises are entities in which the
Company is the primary beneficiary. As a result, these entities
have been consolidated as of April 2, 2004. The following
is a summary of the effect of consolidating these entities in
2004.

|                                                                      |  |               |       | 
|--------------------------------------------------------------------- |  | ------------- | ----- | 
|                                                                      |  | Fiscal Year   |      
|                                                                      |  | Ended         |      
|                                                                      |  | April 2, 2004 |      
|                                                                      |  |               |      
|Revenue, net of elimination of fees of $41,000                        |  | $             | 1,208 | 
|Cost and minority interest, net of elimination of
    fees of $41,000 |  |               | 1,208 | 
|                                                                      |  |               |      
|Net income                                                            |  | $             |      | 
|                                                                      |  |               |      
|Total Assets                                                          |  | $             | 107   | 
|Total Liabilities                                                     |  |               | 74    | 
|                                                                      |  |               |      
|Minority interest                                                     |  | $             | 33    | 
|                                                                      |  |               |      

The Company has not restated prior periods for
the above consolidation and there was no cumulative effect on
the prior years related to the consolidation during fiscal 2004.
The pro forma effect of the consolidation had it been recorded
in prior years is included in Note 3.

20. Supplemental Cash Flow
Information:

|                                   |                                                                        |                    |   |        |                |  |   |                |   |  |   |     | 
|---------------------------------- | ---------------------------------------------------------------------- | ------------------ | - | ------ | -------------- |  | - | -------------- | - |  | - | --- | 
|                                   |                                                                        |                   
|                                   |                                                                        | Fiscal Years Ended |  
|                                   |                                                                        |                    |  
|                                   |                                                                        | April 2, 2004      |   |        | March 28, 2003 |  |   | March 29, 2002 |  
|                                   |                                                                        |                    |   |        |                |  |   |                |  
|                                   |                                                                        |                   
|                                   |                                                                        | (In thousands)     |  
|Cash payments during the year for: |                                                                        |                    |   |        |                |  |   |                |   |  |   |    
|                                   | Interest                                                               |                    | $ | 3,279  |                |  | $ | 715            |   |  | $ | 438 | 
|                                   | Income taxes                                                           |                    | $ | (1,742 | )              |  | $ | (2,357         | ) |  | $ | 821 | 
|                                   | Stock issued to Jacobson Partners for Tutor Time
    acquisition costs |                    | $ |       |                |  | $ | 482            |   |  | $ |    | 

In connection with the acquisition of certain
assets, the Company incurred debt of $0.0 million,
$14.0 million, $0.0 million in fiscal 2004, 2003 and
2002, respectively.

F-23



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

21. Quarterly Data (unaudited):

Quarterly financial data for fiscal 2004 and 2003
are summarized as follows in thousands except per share data:

Quarterly Data

|                             |  |                |        |  |                 |   |        |                  |  |   |                |   |  |   |        |  
|---------------------------- |  | -------------- | ------ |  | --------------- | - | ------ | ---------------- |  | - | -------------- | - |  | - | ------ | -
|                             |  |               
|                             |  | Fiscal 2004    |       
|                             |  |                |       
|                             |  | 13 Weeks Ended |        |  | 12 Weeks Ended  |   |        | 12 Weeks Ended   |  |   | 16 Weeks Ended |  
|                             |  | April 2, 2004  |        |  | January 2, 2004 |   |        | October 10, 2003 |  |   | July 18, 2003  |  
|                             |  |                |        |  |                 |   |        |                  |  |   |                |  
|Revenue(1)                   |  | $              | 52,930 |  |                 | $ | 45,067 |                  |  | $ | 45,217         |   |  | $ | 62,894 |  
|Gross profit                 |  | $              | 8,289  |  |                 | $ | 6,163  |                  |  | $ | 4,132          |   |  | $ | 7,982  |  
|Net income (loss)            |  | $              | 1,452  |  |                 | $ | (552   | )                |  | $ | (1,553         | ) |  | $ | (270   | )
|Earnings per share  Diluted |  | $              | 0.07   |  |                 | $ | (0.02  | )                |  | $ | (0.08          | ) |  | $ | (0.02  | )

|                                                                             |                                                                              |                |        |       |                 |   |        |                  |   |   |                |       |   |   |        |       |  
|---------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------- | ------ | ----- | --------------- | - | ------ | ---------------- | - | - | -------------- | ----- | - | - | ------ | ----- | -
|                                                                             |                                                                              |               
|                                                                             |                                                                              | Fiscal 2003    |       
|                                                                             |                                                                              |                |       
|                                                                             |                                                                              | 12 Weeks Ended |        |       | 12 Weeks Ended  |   |        | 12 Weeks Ended   |   |   | 16 Weeks Ended |      
|                                                                             |                                                                              | March 28, 2003 |        |       | January 3, 2003 |   |        | October 11, 2002 |   |   | July 19, 2002  |      
|                                                                             |                                                                              |                |        |       |                 |   |        |                  |   |   |                |      
|Revenue                                                                      |                                                                              | $              | 45,406 |       |                 | $ | 42,786 |                  |   | $ | 43,326         |       |   | $ | 44,063 |      
|Gross profit                                                                 |                                                                              | $              | 6,310  |       |                 | $ | 6,179  |                  |   | $ | 2,654          |       |   | $ | 4,500  |      
|Income (loss) before cumulative effect of
    change in accounting principle |                                                                              | $              | (322   | )     |                 | $ | (1,066 | )                |   | $ | (11,388        | )     |   | $ | (408   | )    
|Net income (loss)                                                            |                                                                              | $              | (322   | )     |                 | $ | (1,066 | )                |   | $ | (11,388        | )     |   | $ | (5,375 | )    
|Earnings (loss) per share  Basic
    and Diluted:                           |                                                                              |                |        |       |                 |   |        |                  |   |   |                |       |   |   |        |      
|                                                                             | Income (loss) before cumulative effect of
    change in accounting principle |                | $      | (0.06 | )               |   | $      | (0.20            | ) |   | $              | (2.10 | ) |   | $      | (0.08 | )
|                                                                             | Net income (loss)                                                            |                | $      | (0.06 | )               |   | $      | (0.20            | ) |   | $              | (2.10 | ) |   | $      | (1.03 | )



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | Revenues have been adjusted to reflect the
    adoption of FIN 46 (see Note 19).

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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 29, 2002, reserve
    for doubtful accounts and claims |  | $                    | 360   |  |          | $ | 1,324      |          |  | $ | 0          |  |        | $      | (991   | ) |  | $ | 693   | 
|                                                                               |  |                      |       |  |          |   |            |          |  |   |            |  |        |        |       
|Fiscal year ended March 28, 2003, reserve
    for doubtful accounts and claims |  | $                    | 693   |  |          | $ | 1,272      |          |  | $ | 6,115      |  |        | $      | (5,359 | ) |  | $ | 2,721 | 
|                                                                               |  |                      |       |  |          |   |            |          |  |   |            |  |        |        |       
|Fiscal year ended April 2, 2004, reserve for
    doubtful accounts and claims  |  | $                    | 2,721 |  |          | $ | 1,302      |          |  | $ | 0          |  |        | $      | (1,996 | ) |  | $ | 2,027 | 
|                                                                               |  |                      |       |  |          |   |            |          |  |   |            |  |        |        |       






|  |                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------
|* | Other accounts in fiscal 2003, represents amounts
    associated with the Tutor Time opening balance sheet reserve.

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##### Table of Contents








EXHIBIT INDEX


|        |     |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | --- |  | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |  | Description
|        |     |  |            
|        | 3.1 |  |             | 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), is incorporated herein by reference.                                                                                                                                                                                                                 
|        | 3.2 |  |             | Certificate of Amendment to Articles of
    Incorporation of the Registrant, filed as Exhibit 3.1 to
    the Registrants Current Report on Form 8-K (filed
    with the Securities and Exchange Commission on January 8,
    2003), is incorporated herein by reference.                                                                                                                                                    
|        | 3.3 |  |             | Certificate of Amendment to Articles of
    Incorporation of the Registrant, filed as Exhibit 3.1 to
    the Registrants Current Report on Form 8-K (filed
    with the Securities and Exchange Commission on March 20,
    2003), is incorporated herein by reference.                                                                                                                                                     
|        | 3.4 |  |             | Restated Bylaws of the Registrant, filed as
    Exhibit 3.1 to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended July 19, 2002,
    are incorporated herein by reference.                                                                                                                                                                                                                      
|        | 4.1 |  |             | 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 Quarterly Report on
    Form 10-Q for the fiscal quarter ended January 4,
    2002, is incorporated herein by reference.                                                                                                    
|        | 4.2 |  |             | First Amendment to Amended and Restated Credit
    Agreement dated as of April 1, 2002, between Childtime and
    Bank One, Michigan, filed as Exhibit 4.4 to the
    Registrants Annual Report on Form 10-K for the year
    ended March 29, 2002, is incorporated herein by reference.                                                                                                                                    
|        | 4.3 |  |             | Second Amendment to Amended and Restated Credit
    Agreement dated as of July 19, 2002, between Childtime and
    Bank One, NA, filed as Exhibit 4.1 to the Registrants
    Current Report on Form 8-K (filed with the Securities and
    Exchange Commission on August 6, 2002), is incorporated
    herein by reference.                                                                                                 
|        | 4.4 |  |             | Subordination Agreement dated as of July 19,
    2002, among Bank One, NA, Childtime and the subordinated
    lenders, including the form of Subordinated Promissory Note
    attached thereto as Schedule B, filed as Exhibit 4.2
    to the Registrants Current Report on Form 8-K (filed
    with the Securities and Exchange Commission on August 6,
    2002), is incorporated herein by reference.                    
|        | 4.5 |  |             | Third Amendment to Amended and Restated Credit
    Agreement dated as of February 14, 2003, between Childtime
    and Bank One, NA, filed as Exhibit 4.1 to the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended January 3, 2003, is incorporated
    herein by reference.                                                                                                                    
|        | 4.6 |  |             | Indenture dated as of May 16, 2003, between
    the Registrant and U.S. Bank National Association, as trustee,
    related to Subordinated Debt Securities, filed as
    Exhibit 4.1 to the Registrants Current Report on
    Form 8-K (filed with the Securities and Exchange Commission
    on May 20, 2003), is incorporated herein by reference.                                                                        
|        | 4.7 |  |             | First Supplemental Indenture, dated as of
    May 16, 2003, between the Registrant and U.S. Bank National
    Association, as trustee, related to the 15% Subordinated Notes
    due 2008, including the form of Subordinated Note, filed as
    Exhibit 4.2 to the Registrants Current Report on
    Form 8-K (filed with the Securities and Exchange Commission
    on May 20, 2003), is incorporated herein by reference.
|        | 4.8 |  |             | Fourth Amendment to Amended and Restated Credit
    Agreement dated as of June 25, 2003, between Childtime and
    Bank One, NA, filed as Exhibit 4.8 to the Registrants
    Annual Report on Form 10-K for the year ended
    March 28, 2003, is incorporated herein by reference.                                                                                                                                         
|        | 4.9 |  |             | Fifth Amendment to Amended and Restated Credit
    Agreement dated as of November 19, 2003, between Childtime
    and Bank One, NA, filed as Exhibit 4.1 to the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended October 10, 2003, is incorporated
    herein by reference.                                                                                                                   

E-1



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##### Table of Contents



|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  | Description
|        |       |  |            
|        | 4.10  |  |             | Sixth Amendment to Amended and Restated Credit
    Agreement dated as of December 29, 2003, between Childtime
    and Bank One, NA, filed as Exhibit 4.1 to the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended January 2, 2004, is incorporated
    herein by reference.                                           
|        | 4.11  |  |             | Seventh Amendment to Amended and Restated Credit
    Agreement dated as of January 20, 2004, between Childtime
    and Bank One, NA, filed as Exhibit 4.2 to the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended January 2, 2004, is incorporated
    herein by reference.                                          
|        | 4.12  |  |             | Eighth Amendment to Amended and Restated Credit
    Agreement dated as of June 24, 2004, between Childtime and
    Bank One, NA.                                                                                                                                                                                                                    
|        | 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 Annual Report on 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 Annual Report on 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  |  |             | 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 Quarterly Report on Form 10-Q for the
    fiscal quarter ended October 12, 2001, is incorporated
    herein by reference.                                                  
|        | 10.7  |  |             | Option Agreement dated September 5, 2001,
    between the Registrant and Leonard C. Tylka, filed as
    Exhibit 10.15 to the Registrants Annual Report on
    Form 10-K for the year ended March 29, 2002, is
    incorporated herein by reference.                                                                                                
|        | 10.8  |  |             | Fee Agreement dated June 27, 2002 between
    the Registrant and Jacobson Partners, filed as
    Exhibit 10.19 to the Registrants Annual Report on
    Form 10-K for the year ended March 29, 2002, is
    incorporated herein by reference.                                                                                                       
|        | 10.9  |  |             | Asset Purchase Agreement among TT Acquisition
    LLC, Tutor Time Learning Systems, Inc. and other sellers named
    therein, dated as of June 28, 2002, filed as
    Exhibit 2.1 to the Registrants Current Report on
    Form 8-K (filed with the Securities and Exchange Commission
    on August 6, 2002), is incorporated herein by reference.
|        | 10.10 |  |             | Option grant letter agreement, dated
    July 19, 2002, among the Registrant, JP Acquisition Fund
    II, L.P. and JP Acquisition Fund III, L.P., filed as
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K (filed with the Securities and Exchange Commission
    on August 6, 2002), is incorporated herein by reference.      
|        | 10.11 |  |             | Stock Option Agreement, dated as of
    August 15, 2002, between the Registrant and William D.
    Davis, filed as Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    July 19, 2002, is incorporated herein by reference.                                                                          
|        | 10.12 |  |             | Employment Agreement, dated August 26, 2002,
    between the Registrant and Frank Jerneycic, filed as
    Exhibit 10.2 to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended July 19, 2002,
    is incorporated herein by reference.                                                                                   
|        | 10.13 |  |             | Option Agreement, dated as of October 16,
    2002, between the Registrant and Paula L. Gavin, filed as
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended October 11,
    2002, is incorporated herein by reference.                                                                              

E-2



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##### Table of Contents



|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- |  | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  | Description
|        |       |  |            
|        | 10.14 |  |             | Option Agreement, dated as of October 16,
    2002, between the Registrant and Kenneth Johnsson, filed as
    Exhibit 10.2 to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended October 11,
    2002, is incorporated herein by reference.                                                                                                        
|        | 10.15 |  |             | Option Agreement, dated as of October 16,
    2002, between the Registrant and Brett D. Shevack, filed as
    Exhibit 10.3 to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended October 11,
    2002, is incorporated herein by reference.                                                                                                        
|        | 10.16 |  |             | Standby Securities Purchase Agreement, dated as
    of February 20, 2003, among the Registrant, Childtime, JP
    Acquisition Fund II, L.P., JP Acquisition Fund III, L.P., and
    the other purchasers named therein, filed as Exhibit 1.1 to
    the Registrants Form S-1 Registration Statement
    (Registration No. 333-103397), is incorporated herein by
    reference.
|        | 10.17 |  |             | Separation Agreement and Release, dated
    April 14, 2003, between the Registrant and Karen R. Danner,
    filed as Exhibit 10.24 to the Registrants Annual
    Report for the year ended March 28, 2003, is incorporated
    herein by reference.                                                                                                                            
|        | 10.18 |  |             | Childtime Learning Centers, Inc. 2003 Equity
    Compensation Plan, filed as Exhibit 99.1 to the
    Registrants Form S-8 Registration Statement
    (Registration No. 333-107483), is incorporated herein by
    reference.                                                                                                                                                   
|        | 10.19 |  |             | Employment Agreement, dated as of
    September 9, 2003, between the Registrant and Kathryn
    Winklehaus, filed as Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    October 10, 2003, is incorporated herein by reference.                                                                                                 
|        | 14    |  |             | Code of Business Conduct and Ethics.                                                                                                                                                                                                                                                                                                                                            
|        | 21    |  |             | List of Subsidiaries, filed as Exhibit 21.1
    to the Registrants Form S-1 Registration Statement
    (Registration No. 333-103397), is incorporated herein by
    reference.                                                                                                                                                                                                 
|        | 23    |  |             | Consent of PricewaterhouseCoopers LLP, dated
    June 30, 2004.                                                                                                                                                                                                                                                                                                                 
|        | 31.1  |  |             | Rule 13a-14(a) Certification by William D.
    Davis, President and Chief Executive Officer.                                                                                                                                                                                                                                                                                    
|        | 31.2  |  |             | Rule 13a-14(a) Certification by Frank M.
    Jerneycic, Treasurer and Chief Financial Officer.                                                                                                                                                                                                                                                                                  
|        | 32.1  |  |             | Certification pursuant to 18 U.S.C. §1350,
    as adopted pursuant to §906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                                                                                               
|        | 32.2  |  |             | Certification pursuant to 18 U.S.C. §1350,
    as adopted pursuant to §906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                                                                                               

E-3