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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


(MARK ONE)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 2, 2004

OR

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

21333 Haggerty Road, Suite 300
Novi, Michigan 48375
(Address of principal executive offices)

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

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 required for the past 90 days. Yes [x] No [  ]

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

The number of shares of Registrants Common Stock, no par value per share,
outstanding at February 2, 2004, was 19,769,010.





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TABLE OF CONTENTS



|                                                   |                                                                     |                                                      |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION                     
|                                                   | ITEM 1. Condensed Consolidated Financial Statements                
|                                                   |                                                                     | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                   |                                                                     | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                   |                                                                     | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                     | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | ITEM 2. Managements Discussion and Analysis                       
|                                                   | ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
|                                                   | ITEM 4. Controls and Procedures                                    
|PART II  OTHER INFORMATION                       
|                                                   | ITEM 1. Legal Proceedings                                          
|                                                   | ITEM 6. Exhibits and Reports on Form 8-K                           
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|6th Amendment/Amended & Restated Credit Agreement 
|7th Amendment/Amended & Restated Credit Agreement 
|Rule 13a-14(a) Certification by William D. Davis  
|Rule 13a-14(a) Certification by Frank M. Jerneycic
|Certification Pursuant to 18 U.S.C Sec. 1350      
|Certification Pursuant to 18 U.S.C Sec. 1350      
|Childtime/Tutor Time Learning Centers RSP         



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##### Table of Contents



CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

For the Quarterly Period Ended January 2, 2004

|                              |                                                                                               |                                                                                                            |    |        |      | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -- | ------ | ---- | 
|                              |                                                                                               |                                                                                                            |    | Page  
|                              |                                                                                               |                                                                                                            |    | Number
|                              |                                                                                               |                                                                                                            |    |       
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                            |    |       
|                              | ITEM 1. Condensed Consolidated Financial Statements                                           |                                                                                                            |    |        |     
|                              |                                                                                               | A. Condensed Consolidated Balance Sheets January 2, 2004 and March 28, 2003                                |    |        | 3    | 
|                              |                                                                                               | B. Condensed Consolidated Statements of Operations 12 & 40 weeks ended January 2, 2004 and January 3, 2003 |    |        | 4    | 
|                              |                                                                                               | C. Condensed Consolidated Statements of Cash Flows 40 weeks ended January 2, 2004 and January 3, 2003      |    |        | 5    | 
|                              |                                                                                               | D. Notes to Condensed Consolidated Financial Statements                                                    |    |        | 6-15 | 
|                              | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                            |    | 16-21  |     
|                              | ITEM 3. Quantitative and Qualitative Disclosures about Market Risks                           |                                                                                                            |    | 21-22  |     
|                              | ITEM 4. Controls and Procedures                                                               |                                                                                                            |    | 22     |     
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                            |    |       
|                              | ITEM 1. Legal Proceedings                                                                     |                                                                                                            |    | 22     |     
|                              | ITEM 6. Exhibits, Reports on Form 8-K                                                         |                                                                                                            |    | 23     |     
|SIGNATURES                    |                                                                                               |                                                                                                            | 24 |       
|EXHIBIT INDEX                 |                                                                                               |                                                                                                            | 25 |       

2



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##### Table of Contents






PART I: FINANCIAL INFORMATION




ITEM 1. Condensed Consolidated Financial Statements




CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |        | 
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------------- | ------ | --------- | ------ | ------- | ------ | 
|                                       |                                                                                                                                                               |                                            |        | January 2,     |        | March 28,
|                                       |                                                                                                                                                               |                                            |        | 2004           |        | 2003     
|                                       |                                                                                                                                                               |                                            |        |                |        |          
|                                       |                                                                                                                                                               |                                            |        | (Unaudited)    |        |           |        |        
|                                       |                                                                                                                                                               |                                            |        | (In thousands)
|ASSETS                                 |                                                                                                                                                               |                                            |        |                |        |           |        |        
|CURRENT ASSETS:                        |                                                                                                                                                               |                                            |        |                |        |           |        |        
|                                       | Cash and cash equivalents                                                                                                                                     |                                            | $      | 1,413          |        |           | $      | 2,499   |       
|                                       | Accounts receivable, net                                                                                                                                      |                                            |        | 10,887         |        |           |        | 8,112   |       
|                                       | Prepaid expenses and other current assets                                                                                                                     |                                            |        | 4,880          |        |           |        | 1,771   |       
|                                       | Income tax receivable                                                                                                                                         |                                            |        | 204            |        |           |        | 1,965   |       
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               | Total current assets                       |        |                | 17,384 |           |        |         | 14,347 | 
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|LAND, BUILDINGS AND EQUIPMENT:         |                                                                                                                                                               |                                            |        |                |        |           |        |        
|                                       | Land                                                                                                                                                          |                                            |        | 9,051          |        |           |        | 9,362   |       
|                                       | Buildings                                                                                                                                                     |                                            |        | 20,642         |        |           |        | 19,924  |       
|                                       | Leasehold improvements                                                                                                                                        |                                            |        | 12,292         |        |           |        | 10,304  |       
|                                       | Vehicles, furniture and equipment                                                                                                                             |                                            |        | 13,328         |        |           |        | 13,202  |       
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               |                                            | 55,313 |                |        |           | 52,792 |        
|                                       | Less: accumulated depreciation and amortization                                                                                                               |                                            |        | (18,624        | )      |           |        | (16,663 | )     
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               |                                            | 36,689 |                |        |           | 36,129 |        
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|OTHER NONCURRENT ASSETS:               |                                                                                                                                                               |                                            |        |                |        |           |        |        
|                                       | Intangible assets, net                                                                                                                                        |                                            |        | 30,235         |        |           |        | 30,812  |       
|                                       | Refundable deposits and other                                                                                                                                 |                                            |        | 2,693          |        |           |        | 2,657   |       
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               |                                            | 32,928 |                |        |           | 33,469 |        
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               | TOTAL ASSETS                               |        | $              | 87,001 |           |        | $       | 83,945 | 
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY   |                                                                                                                                                               |                                            |        |                |        |           |        |        
|CURRENT LIABILITIES:                   |                                                                                                                                                               |                                            |        |                |        |           |        |        
|                                       | Accounts and drafts payable                                                                                                                                   |                                            | $      | 10,404         |        |           | $      | 5,929   |       
|                                       | Accrued wages and benefits                                                                                                                                    |                                            |        | 5,807          |        |           |        | 6,491   |       
|                                       | Current portion of long-term debt                                                                                                                             |                                            |        | 17,871         |        |           |        | 1,280   |       
|                                       | Exit and closure expense accrual                                                                                                                              |                                            |        | 517            |        |           |        | 1,270   |       
|                                       | Other current liabilities                                                                                                                                     |                                            |        | 10,450         |        |           |        | 12,110  |       
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               | Total current liabilities                  |        |                | 45,049 |           |        |         | 27,080 | 
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|LONG-TERM DEBT, NET OF CURRENT PORTION |                                                                                                                                                               |                                            | 3,727  |                |        |           | 29,631 |        
|DEFERRED RENT LIABILITY                |                                                                                                                                                               |                                            | 1,878  |                |        |           | 1,421  |        
|CAPITAL LEASE OBLIGATIONS              |                                                                                                                                                               |                                            | 835    |                |        |           |       |        
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       | Total Liabilities                                                                                                                                             |                                            |        | 51,489         |        |           |        | 58,132  |       
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|SHAREHOLDERS EQUITY                   |                                                                                                                                                               |                                            |        |                |        |           |        |        
|                                       | Common Stock, 40,000,000 shares authorized, no par value; 19,769,010 and
5,416,210 issued and outstanding at January 2, 2004 and March 28, 2003, respectively |                                            |        | 43,739         |        |           |        | 31,665  |       
|                                       | Preferred Stock, 100,000 shares authorized, no par value; no shares issued or outstanding                                                                     |                                            |        |               |        |           |        |        |       
|                                       | Retained earnings (accumulated deficit)                                                                                                                       |                                            |        | (8,227         | )      |           |        | (5,852  | )     
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               | Total shareholders equity                 |        |                | 35,512 |           |        |         | 25,813 | 
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       
|                                       |                                                                                                                                                               | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |        | $              | 87,001 |           |        | $       | 83,945 | 
|                                       |                                                                                                                                                               |                                            |        |                |        |           |        |         |       

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

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |         |  
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | - | ------------------------------------- | ----- | -------------- | - | ---------- | ------ | ---------- | - | ------- | ------ | - | - | ------- | ------- | -
|                                                    |                                                                                                                 |   | 12 Weeks Ended                        |       | 40 Weeks Ended
|                                                    |                                                                                                                 |   |                                       |       |               
|                                                    |                                                                                                                 |   | January 2,                            |       | January 3,     |   | January 2, |        | January 3,
|                                                    |                                                                                                                 |   | 2004                                  |       | 2003           |   | 2004       |        | 2003      
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |           
|                                                    |                                                                                                                 |   | (In thousands, except per share data)
|Revenue from Learning Center Operations             |                                                                                                                 | $ | 43,513                                |       |                | $ | 41,718     |        |            | $ | 148,106 |        |   | $ | 128,404 |        
|Revenue from Franchise Operations                   |                                                                                                                 |   | 1,418                                 |       |                |   | 1,258      |        |            |   | 4,654   |        |   |   | 2,400   |        
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|Revenue, net                                        |                                                                                                                 |   | 44,931                                |       |                |   | 42,976     |        |            |   | 152,760 |        |   |   | 130,804 |        
|Operating expenses of Learning Centers              |                                                                                                                 |   | 38,778                                |       |                |   | 36,821     |        |            |   | 134,471 |        |   |   | 117,439 |        
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|Gross profit                                        |                                                                                                                 |   | 6,153                                 |       |                |   | 6,155      |        |            |   | 18,289  |        |   |   | 13,365  |        
|General and administrative expenses                 |                                                                                                                 |   | 4,383                                 |       |                |   | 4,593      |        |            |   | 14,321  |        |   |   | 12,398  |        
|Depreciation and amortization expenses              |                                                                                                                 |   | 986                                   |       |                |   | 1,031      |        |            |   | 3,087   |        |   |   | 2,773   |        
|Provision for doubtful accounts                     |                                                                                                                 |   | 564                                   |       |                |   | 424        |        |            |   | 1,147   |        |   |   | 890     |        
|Intangible asset impairment charges                 |                                                                                                                 |   |                                      |       |                |   |           |        |            |   |        |        |   |   | 4,181   |        
|Long lived fixed asset impairment charges           |                                                                                                                 |   |                                      |       |                |   |           |        |            |   |        |        |   |   | 3,401   |        
|Exit and closure expenses                           |                                                                                                                 |   | 220                                   |       |                |   | 377        |        |            |   | 230     |        |   |   | 725     |        
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | OPERATING INCOME (LOSS)                                                                                         |   |                                       |      |                |   |            | (270   | )          |   |         | (496   | ) |   |         | (11,003 | )
|Interest expense, net                               |                                                                                                                 |   | 447                                   |       |                |   | 746        |        |            |   | 1,523   |        |   |   | 1,496   |        
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | (LOSS) BEFORE INCOME TAXES, DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE     |   |                                       | (447  | )              |   |            | (1,016 | )          |   |         | (2,019 | ) |   |         | (12,499 | )
|Income tax provision (benefit)                      |                                                                                                                 |   |                                      |       |                |   |           |        |            |   |        |        |   |   | (227    | )      
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | (LOSS) BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE                   |   |                                       | (447  | )              |   |            | (1,016 | )          |   |         | (2,019 | ) |   |         | (12,272 | )
|Discontinued operations, net of taxes               |                                                                                                                 |   | (105                                  | )     |                |   | (50        | )      |            |   | (356    | )      |   |   | (592    | )      
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE                                               |   |                                       | (552  | )              |   |            | (1,066 | )          |   |         | (2,375 | ) |   |         | (12,864 | )
|Cumulative effect of change in accounting principle |                                                                                                                 |   |                                      |       |                |   |           |        |            |   |         |        |   |   | (4,967  | )      
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | NET (LOSS)                                                                                                      |   | $                                     | (552  | )              |   | $          | (1,066 | )          |   | $       | (2,375 | ) |   | $       | (17,831 | )
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|EARNINGS (LOSS) PER SHARE:                          |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | Basic and diluted (loss) before discontinued operations and
cumulative effect of change in accounting principle |   | $                                     | (0.02 | )              |   | $          | (0.19  | )          |   | $       | (0.12  | ) |   | $       | (2.30   | )
|                                                    | Discontinued operations, net of taxes                                                                           |   |                                       |      |                |   |            | (0.01  | )          |   | $       | (0.02  | ) |   |         | (0.11   | )
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | Basic and diluted (loss) before cumulative effect
of change in accounting principle                             |   | $                                     | (0.02 | )              |   | $          | (0.20  | )          |   | $       | (0.14  | ) |   | $       | (2.41   | )
|Cumulative effect of change in accounting principle |                                                                                                                 |   |                                      |       |                | $ |           |        |            | $ |        |        |   |   | (0.93   | )      
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|                                                    | Net (loss)                                                                                                      |   | $                                     | (0.02 | )              |   | $          | (0.20  | )          |   | $       | (0.14  | ) |   | $       | (3.34   | )
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        
|Weighted average shares outstanding                 |                                                                                                                 |   | 19,769                                |       |                |   | 5,416      |        |            |   | 17,182  |        |   |   | 5,346   |        
|                                                    |                                                                                                                 |   |                                       |       |                |   |            |        |            |   |         |        |   |   |         |        

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

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |         |        |  
|---------------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------------- | ------ | --------------- | ------ | --------------- | ------- | ------- | ------ | -
|                                                                                   |                                                          |                                                          |        | 40 Weeks Ended 
|                                                                                   |                                                          |                                                          |        |                
|                                                                                   |                                                          |                                                          |        | January 2, 2004 |        | January 3, 2003
|                                                                                   |                                                          |                                                          |        |                 |        |                
|                                                                                   |                                                          |                                                          |        | (In thousands) 
|OPERATING ACTIVITIES:                                                              |                                                          |                                                          |        |                 |        |                 |         |        
|Net (loss)                                                                         |                                                          | $                                                        | (2,375 | )               |        | $               | (17,831 | )      
|Adjustments to reconcile net loss to cash
provided (used) by operating activities: |                                                          |                                                          |        |                 |        |                 |         |        
|                                                                                   | Depreciation and amortization                            |                                                          |        | 3,092           |        |                 |         | 2,892   |       
|                                                                                   | Intangible and long lived fixed asset impairment charges |                                                          |        |                |        |                 |         | 13,532  |       
|                                                                                   | Provision for doubtful accounts                          |                                                          |        | 1,147           |        |                 |         | 958     |       
|                                                                                   | Deferred rent liability                                  |                                                          |        | 456             |        |                 |         | (19     | )     
|                                                                                   | Deferred income taxes                                    |                                                          |        | 1,762           |        |                 |         | (1,188  | )     
|                                                                                   | Gains (loss) on sale of assets                           |                                                          |        | 6               |        |                 |         | (114    | )     
|                                                                                   | Changes in operating assets and liabilities:             |                                                          |        |                 |        |                 |         |         |       
|                                                                                   |                                                          | Accounts receivable                                      |        |                 | (3,922 | )               |         |         | (2,272 | )
|                                                                                   |                                                          | Prepaid expenses and other current assets                |        |                 | (3,113 | )               |         |         | 1,973  |  
|                                                                                   |                                                          | Accounts payable, accruals and other current liabilities |        |                 | 2,238  |                 |         |         | (934   | )
|                                                                                   |                                                          | Exit and closure expense accrual                         |        |                 | (753   | )               |         |         | 377    |  
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|                                                                                   | Net cash used by operating activities                    |                                                          |        | (1,462          | )      |                 |         | (2,626  | )     
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|INVESTING ACTIVITIES:                                                              |                                                          |                                                          |        |                 |        |                 |         |        
|                                                                                   | Acquisition of Tutor Time - (net of cash of $682)        |                                                          |        |                |        |                 |         | (21,621 | )     
|                                                                                   | Capital spending                                         |                                                          |        | (3,299          | )      |                 |         | (3,387  | )     
|                                                                                   | Proceeds from sale of assets                             |                                                          |        | 218             |        |                 |         | 555     |       
|                                                                                   | Payments for refundable deposits and other assets        |                                                          |        | (54             | )      |                 |         | (9      | )     
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|                                                                                   | Net cash used in investing activities                    |                                                          |        | (3,135          | )      |                 |         | (24,462 | )     
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|FINANCING ACTIVITIES:                                                              |                                                          |                                                          |        |                 |        |                 |         |        
|                                                                                   | Net borrowings on revolving line of credit               |                                                          |        | 2,307           |        |                 |         | 10,133  |       
|                                                                                   | Repayments under long-term debt                          |                                                          |        | (15,121         | )      |                 |         | (389    | )     
|                                                                                   | Issuance of long-term debt                               |                                                          |        | 3,500           |        |                 |         | 14,000  |       
|                                                                                   | Changes in drafts payable                                |                                                          |        | (99             | )      |                 |         | 1,261   |       
|                                                                                   | Capital lease obligations                                |                                                          |        | 835             |        |                 |         |        |       
|                                                                                   | Issuance of common shares (net of issuance costs)        |                                                          |        | 12,089          |        |                 |         |        |       
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|                                                                                   | Net cash provided by financing activities                |                                                          |        | 3,511           |        |                 |         | 25,005  |       
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|Net decrease in cash and cash equivalents                                          |                                                          |                                                          | (1,086 | )               |        |                 | (2,083  | )      
|Cash and cash equivalents, beginning of year                                       |                                                          |                                                          | 2,499  |                 |        |                 | 4,891   |        
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        
|Cash and cash equivalents, end of period                                           |                                                          | $                                                        | 1,413  |                 |        | $               | 2,808   |        
|                                                                                   |                                                          |                                                          |        |                 |        |                 |         |        

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

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CHILDTIME LEARNING CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1  DESCRIPTION OF BUSINESS

Childtime Learning Centers, Inc. conducts business through its wholly-owned
subsidiary Childtime Childcare, Inc. and its other wholly-owned subsidiaries
(collectively, the Company). The Company and its predecessors began
operations in 1967. The Company operates in three business segments: Childtime
Learning Centers, Tutor Time Learning Centers and Franchise Operations. 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 Childcare Learning
Centers (Tutor Time). As of January 2, 2004, the Company operated or
franchised a total of 472 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:272 centers operated by the Company, consisting of:                
| | - |  | ----------------------------------------------------------------------------------------------
|
| |   |  |  261 Childtime centers and                                                                   
|
| |   |  |  11 Childtime-branded centers operated for third parties;                                    
|
| |  |  | Tutor Time Learning Centers:64 Tutor Time centers operated by the Company; and                
|
| |  |  | Tutor Time Franchise:royalties and other fees received from 136 franchised Tutor Time centers.

Childtime and Tutor Time corporate centers are located in the United States (in
27 states), with the exception of one Tutor Time center located in Canada. The
vast majority of these centers are operated on leased premises, with typical
lease terms ranging from 1 to 25 years; 51 of the Childtime centers are
operated on Company-owned premises.

The 11 Childtime centers the Company operates under management contracts are
all located in the U.S., serving hospitals, corporations and the federal
government. Under these contracts, the 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
124 centers operating in 17 states. An additional 12 centers are operated in
Canada, Hong Kong, Indonesia, and the Philippines, for the most part under
master franchise agreements. The Company currently guarantees leases or
provides sub-leases for 60 of its franchise centers, including sites under
development.

NOTE 2  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 George A. Kellner, the Companys former
Vice Chairman of the Board, is a special advisor.

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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.
The Subordinated Notes were subject to a Subordination Agreement in favor of
Bank One, NA, mature December 31, 2004 and bear interest at 15%, of which 7%
was payable in cash, and the balance was payable in kind by the issuance of
Additional Subordinated Notes, with interest and principal payable on the
earlier of December 31, 2004 or such date on which the Company consummated the
Rights Offering (see Note 6), provided that interest on the Subordinated Notes
(including the Additional Subordinated Notes and interest thereon) could be
paid only to the extent the aggregate proceeds of the Rights Offering exceeded
$14 million. 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 individuals who,
at that time, were directors of the Company (Mr. Jacobson, Mr. Morgan and Mr.
Kellner) (for an aggregate of $515,132). The Subordinated Notes were repaid
upon completion of the Companys Rights Offering (see Note 6).

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 proposed Rights Offering which was completed on May 16, 2003
(see Note 6). 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 information for the Company and Tutor Time follows (in thousands,
except per share data):

|                                                                                                          |  |                 |         |  
|--------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | -
|                                                                                                          |  | 40 Weeks Ended 
|                                                                                                          |  | January 3, 2003
|                                                                                                          |  |                
|Revenue, net                                                                                              |  | $               | 147,352 |  
|Operating loss                                                                                            |  | $               | (9,961  | )
|Loss before income taxes, discontinued operations
and cumulative effect of change
in accounting principle |  | $               | (12,267 | )
|Loss before cumulative effect of change
in accounting principle                                           |  | $               | (12,632 | )
|Net loss                                                                                                  |  | $               | (17,599 | )
|Earnings (loss) per share                                                                                 |  | $               | (3.30   | )

In connection with the Tutor Time bankruptcy proceedings, Tutor Time, at the
request of the Company, was able to reject numerous leases and franchise
agreements. The accompanying 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 for the 40
weeks ended January 3, 2003). Additional interest expense was included in the
pro forma results based upon the additional debt incurred to finance the Tutor
Time acquisition.

NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of
Childtime Learning Centers, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.

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The accompanying financial statements have been prepared by the Company in
accordance with the accounting policies described in the Companys audited
financial statements included in the Companys Annual Report on Form 10-K for
the year ended March 28, 2003, and should be read in conjunction with the notes
thereto.

In the opinion of the Companys management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments which are
necessary to present fairly its financial position as of January 2, 2004, and
the results of its operations and cash flows for the periods ended January 2,
2004 and January 3, 2003, respectively, and are of a normal and recurring
nature. The results of operations for interim periods are not necessarily
indicative of the operating results to be expected for the full year.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance
with generally accepted accounting principles requires management to render
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.

Fiscal Year

The Company utilizes a 52-53 week fiscal year ending on the Friday closest to
March 31. For fiscal year 2004, the third quarter contained 12 weeks, and the
fiscal year contains 53 weeks. For fiscal year 2003, the third quarter
contained 12 weeks, and the fiscal year contained 52 weeks.

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 loss per share would have increased to the pro
forma amounts indicated below (in thousands):

|                                                                                                                                    |  |                |       |                |  |            |        |            |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | -------------- |  | ---------- | ------ | ---------- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                    |  | 12 Weeks Ended |       | 40 Weeks Ended
|                                                                                                                                    |  |                |       |               
|                                                                                                                                    |  | January 2,     |       | January 3,     |  | January 2, |        | January 3,
|                                                                                                                                    |  | 2004           |       | 2003           |  | 2004       |        | 2003      
|                                                                                                                                    |  |                |       |                |  |            |        |           
|Net loss as reported                                                                                                                |  | $              | (552  | )              |  | $          | (1,066 | )          |  | $ | (2,375 | ) |  | $ | (17,831 | )
|Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects |  |                |      |                |  |            | 5      |            |  |   | 896    |   |  |   | 280     |  
|                                                                                                                                    |  |                |       |                |  |            |        |            |  |   |        |   |  |   |         |  
|Pro forma net loss                                                                                                                  |  | $              | (552  | )              |  | $          | (1,071 | )          |  | $ | (3,271 | ) |  | $ | (18,111 | )
|Basic and diluted net loss per share:                                                                                               |  |                |       |                |  |            |        |            |  |   |        |   |  |   |         |  
|As reported                                                                                                                         |  | $              | (0.02 | )              |  | $          | (0.20  | )          |  | $ | (0.13  | ) |  | $ | (3.34   | )
|Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects |  |                |      |                |  |            |       |            |  |   | 0.05   |   |  |   | 0.05    |  
|                                                                                                                                    |  |                |       |                |  |            |        |            |  |   |        |   |  |   |         |  
|Pro forma                                                                                                                           |  | $              | (0.02 | )              |  | $          | (0.20  | )          |  | $ | (0.18  | ) |  | $ | (3.39   | )
|                                                                                                                                    |  |                |       |                |  |            |        |            |  |   |        |   |  |   |         |  
|Weighted average fair value of options granted during the period                                                                    |  | $              |      |                |  | $          | 0.70   |            |  | $ | 0.89   |   |  | $ | 0.92    |  
|                                                                                                                                    |  |                |       |                |  |            |        |            |  |   |        |   |  |   |         |  

The fair value of the options used to compute pro forma net income and earnings
per share disclosures is the estimated present value at grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for the 12 and 40 weeks ended January 2,

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2004 and the 12 and 40 weeks ended January 3, 2003: no dividend yield; expected
volatility of 37.3 and 37.3 percent; risk free interest rate of 2.0 and 3.2
percent; and expected holding periods of 5.0 and 5.0 years, respectively.

Franchise Lease Liabilities

The Company is primarily or contingently liable for many of the leases of Tutor
Times franchisees. The Company would be required to pay the related lease
obligations in the 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 does
not record any liabilities for any known default if the value of the existing
franchise operation is greater than the potential liability or if the known net
worth of the franchisee (or the owner of the franchisee), who personally
guarantees the related franchise liabilities, is greater than the potential
liability.

NOTE 4  ACCOUNTS RECEIVABLE

Accounts receivable is presented net of an allowance for doubtful accounts. At
January 2, 2004 and March 28, 2003, the allowance for doubtful accounts was
$2.8 million and $2.7 million, respectively.

NOTE 5  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 January 2,
2004 and March 28, 2003, the aggregate drafts payable were $3.1 million and
$3.2 million, respectively.

NOTE 6  FINANCING ARRANGEMENTS

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 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 (see Note 2). 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 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.

NOTE 7  CONTINGENCIES

The Company is primarily liable on approximately $1.0 million for lease
assignments already negotiated in connection with certain lease terminations
resulting from the fiscal 2001 restructuring program (see Note 11). The Company
has recorded a liability for estimates of future liabilities under these
leases.

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 aggregate liability is
approximately $89.9 million related to leases and $21.2 million related to
guarantees. The leases have durations from 1-20 years. The Company would be
required to pay the related lease obligations in the 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. During fiscal 2003, the Company took 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

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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 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.

NOTE 8  OPTION GRANTS AND PAYMENTS FOR CONSULTING SERVICES

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 paid with respect 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 a consulting fee, 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
2). Total consulting fees incurred for Jacobson Partners (exclusive of the
Tutor Time fee) were $342,500 and $192,500 for the 40 weeks ended January 2,
2004 and January 3, 2003, respectively, and are included in general and
administrative expenses in the accompanying condensed consolidated statement of
operations.

NOTE 9  INCOME TAXES

The Company provides for income taxes in accordance SFAS No. 109, Accounting
for Income Taxes,which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the condensed consolidated financial statements or tax returns.
Under this method, 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.

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.

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NOTE 10  LOSS PER SHARE

For the 12 and 40 weeks ended January 2, 2004 and January 3, 2003, basic loss
per share has been calculated by dividing earnings available to common
shareholders by the weighted average number of common shares outstanding for
the period. The calculation of basic and diluted shares is as follows (in
thousands):

|                                         |  |                                   |        |                |  |            |       |            |  |  |        |  |  |  |       | 
|---------------------------------------- |  | --------------------------------- | ------ | -------------- |  | ---------- | ----- | ---------- |  |  | ------ |  |  |  | ----- | 
|                                         |  | Calculation of Incremental Shares
|                                         |  |                                  
|                                         |  | 12 Weeks Ended                    |        | 40 Weeks Ended
|                                         |  |                                   |        |               
|                                         |  | January 2,                        |        | January 3,     |  | January 2, |       | January 3,
|                                         |  | 2004                              |        | 2003           |  | 2004       |       | 2003      
|                                         |  |                                   |        |                |  |            |       |           
|Basic shares (based on weighted average) |  |                                   | 19,769 |                |  |            | 5,416 |            |  |  | 17,182 |  |  |  | 5,346 | 
|Stock options (1)                        |  |                                   |       |                |  |            |      |            |  |  |       |  |  |  |      | 
|                                         |  |                                   |        |                |  |            |       |            |  |  |        |  |  |  |       | 
|Diluted shares                           |  |                                   | 19,769 |                |  |            | 5,416 |            |  |  | 17,182 |  |  |  | 5,346 | 
|                                         |  |                                   |        |                |  |            |       |            |  |  |        |  |  |  |       | 

(1)  For the 12 and 40 weeks ended January 2, 2004, respectively, the above
calculation does not include 209,015 and 167,553 shares issuable from employee
stock options that have the potential to dilute earnings per share in the
future. These shares were not included in the above calculation of diluted
shares because to do so would have been antidilutive.

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NOTE 11  EXIT AND CLOSURE EXPENSES AND DISCONTINUED OPERATIONS

The Company instituted a restructuring program in fiscal 2001 and incurred a
charge of $4.0 million for the fiscal year ended March 30, 2001 to close
various under-performing centers. During the 12 and 40 weeks ended January 3,
2003, the Company incurred charges of $0.4 million and $1.1 million,
respectively, to increase the reserves and to provide reserves for other closed
centers. During the 12 and 40 weeks ended January 2, 2004, the Company incurred
charges of $0.3 million and $0.4 million, respectively, to increase the reserves
and to provide for other closed centers. During the 40 weeks ended January 2,
2004, the Company made payments related to its restructuring reserve of $1.2
million. 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 |     | January 2, 2004
|                        |  |                                                                        |       |          |  |          |     |                
|Continuing operations   |  | $                                                                      | 951   |          |  | $        | 220 |                 |  | $       | 729   |        |  | $ | 442 | 
|Discontinued operations |  |                                                                        | 319   |          |  |          | 198 |                 |  |         | 442   |        |  |   | 75  | 
|                        |  |                                                                        |       |          |  |          |     |                 |  |         |       |        |  |   |     | 
|Total                   |  | $                                                                      | 1,270 |          |  | $        | 418 |                 |  | $       | 1,171 |        |  | $ | 517 | 
|                        |  |                                                                        |       |          |  |          |     |                 |  |         |       |        |  |   |     | 

The lease liability for the centers closed during the 40 weeks ended January 2,
2004 has been recorded at managements estimate of cost.

A summary of discontinued operations is as follows (in thousands):

|                                          |                                           |   |                 |      |                 |   |                 |     |                 |   |      |      |   |   |       |      |  
|----------------------------------------- | ----------------------------------------- | - | --------------- | ---- | --------------- | - | --------------- | --- | --------------- | - | ---- | ---- | - | - | ----- | ---- | -
|                                          |                                           |   | 12 Weeks Ended  |      | 40 Weeks Ended 
|                                          |                                           |   |                 |      |                
|                                          |                                           |   | January 2, 2004 |      | January 3, 2003 |   | January 2, 2004 |     | January 3, 2003
|                                          |                                           |   |                 |      |                 |   |                 |     |                
|Revenues, net                             |                                           | $ | 1               |      |                 | $ | 327             |     |                 | $ | 328  |      |   | $ | 1,340 |     
|Operating expenses of Learning Centers    |                                           |   | 25              |      |                 |   | 372             |     |                 |   | 478  |      |   |   | 1,478 |     
|                                          |                                           |   |                 |      |                 |   |                 |     |                 |   |      |      |   |   |       |     
|Gross profit                              |                                           |   | (24             | )    |                 |   | (45             | )   |                 |   | (150 | )    |   |   | (138  | )   
|Provision for doubtful accounts           |                                           |   |                |      |                 |   |                |     |                 |   | 2    |      |   |   | 22    |     
|Depreciation and amortization expenses    |                                           |   | 1               |      |                 |   | 5               |     |                 |   | 7    |      |   |   | 17    |     
|Intangible asset impairment charges       |                                           |   |                |      |                 |   |                |     |                 |   |     |      |   |   | 10    |     
|Long lived fixed asset impairment charges |                                           |   |                |      |                 |   |                |     |                 |   |     |      |   |   | 63    |     
|Exit and closure expenses                 |                                           |   | 80              |      |                 |   |                |     |                 |   | 197  |      |   |   | 354   |     
|                                          |                                           |   |                 |      |                 |   |                 |     |                 |   |      |      |   |   |       |     
|                                          | Discontinued operations before income tax |   |                 | (105 | )               |   |                 | (50 | )               |   |      | (356 | ) |   |       | (604 | )
|Income tax provision (benefit)            |                                           |   |                |      |                 |   |                |     |                 |   |     |      |   |   | (12   | )   
|                                          |                                           |   |                 |      |                 |   |                 |     |                 |   |      |      |   |   |       |     
|                                          | Discontinued operations, net of tax       |   | $               | (105 | )               |   | $               | (50 | )               |   | $    | (356 | ) |   | $     | (592 | )
|                                          |                                           |   |                 |      |                 |   |                 |     |                 |   |      |      |   |   |       |     

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NOTE 12  INTANGIBLE ASSETS AND GOODWILL

The changes in the carrying amounts of goodwill and other intangible assets for
the 40 weeks ended January 2, 2004 were as follows (in thousands):

|                          |  |         |        |              |  |        |     |             |  |   |        |  |  |            |    | 
|------------------------- |  | ------- | ------ | ------------ |  | ------ | --- | ----------- |  | - | ------ |  |  | ---------- | -- | 
|                          |  | Balance |        |              |  |        |     | Balance     |  |   |        | 
|                          |  | 3/28/03 |        | Amortization |  | 1/2/04 |     | Useful life
|                          |  |         |        |              |  |        |     |            
|Goodwill                  |  | $       | 17,866 |              |  | $      |    |             |  | $ | 17,866 |  |  | Indefinite
|Franchise Agreements      |  |         | 8,775  |              |  |        | 350 |             |  |   | 8,425  |  |  |            | 20 | 
|Trade Name and trademarks |  |         | 3,770  |              |  |        | 151 |             |  |   | 3,619  |  |  |            | 20 | 
|Curriculum                |  |         | 396    |              |  |        | 71  |             |  |   | 325    |  |  |            | 5  | 
|Covenants                 |  |         | 5      |              |  |        | 5   |             |  |   |       |  |  |            | 5  | 

Estimated amortization of intangible assets is expected to be $0.7 million for
fiscal 2004 and approximately $0.7 million annually for the next four years.

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NOTE 13  SEGMENT INFORMATION

The Company has three reportable segments: Childtime Learning Centers, Tutor
Time Learning Centers and Tutor Time Franchise. Childtime operates childcare
centers primarily under the Childtime Learning Centers brand name, Tutor Time
operates childcare centers under the Tutor Time brand name and Franchise
licenses and provides developmental and administrative support to franchisees
operating under the Tutor Time brand name. Corporate and other represents all
general and administrative costs associated with supporting the Companys
segments. For the Tutor Time Franchise segment, revenues and operating income
represent royalties and other fees payable by franchisees and support costs are
included in general and administrative expenses. 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
assessing the performance of the segments.

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

|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |         |  
|------------------------ | ----------------------------- | ----- | - | -------------- | ------ | -------------- | - | ---------- | ------ | ---------- | - | ------- | ------- | - | - | ------- | ------- | -
|                         |                               |       |   | 12 Weeks Ended |        | 40 Weeks Ended
|                         |                               |       |   |                |        |               
|                         |                               |       |   | January 2,     |        | January 3,     |   | January 2, |        | January 3,
|                         |                               |       |   | 2004           |        | 2003           |   | 2004       |        | 2003      
|                         |                               |       |   |                |        |                |   |            |        |           
|Revenues:                |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |        
|                         | Childtime                     |       | $ | 31,534         |        |                | $ | 31,289     |        |            | $ | 107,735 |         |   | $ | 107,488 |        
|                         | Tutor Time                    |       |   | 11,979         |        |                |   | 10,429     |        |            |   | 40,371  |         |   |   | 20,916  |        
|                         | Franchise                     |       |   | 1,418          |        |                |   | 1,258      |        |            |   | 4,654   |         |   |   | 2,400   |        
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|                         |                               | Total |   | $              | 44,931 |                |   | $          | 42,976 |            |   | $       | 152,760 |   |   | $       | 130,804 |  
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|Operating income (loss): |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |        
|                         | Childtime                     |       | $ | 4,024          |        |                | $ | 4,095      |        |            | $ | 11,522  |         |   | $ | 10,544  |        
|                         | Tutor Time                    |       |   | 147            |        |                |   | 379        |        |            |   | 967     |         |   |   | (468    | )      
|                         | Franchise                     |       |   | 1,418          |        |                |   | 1,258      |        |            |   | 4,654   |         |   |   | 2,400   |        
|                         | Depreciation and amortization |       |   | (986           | )      |                |   | (1,031     | )      |            |   | (3,087  | )       |   |   | (2,773  | )      
|                         | Corporate and other           |       |   | (4,603         | )      |                |   | (4,971     | )      |            |   | (14,552 | )       |   |   | (20,706 | )      
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|                         |                               | Total |   | $              | -      |                |   | $          | (270   | )          |   | $       | (496    | ) |   | $       | (11,003 | )
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|Goodwill:                |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |        
|                         | Childtime                     |       | $ | 7,215          |        |                | $ | 7,205      |        |            | $ | 7,215   |         |   | $ | 7,205   |        
|                         | Tutor Time (1)                |       |   | 5,578          |        |                |   | 2,511      |        |            |   | 5,578   |         |   |   | 2,511   |        
|                         | Franchise (1)                 |       |   | 5,073          |        |                |   | 5,073      |        |            |   | 5,073   |         |   |   | 5,073   |        
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|                         |                               | Total |   | $              | 17,866 |                |   | $          | 14,789 |            |   | $       | 17,866  |   |   | $       | 14,789  |  
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|All other assets:        |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |        
|                         | Childtime                     |       | $ | 47,093         |        |                | $ | 46,957     |        |            | $ | 47,093  |         |   | $ | 46,957  |        
|                         | Tutor Time                    |       |   | 11,131         |        |                |   | 11,199     |        |            |   | 11,131  |         |   |   | 11,199  |        
|                         | Franchise                     |       |   | 10,911         |        |                |   | 11,853     |        |            |   | 10,911  |         |   |   | 11,853  |        
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        
|                         |                               | Total |   | $              | 69,135 |                |   | $          | 70,009 |            |   | $       | 69,135  |   |   | $       | 70,009  |  
|                         |                               |       |   |                |        |                |   |            |        |            |   |         |         |   |   |         |        

(1)  For the 12 and 40 weeks ended January 3, 2003, Tutor Time and Franchise
Operations goodwill includes estimated amounts associated with the previously
unallocated purchase price. The purchase price allocations were adjusted as of
March 28, 2003, and these adjustments are reflected in the consolidated balance
sheet as of that date.

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NOTE 14  FINANCIAL INSTRUMENT

The Company has exposure to market risk for changes in interest rates related
to its debt obligations. The Company did not have cash flow exposure due to
rate changes on its 15% New Subordinated Notes in the amount of $3.5 million at
January 2, 2004. As of January 2, 2004, the Company had cash flow exposure on
the revolving line of credit, with an outstanding balance of $15.3 million, and
its notes payable, with an outstanding balance of $2.8 million, which has been
partially offset by the Company entering into $5.0 million notional amount of
interest rate swap contracts. These contracts, which have maturity dates of
November 2005 and January 2006, 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 less than $0.1 million is included in
other current liabilities on the condensed consolidated balance sheet as of
January 2, 2004.

NOTE 15  NEW ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issued SFAS No. 149, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and should be applied
prospectively. The Company has adopted the provisions of SFAS No. 149 which has
not had, nor does the Company expect the provisions to have, a material impact
on its financial condition or results of operations.

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 has adopted the provisions of SFAS 150 which
has not had, nor does the Company expect the provisions to have, 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.

The disclosure provisions of FIN 46 are effective in all financial statements
initially issued after January 31, 2003. FIN 46 is required to be immediately
applied by all entities with a variable interest in a VIE created after January
31, 2003. A public entity with a variable interest in a VIE created before
February 1, 2003 is required to apply FIN 46 to that entity no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. It is the opinion of management that there is no impact from FIN 46
for the third quarter 2004, since there have been no new business relationships
formed by the Company after January 31, 2003. Management is still researching
the impact of FIN 46 on future periods.

NOTE 16  SUBSEQUENT EVENT

Subsequent to the end of third quarter 2004, the Company entered into
sale/leaseback transactions pursuant to which it sold eight Company owned
Childtime center premises for $6.5 million and simultaneously entered into
leases for these locations. In connection with these transactions, on January
20, 2004, the Company further amended the Amended and Restated Credit
Agreement. As part of the amendment, the lender released its lien on the
properties subject to the sale/leaseback transactions in return for reducing
the amount of the credit facility by $2.5 million, to $15.0 million.

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ITEM 2. Managements Discussion and Analysis

GENERAL

The information presented herein refers to the 12 weeks (third quarter 2004)
and the 40 weeks (year to date 2004) ended January 2, 2004, compared to the 12
weeks (third quarter 2003) and the 40 weeks (year to date 2003) ended January
3, 2003.

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.

During the third quarter 2004 the Company opened one Learning Center. During
the third quarter 2003, the Company closed one Learning Center. During year to
date 2004, the Company closed four Learning Centers, franchised one center
previously operated as a corporate center and opened two corporate centers.
During year to date 2003, the Company added 60 Learning Centers, which included
the 58 Tutor Time Learning Centers acquired at the end of the first quarter of
2003, closed eight and transferred two Learning Centers to franchisees. The
Company also closed nine centers during year to date 2003, whose leases were
rejected, as part of the Tutor Time purchase transaction.

RESULTS OF OPERATIONS

Revenue, net. Net revenue for third quarter 2004 increased $2.0 million, or
4.5%, from the same period last year to $44.9 million. Learning Center revenues
increased $1.8 million, with comparable center revenues, defined as centers
opened 18 months or longer, increasing $0.9 million or 2.4%, non-comparable
centers increasing $1.1 million offset by a reduction of closed center revenue
of $0.2 million. Franchise Operations revenues, which consisted primarily of
royalties, increased $0.2 million, or 12.7%, from the same period last year to
$1.4 million. Net revenues for year to date 2004 increased $22.0 million, or
16.8%, from the same period last year to $152.8 million. The increase was
primarily a result of additional revenues of $19.5 million contributed by Tutor
Time centers and $2.3 million contributed by Franchise Operations, both of
which were acquired at the end of first quarter 2003.

Operating expenses of Learning Centers.Operating expenses for third quarter
2004 increased $2.0 million, or 5.3%, from the same period last year to $38.8
million. The increase was a result of an increase in occupancy expense ($0.6
million), which was primarily a result of new center openings; an increase in
center operating expenses ($0.5 million), which increased with higher
enrollments and higher maintenance expense; and an increase in personnel
expense ($0.9 million), which increased with higher enrollments. Operating
expenses as a percentage of revenue from Learning Center Operations increased
to 89.1% for third quarter 2004 from 88.3% in the same period last year. The
increase was a result of increased occupancy expense, which was higher on newly
opened centers, and increased maintenance expense, as the Company took steps
to improve the conditions of centers, partially offset by a decrease in
personnel expense, which resulted from improved efficiencies. Operating
expenses year to date 2004 increased $17.0 million, or 14.5%, from the same
period last year to $134.5 million. The increase was attributable to the
acquisition of the Tutor Time centers, which were acquired at the end of first
quarter 2003, partially offset by an improvement in personnel expense over the
same period last year. Operating expenses as a percentage of revenue from
Learning Center Operations decreased to 90.8% for year to date 2004 from 91.5%
in the same period last year. The decrease was primarily a result of reduced
personnel expenses achieved through improved labor efficiencies.

Gross profit. Gross profit for third quarter 2004 remained unchanged from the
same period last year of $6.2 million. Gross profit percentages for third
quarter 2004 by segment were 13.8% for Childtime centers (as compared to 14.2%
for 2003), 3.2% for Tutor Time centers (as compared to 4.3% for 2003) and 100%
for Franchise Operations. The third quarter gross profit and gross profit
percentage changes were a result of the changes in operating expenses described
above. Gross profit for year to date 2004 increased $4.9 million, or 36.8%,
from the same period last year to $18.3 million. This increase was a result of
a $2.3 million increase in Franchise Operations, and increased revenues from
Tutor Time centers. Gross profit percentages for year to date 2004 by segment
were 11.4% for Childtime centers (as compared to 10.5% for 2003), 3.3% for
Tutor Time centers (as compared to -1.6% for 2003) and 100% for Franchise
Operations. The year to date gross profit and gross profit percentage changes
were a result of the changes in operating expenses described above.

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General and administrative expenses. General and administrative expenses for
third quarter 2004 decreased $0.2 million, or 4.6%, from the same period last
year to $4.4 million. The decrease was a result of the reduction in travel
costs and additional professional fees incurred in connection with the 2002
acquisition of Tutor Time offset by an increase in fees to Jacobson
Partners. Year to date 2004 expenses increased $1.9 million,
or 15.5%, from the same period last year to $14.3 million. The increase was a
result of costs associated with supporting the Tutor Time centers and Franchise
Operations, and costs associated with staffing leadership and support positions
that were unfilled in the same period last year.

Depreciation and amortization expense. Depreciation and amortization expense
for third quarter 2004 remained unchanged from the same period last year of
$1.0 million. Year to date 2004 expense increased $0.3 million from the same
period last year to $3.1 million. The increase was primarily a result of
depreciation and amortization expense attributable to the Tutor Time
acquisition, partially offset by a decrease resulting from fixed asset
impairment charges. Depreciation and amortization expense as a percentage of
revenue decreased from 2.1% for year to date 2004 to 2.0% for the same period
this year.

Provision for doubtful accounts. Provision for doubtful accounts for third
quarter 2004 increased $0.1 million or 33.0% to $0.6 million for the same
period last year. Year to date 2004 expense increased $0.3 million or 28.9%
from the same period last year to $1.1 million. The increase is a result of a
decline in collection experience.

Intangible asset impairment charges.During year to date 2003, the Company
incurred an expense of $4.2 million as a result of an evaluation done under
SFAS 142, Goodwill and Other Intangible Assets. There were no charges for this
item in third quarter and year to date 2004.

Long lived fixed asset impairment charges.During year to date 2003, the
Company incurred an expense of $3.5 million as a result of an evaluation done
under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
There were no charges for this item in third quarter and year to date 2004.

Exit and closure expenses. The Company instituted a restructuring program in
fiscal 2001 and incurred a charge of $4.0 million for the fiscal year ended
March 30, 2001 to close various under-performing centers. During third quarter
and year to date 2003, the Company incurred charges of $0.4 million and $0.7
million, respectively, to increase the reserves. During third quarter and year
to date 2004, the Company incurred charges of $0.2 million to increase the
reserves. The Company made payments related to this restructuring program of
$0.1 million and $0.7 million for third quarter and year to date 2004,
respectively, and payments of $0.2 million and $0.7 million for third quarter
and year to date 2003, respectively.

Interest expense. Interest expense for third quarter 2004 was $0.4 million,
compared to $0.8 million for the same period last year. This decrease was a
result of a reduction of indebtedness that occurred with the completion of the
Rights Offering (see Note 6 of the Companys Notes to Condensed Consolidated
Financial Statements (unaudited)) during first quarter 2004. Interest expense
for year to date 2004 remained unchanged at $1.5 million.

Income tax benefit.Income tax benefit and the effective tax rate for both
third quarter 2004 and the same period last year were $0.0 and 0.0%,
respectively, as the tax benefit for both periods was reduced by a valuation
reserve. Income tax benefit for year to date 2004 was $0.0 compared to $0.2
million for the same period last year. The effective tax rate was 0.0% for year
to date 2004 compared to 2.0% for the same period last year as the tax benefit
for both periods was reduced by a valuation reserve.

Discontinued operations, net of taxes.Discontinued operations, net of taxes,
for third quarter 2004 was a loss of ($0.1 million), compared to a loss of
($0.1 million) for the same period last year. Discontinued operations, net of
taxes, for year to date 2004 was a loss of ($0.4 million), compared to a loss
of ($0.6 million) for the same period last year. These losses include operating
and lease termination costs associated with closed centers.

Cumulative effect of change in accounting principle.Year to date 2003 included
an adjustment of $5.0 million as the cumulative effect of goodwill impairment
under SFAS 142, Goodwill and Other Intangibles. This amount was reduced by a
tax benefit of $0.9 million, which had been reduced by a valuation reserve.
There were no charges for this item in third quarter and year to date 2004.

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Net loss. As a result of the foregoing changes, net loss decreased to ($0.6
million) for third quarter 2004, compared to a net loss of ($1.1 million) for
the same period last year. Year to date 2004 net loss decreased to ($2.4
million), compared to a net loss of ($17.8 million) for the same period last
year.

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, cash generated from operations and sale/leaseback transactions
on Company-owned Childtime center premises. Subsequent to the end of third
quarter 2004, the Company entered into sale/leaseback transactions pursuant to
which it sold eight Company owned Childtime center premises for $6.5 million
and simultaneously entered into leases for these locations. Additional cash
arrangements may be entered into in the future

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,
resulting in decreased liquidity. Should cash flow generated from current
sources 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 liquidity will be
sufficient.

On June 25, 2003, the Company amended its $17.5 million Amended and Restated
Credit Agreement with its existing lender. This revolving line of credit will
mature on June 30, 2004, and is secured 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 $15.3 million at January 2, 2004, and $13.0 million
at March 28, 2003. Outstanding letters of credit reduced the availability,
under the $17.5 million line of credit, in the amount of $2.1 million at
January 2, 2004 and $2.5 million at March 28, 2003. Although it is the
Companys intention to extend this agreement prior to maturity, no assurance
can be given that the Company will be able to obtain an extension. 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 each of the first three fiscal quarters of the year
ended March 28, 2003, the Company had not maintained minimum consolidated
EBITDA levels and had not provided timely reporting as required by the Amended
and Restated Credit Agreement. During the quarter ended October 10, 2003, the
Company had not maintained the minimum consolidated EBITDA and fixed charge
coverage ratio as required under the agreement. On November 19, 2003, the
Company further amended the Amended and Restated Credit Agreement, whereby the
lender waived these defaults and provided for amended covenants for the
remainder of the year. The Company was in compliance with the amended covenants
for the quarter ended January 2, 2004. No assurance can be given that the
Company will be in covenant compliance during the remainder of this agreement
or that waivers can be obtained if a default occurs. On January 20, 2004, the
Company further amended the Amended and Restated Credit Agreement. As part of
the amendment, the lender released its lien on the properties subject to the
sale/leaseback transactions in return for reducing the amount of the credit
facility by $2.5 million, to $15.0 million.

Net cash (used) by operating activities was ($1.5 million) for year to date
2004, compared to ($2.6 million) for the same period last year. Year to date
2004 cash (used) by operating activities was negatively impacted by an increase
in the accounts receivable balance and an increase in prepaid assets. Year to date 2003 cash
(used) by operating activities was negatively impacted by a net loss and
deferred income taxes, partially offset by the non cash expense related to
intangible and long lived fixed asset impairment charges.

During year to date 2004, 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 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 (see Note 2
of the Companys Notes to Condensed Consolidated Financial Statements
(unaudited)). 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 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.

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Primarily as a result of the Rights Offering, the Company recorded in year to
date 2004 the issuance of long-term debt of $3.5 million, the repayment of
long-term debt of $15.1 million and the issuance of common shares in the amount
of $12.1 million. Additionally, the Company increased its borrowings on the
line of credit by $2.3 million. This compared to financing activities of $25.0
million for the same period last year, consisting primarily of net borrowings
on the revolving line of credit of $10.1 million and the issuance of long-term
debt of $14.0 million and changes in drafts payable of $1.3 million. Year to
date 2003 financing activities primarily related to the acquisition of
substantially all of the assets of Tutor Time Learning Systems, Inc., as
discussed below.

Investing activities were $3.1 million for year to date 2004, of which $3.3
million was used for capital spending partially offset by $0.2 million of
proceeds from asset sales. Investing activities were $24.5 million for the same
period last year, and consisted primarily of the acquisition of substantially
all of the assets of Tutor Time Learning Systems, Inc., as discussed below.

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 the issuance of
$14 million of subordinated loans (the Subordinated Notes). The Subordinated
Notes were issued to 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 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 January 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 year to date 2004, the market value of the
outstanding interest rate contracts was substantially unchanged.

Contractual Obligations and Commitments

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 $89.9 million and
$21.2 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 provisions for the lease termination at that
time. During fiscal year 2003, the Company took 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.

At January 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
|                            |       |   | Total          |         | 1 Year |   | Years     |        | Years |   | 5 Years
|                            |       |   |                |         |        |   |           |        |       |   |        
|                            |       |   | (In thousands)
|Franchise Lease Guarantees  |       | $ | 21,225         |         |        | $ | 2,402     |        |       | $ | 4,493   |        |       | $ | 2,736  |        |  | $ | 11,594 |       
|Franchise Lease Commitments |       |   | 89,856         |         |        |   | 7,688     |        |       |   | 22,352  |        |       |   | 13,720 |        |  |   | 46,096 |       
|                            |       |   |                |         |        |   |           |        |       |   |         |        |       |   |        |        |  |   |        |       
|                            | Total |   | $              | 111,081 |        |   | $         | 10,090 |       |   | $       | 26,845 |       |   | $      | 16,456 |  |   | $      | 57,690 | 
|                            |       |   |                |         |        |   |           |        |       |   |         |        |       |   |        |        |  |   |        |       

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Related Party Transactions

In addition to the related party transactions described in the Companys Annual
Report on Form 10-K for the fiscal year ended March 28, 2003 (see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Related Party Transactions), involving Jacobson Partners, see
Note 2, Acquisition and Pro Forma Information, of the Companys Notes to
Condensed Consolidated Financial Statements (unaudited), included in this
Report under Item 1, for additional transactions entered into with Jacobson
Partners in connection with the Companys proposed Rights Offering. Jacobson
Partners is a private equity firm whose managing partner is Benjamin R.
Jacobson, the Companys Chairman of the Board. James J. Morgan, a director of
the Company and former interim Chairman of the Board and interim Chief
Executive Officer, is also a partner of Jacobson Partners, and George A.
Kellner, the Companys former Vice Chairman of the Board, serves as a special
advisor to Jacobson Partners.

Contingencies

During fiscal 2002, the Company decided not to pursue opening three new
build-to-suit centers after leases for these centers had been signed with the
developer of the centers. The Company was subsequently sued by the developer
for breach of contract. This case was settled at the end of fiscal 2002, and a
current liability was recorded on the balance sheet as of March 29, 2002 in the
amount of $0.8 million, which was paid during first quarter 2003.

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
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.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Predicting future events is
inherently an imprecise activity and as such requires the use of judgment.
Actual results may vary from estimates in amounts that may be material to the
financial statements.

For a description of the Companys significant accounting policies, see Note 3,
Summary of Significant Accounting Policies, to the Condensed Consolidated
Financial Statements (unaudited) included in this Report under Item 1. For a
more complete description, please refer to the Companys Annual Report on Form
10-K for the fiscal year ended March 28, 2003.

New Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and should be applied
prospectively. The Company has adopted the provisions of SFAS No. 149 which has
not had, nor does the Company expect the provisions to have, a material impact
on its financial condition or results of operations.

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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 has adopted the provisions of SFAS 150 which
has not had, nor does the Company expect the provisions to have, 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.

The disclosure provisions of FIN 46 are effective in all financial statements
initially issued after January 31, 2003. FIN 46 is required to be immediately
applied by all entities with a variable interest in a VIE created after January
31, 2003. A public entity with a variable interest in a VIE created before
February 1, 2003 is required to apply FIN 46 to that entity no later than the
beginning of the first interim or annual reporting period beginning after June
15, 2003. It is the opinion of management that there is no impact from FIN 46
for the third quarter 2004, since there have been no new business relationships
formed by the Company after January 31, 2003. Management is still researching
the impact of FIN 46 on future periods.

Wage Increases

Expenses for center-level salaries, wages and benefits represented
approximately 51.4% of net revenues for the third quarter 2004. 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.

SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. In
connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors that future
financial and operating results may differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance,
or achievements expressed or implied by such forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties,
including, but not limited to, ability to hire, train and retain qualified
personnel, continuation of federal and state assistance programs, projected
exit and closure expenses, pricing, competition, insurability, demand for
childcare and general economic conditions. Accordingly, actual results could
differ materially from those projected in such forward-looking statements.




ITEM 3. Quantitative and Qualitative Disclosures about Market Risks

Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. The Company is exposed
to market risk in the areas of interest rates and foreign currency exchange
rates.

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Financial Instrument

The Company has exposure to market risk for changes in interest rates related
to its debt obligations. The Company did not have cash flow exposure due to
rate changes on its 15% New Subordinated Notes in the amount of $3.5 million at
January 2, 2004. As of January 2, 2004, the Company had cash flow exposure on
the revolving line of credit, with an outstanding balance of $15.3 million, and
its notes payable, with an outstanding balance of $2.8 million, which has 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 $0.1 million in the year to date 2004.

Foreign Currency Exchange Rates

The Companys exposure to foreign currency exchange rates is limited to
revenues for one company owned center and franchise royalties for 12 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 4. Controls and Procedures

Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly 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 our internal control over financial reporting
during the fiscal quarter ended January 2, 2004, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under 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 us 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.




PART II  OTHER INFORMATION




ITEM 1. Legal Proceedings

Information regarding this Item is set forth in Note 7 to the Companys Notes
to Condensed Consolidated Financial Statements (unaudited) included in Part I,
Item 1 of this Report.

ITEMS 2 through 5 are not applicable.

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ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|     |  |                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Sixth Amendment to Amended and Restated Credit Agreement dated as of December 29, 2003, between
Childtime Childcare, Inc. and Bank One, NA 
|     |  |                                                                                                                                            
|4.2  |  | Seventh Amendment to Amended and Restated Credit Agreement dated as of January 20, 2004, between
Childtime Childcare, Inc. and Bank One, NA
|     |  |                                                                                                                                            
|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                                   
|     |  |                                                                                                                                            
|99.1 |  | Childtime/Tutor Time Learning Centers Retirement Savings Plan (RSP) (f/k/a Childtime Childrens Centers
401(k) Savings & Retirement Plan)  

(b) Reports on Form 8-K



| | 1) |  | The Company filed a Current Report on Form 8-K on November 24, 2003,
announcing the temporary suspension of trading under its Employee
Benefit plans and its operating results for the second quarter 2004.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

|                        |  |                                               |  |                                      
|----------------------- |  | --------------------------------------------- |  | -------------------------------------
|                        |  | CHILDTIME LEARNING CENTERS, INC.
(REGISTRANT)
|                        |  |                                               |  |                                      
|Date: February 17, 2004 |  | By:                                           |  | /s/ Frank M. Jerneycic               
|                        |  |                                               |  |                                      
|                        |  |                                               |  | Frank M. Jerneycic                   
|                        |  |                                               |  | Chief Financial Officer and Treasurer
|                        |  |                                               |  | (Duly Authorized Officer and         
|                        |  |                                               |  | Principal Financial Officer)         

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EXHIBIT INDEX

|        |  |                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                            
|Number  |  | Description                                                                                                                                
|        |  |                                                                                                                                            
|4.1     |  | Sixth Amendment to Amended and Restated Credit Agreement dated as of December 29, 2003, between
Childtime Childcare, Inc. and Bank One, NA 
|        |  |                                                                                                                                            
|4.2     |  | Seventh Amendment to Amended and Restated Credit Agreement dated as of January 20, 2004, between
Childtime Childcare, Inc. and Bank One, NA
|        |  |                                                                                                                                            
|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                                  
|        |  |                                                                                                                                            
|99.1    |  | Childtime/Tutor Time Learning Centers Retirement Savings Plan (RSP) (f/k/a Childtime Childrens Centers
401(k) Savings & Retirement Plan)  

25