|                                                          
|----------------------------------------------------------
|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 OCTOBER 14, 2005           
|                                                          
|OR                                                        
|                                                          
|o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|SECURITIES EXCHANGE ACT OF 1934                           
|                                                          
|FOR THE TRANSITION PERIOD FROM ______ TO ______           
|                                                          
|COMMISSION FILE NUMBER: 0-27656                           
|                                                          
|LEARNING CARE GROUP, 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 300Novi, 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x
The number of shares of Registrants Common Stock, no par value per share, outstanding at November
10, 2005, was 20,124,989.

|
|



|LEARNING CARE GROUP, INC. AND SUBSIDIARIES     
|-----------------------------------------------
|                                               
|FORM 10-Q                                      
|                                               
|INDEX                                          
|                                               
|For the Quarterly Period Ended October 14, 2005
|                                               

|              |                       |  |                                                                            |                                                                            | Page
            Number | 
|------------- | --------------------- |  | -------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------- | 
|              |                       |  |                                                                            |                                                                            |                         | 
|              |                       |  |                                                                           
|             
|PART I.       | FINANCIAL INFORMATION |  |                                                                           
|              |                       |  |                                                                            |                                                                            |                         | 
|              | ITEM 1.               |  | Condensed Consolidated Financial Statements                                |                                                                            |                        
|              |                       |  |                                                                            |                                                                            |                         | 
|              |                       |  | A.                                                                         | Condensed Consolidated Balance Sheets October 14, 2005 and April 1, 2005   | 3                       | 
|              |                       |  | B.                                                                         | Condensed Consolidated Statements of Operations 12 and 28 weeks ended      |                         | 
|              |                       |  |                                                                            | October 14, 2005 and October 15, 2004                                      | 4                       | 
|              |                       |  | C.                                                                         | Condensed Consolidated Statements of Cash Flows 28 weeks ended October 14, |                         | 
|              |                       |  |                                                                            | 2005 and October 15, 2004                                                  | 5                       | 
|              |                       |  | D.                                                                         | Notes to Condensed Consolidated Financial Statements                       | 6-15                    | 
|              | ITEM 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of |                                                                            |                        
|              |                       |  | Operations                                                                 | 15-21                                                                      |                        
|              | ITEM 3.               |  | Quantitative and Qualitative Disclosures about Market Risks                | 21-22                                                                      |                        
|              | ITEM 4.               |  | Controls and Procedures                                                    | 23                                                                         |                        
|              |                       |  |                                                                            |                                                                            |                         | 
|PART II.      | OTHER INFORMATION     |  |                                                                           
|              |                       |  |                                                                            |                                                                            |                         | 
|              | ITEM 1.               |  | Legal Proceedings                                                          | 24                                                                         |                        
|              | ITEM 5.               |  | Other Information                                                          | 24                                                                         |                        
|              | ITEM 6.               |  | Exhibits                                                                   | 24                                                                         |                        
|              |                       |  |                                                                            |                                                                            |                         | 
|SIGNATURES    | 25                    | 
|              |                       |  |                                                                            |                                                                            |                         | 
|EXHIBIT INDEX | 26                    | 

|2
|-



|PART I  FINANCIAL INFORMATION                                                 
|-------------------------------------------------------------------------------
|                                                                               
|ITEM 1. Condensed Consolidated Financial Statements                            
|                                                                               
|LEARNING CARE GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
|                                                                               

|                                                                                                                                                      | October 14,
      2005 |         | April 1,
      2005 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ------------------- | -
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                      |                        |         |                     |  
|                                                                                                                                                      |                       
|ASSETS                                                                                                                                                |                        |         |                     |  
|CURRENT ASSETS:                                                                                                                                       |                        |         |                     |  
|Cash and cash equivalents                                                                                                                             | $                      | 673     |                     | $
|Accounts receivable, net                                                                                                                              |                        | 10,460  |                     |  
|Prepaid expenses and other current assets                                                                                                             |                        | 4,678   |                     |  
|                                                                                                                                                      |                        |         |                    
|Total current assets                                                                                                                                  |                        | 15,811  |                     |  
|                                                                                                                                                      |                        |         |                    
|LAND, BUILDINGS AND EQUIPMENT:                                                                                                                        |                        |         |                     |  
|Land                                                                                                                                                  |                        | 9,225   |                     |  
|Buildings                                                                                                                                             |                        | 20,394  |                     |  
|Leasehold improvements                                                                                                                                |                        | 17,505  |                     |  
|Vehicles, furniture and equipment                                                                                                                     |                        | 15,722  |                     |  
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                      |                        | 62,846  |                     |  
|Less: accumulated depreciation and amortization                                                                                                       |                        | (22,852 | )                   |  
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                      |                        | 39,994  |                     |  
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                     
|OTHER NONCURRENT ASSETS:                                                                                                                              |                        |         |                     |  
|Goodwill, net                                                                                                                                         |                        | 19,109  |                     |  
|Intangible assets, net                                                                                                                                |                        | 11,059  |                     |  
|Refundable deposits and other                                                                                                                         |                        | 1,623   |                     |  
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                      |                        | 31,791  |                     |  
|                                                                                                                                                      |                        |         |                    
|TOTAL ASSETS                                                                                                                                          | $                      | 87,596  |                     | $
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                     
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                  |                        |         |                     |  
|CURRENT LIABILITIES:                                                                                                                                  |                        |         |                     |  
|Accounts and drafts payable                                                                                                                           | $                      | 5,204   |                     | $
|Accrued wages and benefits                                                                                                                            |                        | 7,679   |                     |  
|Current portion of long-term debt                                                                                                                     |                        | 64      |                     |  
|Exit and closure expense accrual                                                                                                                      |                        | 222     |                     |  
|Other current liabilities                                                                                                                             |                        | 11,603  |                     |  
|                                                                                                                                                      |                        |         |                    
|Total current liabilities                                                                                                                             |                        | 24,772  |                     |  
|LONG-TERM DEBT, NET OF CURRENT PORTION                                                                                                                |                        | 6,546   |                     |  
|DEFERRED RENT LIABILITY                                                                                                                               |                        | 3,203   |                     |  
|OBLIGATIONS UNDER SALE LEASEBACK TRANSACTIONS                                                                                                         |                        | 11,068  |                     |  
|                                                                                                                                                      |                        |         |                    
|Total liabilities                                                                                                                                     |                        | 45,589  |                     |  
|                                                                                                                                                      |                        |         |                    
|                                                                                                                                                     
|SHAREHOLDERS EQUITY                                                                                                                                  |                        |         |                     |  
|Common Stock, 40,000,000 shares authorized, no par value; 20,124,589 and
     19,839,410 issued and outstanding at October 14, 2005 and April 1, 2005 |                        | 44,767  |                     |  
|Preferred Stock, 100,000 shares authorized, no par value; no shares issued or 
     outstanding                                                       |                        |        |                     |  
|Retained earnings (accumulated deficit)                                                                                                               |                        | (2,760  | )                   |  
|                                                                                                                                                      |                        |         |                    
|Total shareholders equity                                                                                                                            |                        | 42,007  |                     |  
|                                                                                                                                                      |                        |         |                    
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                            | $                      | 87,596  |                     | $
|                                                                                                                                                      |                        |         |                    

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

|3
|-



|LEARNING CARE GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|-----------------------------------------------------------------------------------------------------

|                                                                                    |   |        |   |  
|----------------------------------------------------------------------------------- | - | ------ | - | -
|
|
|
|
|
|                                                                                    |   |        |   |  
|Revenue from Learning Center Operations                                             | $ | 48,662 |   | $
|Revenue from Franchise Operations                                                   |   | 1,780  |   |  
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|Total revenue                                                                       |   | 50,442 |   |  
|Operating expenses of Learning Centers (exclusive of depreciation and amortization) |   | 44,219 |   |  
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|Gross profit                                                                        |   | 6,223  |   |  
|                                                                                    |   |        |   |  
|General and administrative expenses                                                 |   | 5,831  |   |  
|Depreciation and amortization expenses                                              |   | 1,040  |   |  
|Loss/(gain) on disposal of assets                                                   |   | 66     |   |  
|Provision for doubtful accounts                                                     |   | 366    |   |  
|Exit and closure expenses                                                           |   | 28     |   |  
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|Operating income (loss)                                                             |   | (1,108 | ) |  
|Interest expense, net                                                               |   | 410    |   |  
|Other expense (income), net                                                         |   | (15    | ) |  
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|Income (loss) before income taxes and discontinued operations                       |   | (1,503 | ) |  
|                                                                                    |   |        |   |  
|Income tax provision (benefit)                                                      |   | (100   | ) |  
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|Income (loss) before discontinued operations                                        |   | (1,403 | ) |  
|                                                                                    |   |        |   |  
|Discontinued operations, net of taxes                                               |   | 185    |   |  
|                                                                                    |   |        |   |  
|Net income (loss)                                                                   | $ | (1,218 | ) | $
|                                                                                    |   |        |   |  
|INCOME (LOSS) PER SHARE - BASIC:                                                    |   |        |   |  
|Income (loss) before discontinued operations                                        | $ | (0.07  | ) | $
|Discontinued operations, net of taxes                                               | $ | 0.01   |   |  
|                                                                                    |   |        |   |  
|Net income (loss)                                                                   | $ | (0.06  | ) | $
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|INCOME (LOSS) PER SHARE - DILUTED:                                                  |   |        |   |  
|Income (loss) before discontinued operations                                        | $ | (0.07  | ) | $
|Discontinued operations, net of taxes                                               |   | 0.01   |   |  
|                                                                                    |   |        |   |  
|Net income (loss)                                                                   | $ | (0.06  | ) | $
|                                                                                    |   |        |   |  
|                                                                                    |   |        |   |  
|Weighted average shares outstanding                                                 |   |        |   |  
|Basic                                                                               |   | 19,974 |   |  
|Diluted                                                                             |   | 21,763 |   |  

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

|4
|-



|LEARNING CARE GROUP, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|-----------------------------------------------------------------------------------------------------

|                                                                                    |   |       
|----------------------------------------------------------------------------------- | - | ------
|
|
|
|
|
|OPERATING ACTIVITIES:                                                               |   |       
|                                                                                    |   |       
|Net income                                                                          | $ | 873   
|Adjustments to reconcile net income to cash
      provided by operating activities: |   |       
|Depreciation and amortization                                                       |   | 2,409 
|Provision for doubtful accounts                                                     |   | 818   
|Stock compensation expense                                                          |   | 749   
|Deferred rent liability                                                             |   | 323   
|Minority interest in variable interest entities                                     |   |      
|Gain on sale of assets                                                              |   | (166  
|Changes in operating assets and liabilities:                                        |   |       
|Accounts receivable                                                                 |   | (1,401
|Prepaid expenses and other current assets                                           |   | 931   
|Income tax payable                                                                  |   | (347  
|Accounts payable, accruals and other current liabilities                            |   | 2,971 
|Exit and closure expense accrual                                                    |   | 35    
|                                                                                    |   |       
|Net cash provided by operating activities                                           |   | 7,195 
|                                                                                   
|INVESTING ACTIVITIES:                                                               |   |       
|Acquisiton of centers                                                               |   | (177  
|Capital spending                                                                    |   | (3,592
|Proceeds from sale of assets                                                        |   | 351   
|Refunding of deposits and other assets                                              |   | 278   
|                                                                                    |   |       
|Net cash used in investing activities                                               |   | (3,140
|                                                                                   
|FINANCING ACTIVITIES:                                                               |   |       
|Net borrowings on revolving line of credit                                          |   | 2,166 
|Repayments under long-term debt                                                     |   | (3,558
|Reduction of drafts payable                                                         |   | (3,024
|Issuance of common shares (net of issuance costs)                                   |   | 51    
|                                                                                    |   |       
|Net cash used in financing activities                                               |   | (4,365
|                                                                                    |   |       
|Net increase (decrease) in cash and cash equivalents                                |   | (310  
|Cash and cash equivalents, beginning of year                                        |   | 983   
|                                                                                    |   |       
|Cash and cash equivalents, end of period                                            | $ | 673   
|                                                                                    |   |       

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

|5
|-



|LEARNING CARE GROUP, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
NOTE 1  DESCRIPTION OF BUSINESS
Learning Care Group, Inc. conducts business through its wholly-owned subsidiaries, Childtime Childcare,
Inc. and Tutor Time Learning Centers, L.L.C. (collectively, the Company). The Company
and its predecessors began operations in 1967. The Company 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 October 14, 2005, the Company operated
or franchised a total of 457 centers system-wide under three major lines of business and had system-wide
licensed capacity to serve over 69,000 children. The Companys three lines of business are:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |  | Childtime Learning Centers:  256 centers operated by the Company, consisting of:
| | - | --------------------------------------------------------------------------------
| |   |                                                                                 

| |      250 Childtime centers and                              
| | -------------------------------------------------------------
| |                                                              
| |      6 Childtime-branded centers operated for third parties;
| |                                                              

| |  | Tutor Time Learning Centers:  70 Tutor Time centers operated by the Company; and                          
| | - | ----------------------------------------------------------------------------------------------------------
| |   |                                                                                                           
| |  | Tutor Time Franchise Operations: royalties and other fees received from 131 franchised Tutor Time centers.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Childtime and Tutor Time corporate centers are located throughout the United States (in 25 states).
The vast majority of these centers are operated on leased premises, with typical lease terms ranging
from 1 to 25 years. Thirty-six of the Childtime centers are operated on Company-owned premises.
The Company operates six Childtime centers under management contracts 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 118 centers operating
in 14 states. An additional 13 centers are operated in Hong Kong, Indonesia, Portugal, and the Philippines,
mostly under master franchise agreements. The Company is currently the primary obligor or guarantor
on leases for 47 of its franchise centers.
NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Learning Care Group, Inc. and
its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation.
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 April 1, 2005, 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 October 14, 2005, and the results of its operations and cash flows for the periods
ended October 14, 2005 and October 15, 2004, 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.

|6
|-



|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 periods. 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 2006 and 2005, the second quarters contained 12 weeks, and the fiscal years contain 52 weeks.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued FAS 123(R). FAS 123(R) is a revision
of FAS No. 123, as amended, Accounting for Stock-Based Compensation (FAS 123), and supersedes
Accounting Principles Board Opinion 25 (APB 25). FAS 123(R) eliminates the alternative to
use the intrinsic value method of accounting that was provided in FAS 123, which generally resulted
in no compensation expense recorded in the financial statements related to the issuance of stock
options. FAS 123(R) requires that the cost resulting from all stock-based payment transactions be
recognized in the financial statements. FAS 123(R) establishes fair value as the measurement objective
in accounting for stock-based payment arrangements and requires all companies to apply a fair-value
based measurement in accounting for all stock-based payment transactions.
On July 23, 2005 (the first day of its fiscal 2006 second quarter), the Company adopted FAS 123(R).
While FAS 123(R) is not effective until the first annual reporting period that begins after June
15, 2005, the Company elected to adopt before the required effective date. The Company adopted FAS
123(R) using a modified prospective application, as permitted under FAS 123(R). Accordingly, prior
period amounts have not been restated. Under this application, the Company is required to record
compensation expense for all awards granted after the date of adoption and for the unvested portion
of previously granted awards that remain outstanding at the date of adoption.
Before the adoption of FAS 123(R), the Company applied APB 25 to account for stock-based awards. Under
APB 25, the Company only recorded stock-based compensation expense for $0.3 million. In accordance
with the adoption of FAS 123(R), the Company recorded stock-based compensation expense for the cost
of stock options issued under the following plans: 1995 Stock Incentive Plan for Key Employees,
the Director Stock Option Plan, the Childtime Learning Centers, Inc. 2003 Equity Compensation Plan
and shares issued under equity compensation plans not approved by security holders (together, the
Stock Option plans).
The impact of adoption of FAS 123(R) in the second quarter was a decrease in compensation expense of
$0.8 million compared to what would have been recorded under APB 25. This decrease was caused by
the market impact of the market based performance conditions that were achieved in the quarter.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-



|The following table details the effect
on net income and net income per share had the stock-based compensation expense for
the Stock Option 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(R). The reported and pro forma net income and net income per share for the
12 weeks ended October 14, 2005 in the table below are the same since
stock-based compensation expense is calculated under the provisions of FAS
123(R). These amounts for the 12 weeks ended October 14, 2005 are included in
the table below only to provide the detail for a comparative presentation to the
second quarter of fiscal 2005. All amounts are in thousands, except per share
amounts.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                                                                                                                         | 12 Weeks Ended |        | 28 Weeks Ended |  
|---------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------ | -------------- | -
|
|
|
|Net income as reported                                                                                                                   | $              | (1,218 | )              | $
|Add: Total stock-based compensation                                                                                                      |                |        |                |  
|expense included in reported net income,net of related tax effects                                                                       |                | 927    |                |  
|Deduct: Total stock-based compensation
      expense determined under fair-value
      method for all awards, net of related tax effects |                | (927   | )              |  
|                                                                                                                                         |                |        |                |  
|Pro forma net income                                                                                                                     | $              | (1,218 | )              | $
|                                                                                                                                         |                |        |                |  
|Earnings per share:                                                                                                                      |                |        |                |  
|Basic-reported                                                                                                                           | $              | (0.06  | )              | $
|Basic- pro forma                                                                                                                         | $              | (0.06  | )              | $
|                                                                                                                                         |                |        |                |  
|Diluted-reported                                                                                                                         | $              | (0.06  | )              | $
|Diluted- pro forma                                                                                                                       | $              | (0.06  | )              | $
|                                                                                                                                         |                |        |                |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On October 14, 2005, the Company has three stock-based compensation plans, which are described below.
The compensation cost that has been charged against income for those plans was $0.9 million and $1.0
million for the 12 and 28 weeks ended October 14, 2005, respectively. For the 12 and 28 weeks ended
October 15, 2004 the stock compensation expense was less than $0.1 million and $0.1 million, respectively.
There was no income tax benefit recognized in the income statement for stock-based compensation plans
for the periods ended October 14, 2005 and October 15, 2004, as the Company had a valuation reserve
recorded (see Note 7).
The 1995 Stock Incentive Plan for Key Employees (the 1995 Plan) provides for grants of
incentive stock options at an option price per share of not less than 100% of the fair market value
of the stock on the date on which the option is granted and non-qualified stock options at an option
price not less than 75% of the fair market value of the stock on the date upon which the option is
granted. 1995 Plan stock options are generally granted with a 5 year vesting period and a 6 year
term. The stock options typically vest in equal annual installments over the vesting period.
The 1995 Plan authorizes 600,000 shares for awards of incentive stock options and non-qualified stock options.

The 2003 Equity Compensation Plan (the 2003 Plan) provides, among other things, for grants
of incentive stock options at an option price per share of not less than 100% of the fair market
value of the stock on the date on which the option is granted, non-qualified stock options at an
option price not less than 50% of the fair market value of the stock on the date upon which the option
is granted, and performance share rights. Stock options are generally granted with a 5 year vesting
period and a 6 year term. The stock options typically vest in equal annual installments over the
vesting period. The 2003 Plan authorizes 1,500,000 shares for awards of incentive stock options, non-qualified stock options and performance share rights.
The Director Stock Option Plan (the Director Plan) provides for grants of non-qualified
stock options at an option price per share equal to the fair market value of the Companys Common
Stock on the date of the grant. Stock options are granted with a one year vesting period and a five
year term. The stock options vest completely at the end of the one year vesting period.
The Director Plan authorizes 75,000 shares for awards of non-qualified stock options.

|8
|-



|The fair value of the stock options was estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The risk free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected holding period of the stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility for a period equal to the stock options expected life.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                         | 2006 |       | 2005 | 
|------------------------ | ---- | ----- | ---- | 
|
|
|                         |      |       |      | 
|                        
|Risk-free rate           |      | 4.1   | %    | 
|Expected term (in years) |      | 5     |      | 
|Expected volatility      |      | 100.0 | %    | 
|Expected dividends       |      | 0.0   | %    | 

|                                                                                               
|-----------------------------------------------------------------------------------------------
|Changes in the Companys stock options for the 28 weeks ended October 14, 2005 were as follows:
|                                                                                               

| |                                 | Number
      of Options (000s) |       | Weighted
      Average
      Exercise Price |   | Weighted
      Average
      Remaining
      Contractual Term |  | Aggregate
      Intrisic
      Value ($000s) |     | 
| | ------------------------------- | ------------------------------- | ----- | ------------------------------------------- | - | ------------------------------------------------------------- |  | --------------------------------------------- | --- | 
| |                                 |                                 |       |                                             |   |                                                               |  |                                               |     | 
| | Options outstanding at 4/1/05   |                                 | 1,894 |                                             | $ | 3.5                                                           |  |                                               |     | 
| | Granted                         |                                 | 135   |                                             |   | 4.2                                                           |  |                                               |     | 
| | Exercised                       |                                 | (22   | )                                           |   | 2.4                                                           |  |                                               |     | 
| | Forfeited or expired            |                                 | (24   | )                                           |   | 8.7                                                           |  |                                               |     | 
| |                                 |                                 |       |                                             |   |                                                               |  |                                               |     | 
| | Options outstanding at 10/14/05 |                                 | 1,983 |                                             |   | 3.5                                                           |  |                                               | 3.2 | 
| |                                 |                                 |       |                                             |   |                                                               |  |                                               |     | 
| | Options exercisable at 10/14/05 |                                 | 1,194 |                                             |   | 4.3                                                           |  |                                               | 2.6 | 
| |                                 |                                 |       |                                             |   |                                                               |  |                                               |     | 

The weighted-average
grant-date fair value of options granted during fiscal 2006 and 2005 were $3.27 and
$1.88, respectively. The total intrinsic value of options exercised during fiscal 2006
and 2005 were $22,000 and $33,000, respectively. A summary of the status of the
Companys nonvested options as of October 14, 2005 and changes during fiscal 2006, is
presented below: Shares (000's)
    
    Weighted
      Average
      Grant-Date
      Fair ValueNonvested
      at 4/1/05
    
    
    
    907
    
    $
    0.90Granted
    
    
    
    135
    
    
    3.27Vested
    
    
    
    (253
    )
    
    0.98Forfeited
    
    
    
    0
    
    
    0.39Nonvested
      at 10/14/05
    
    
    
    789
    
    $
    1.28  As of October 14, 2005, there was
$0.8 million of total unrecognized compensation cost related to nonvested stock-based
compensation granted under the Stock Option Plans. That cost is expected to be recognized
over a weighted-average period of 4.1 years.  The total fair value of shares vested
during the 28 weeks ended October 14, 2005 was $0.2 million. The fair value of the performance
share rights awarded under the 2003 Plan were estimated on the date of grant using a
binomial option valuation model that uses the assumptions noted in the following table.
The risk free rate is based on the U.S. Treasury yield curve in effect at the time of
grant. Expected volatility was based on historical volatility for a period equal to the
awards expected life. The expected holding term is 6 years for rights awarded in
2005 and 2004, respectively. The employee turnover is based on the historical experience
of the individual employees awarded the performance share rights.


|
|
|
|
|
|
|
|
|
|
|

|                                                                                                    
|----------------------------------------------------------------------------------------------------
|Changes in the Companys performance shares for the 28 weeks ended October 14, 2005 were as follows:
|                                                                                                    

|                                     | Number
      of Performance
      Shares (000s) |          | Weighted
      Average
      Exercise Price |   | Average
      Remaining
      Contractual Term |  | Aggregate
      Intrisic
      Value ($000s) |  
|------------------------------------ | ------------------------------------------------ | -------- | ------------------------------------------- | - | ---------------------------------------------- |  | --------------------------------------------- | -
|
|Shares outstanding
      at 4/1/05   |                                                  | 100,000  |                                             | $ |                                               |  |                                               |  
|Granted                              |                                                  | 200,000  |                                             |   |                                               |  |                                               |  
|Vested and
      exercised           |                                                  | (300,000 | )                                           |   |                                               |  |                                               |  
|Forfeited
      or expired           |                                                  |         |                                             |   |                                               |  |                                               | 
|                                     |                                                  |          |                                             |   |                                                |  |                                               |  
|Shares outstanding
      at 10/14/05 |                                                  |         |                                             |   |                                               |  |                                               | 
|                                     |                                                  |          |                                             |   |                                                |  |                                               |  
|Shares exercisable
      at 10/14/05 |                                                  |         |                                             |   |                                               |  |                                               | 
|                                     |                                                  |          |                                             |   |                                                |  |                                               |  

|9
|-



|The 100,000 performance share rights awarded in 2005 vested on a one-for-one basis on August 16, 2005, based on the Companys stock achieving a market price of $5.00 or more for twenty consecutive trading days. The 200,000 performance share rights awarded in 2006 vested on a one-for-one basis on September 16, 2005, based on the Companys stock achieving a market price of $5.50 or more for twenty consecutive trading days. There was no exercise price associated with the performance share rights. The weighted-average grant-date fair value of rights awarded during fiscal 2006 and 2005 were $3.46 and $1.80, respectively. The total intrinsic value of rights vested and exercised during fiscal 2006 and 2005 were $872,000 and $0, respectively.                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Cash received from option exercise under all stock-based payment arrangements for fiscal 2006 and 2005 was $51,000 and $65,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Company has a policy of issuing new shares from the total shares authorized to satisfy share option exercises.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Under the terms of the various plans, in the event of a change in control of the Company, all of the outstanding shares become vested or, at the discretion of the Compensation Committee, will vest as of the date of the change in control (see Note 15).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 3  ACCOUNTS RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Accounts receivable is presented net of an allowance for doubtful accounts. At October 14, 2005 and April 1, 2005, the allowance for doubtful accounts was $0.7 million and $0.6 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 4  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 October 14, 2005 and April 1, 2005, the aggregate drafts payable were $1.7 million and $4.7 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 5  COMMITMENTS & CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|A subsidiary of the Company is primarily or contingently liable for many of the leases of Tutor Times franchisees. In an effort to build its franchisee network, Tutor Time either leased the prospective site for a franchisee, with a subsequent sublease of the site to the franchisee, or provided a lease guarantee to the landlord for the benefit of the franchisee in exchange for a monthly lease guarantee fee payable by the franchisee that is based upon the monthly rent expense of the guaranteed lease. The payments the Company could be required to pay related to leases and guarantees aggregate $65.6 million and $10.6 million, respectively, in case of default by the franchisee. Should the Company be required to make payments under these
leases, it may assume obligations for operating the center. Should the center not be economically viable, the Company will make provision for the lease termination at that time. The Company does not anticipate that it will be required to make payments under any of these lease arrangements, 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 former centers. In addition, the Company has and will continue to vigorously protect its rights against parties that violate franchise agreements or infringe on its intellectual property rights. Litigation is subject to many uncertainties; the outcome of individual litigated matters is not predictable with assurance, and it is reasonably possible that some of these matters may be decided unfavorably to the Company. Although there is a chance that any unfavorable decision could have a material adverse impact on the
Companys financial position, liquidity and results of operations, 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 6  RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|In July 2000, the Company retained Jacobson Partners, of which Benjamin R. Jacobson, the Companys Chairman of the Board, is the managing general partner, to provide management and financial consulting services. Total consulting fees incurred for Jacobson Partners were $135,000 for the 28 weeks ended October 14, 2005 and October 15, 2004, and are included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|10
|--



|As discussed in Note 15, the Company announced its agreement to be acquired by A.B.C. Learning Centres
Limited and become a wholly-owned subsidiary. In connection with the negotiation of the merger agreement,
the Company also entered into a financial advisory agreement, dated November 11, 2005, with Jacobson
Partners. The financial advisory agreement provides for payment by the Company to Jacobson Partners
of a fee equal to 1% of the total merger consideration paid by A.B.C under the agreement in exchange
for investment banking and financial advisory services provided to the Company by Jacobson Partners
in connection with the merger. This fee is payable only upon consummation of the merger, at which
time the fee for management and financial consulting services described above will terminate.
In September 2005, the Company retained La Paz Group, Inc., of which Dan Boyle, a member of the Companys
Board of Directors, is the owner, to provide consulting services. Total consulting fees incurred
were $3,000 for the 28 weeks ended October 14, 2005, and are included in general and administrative
expenses in the accompany Condensed Consolidated Statements of Operations.
NOTE 7  INCOME TAXES
During the 12 weeks ended October 14, 2005, an income tax benefit of $0.1 million was recorded on a
loss before income taxes and discontinued operations of $1.5 million, compared to an income tax benefit
of $0.1 million on a loss before income taxes and discontinued operations of $1.0 million for the
same period last year. During the 28 weeks ended October 14, 2005, an income tax provision of $0.1
million was recorded on income before income taxes and discontinued operations of $0.9 million, compared
to an income tax provision of $0.1 million on income before income taxes and discontinued operations
of $0.0 million for the same period last year. Income tax expense for the 12 and 28 weeks ended October
14, 2005 and October 15, 2004 varied from the U.S. statutory rate of 34% due primarily to the utilization
of net operating loss carryforwards for which a valuation allowance has been recorded.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11
|--



|NOTE 8  NET INCOME PER SHARE
    For the 12 and 28 weeks ended October 14, 2005 and October 15, 2004, basic income 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 on Incremental Shares |       
|---------------------------------------- | --------------------------------- | ------
|
|
|
|
|
|Basic shares (based on weighted average) |                                   | 19,974
|Stock options (1)                        |                                   | 1,789 
|                                         |                                   |       
|Diluted shares                           |                                   | 21,763
|                                         |                                   |       

|
|

|(1) For the 12 and 28 weeks ended October 14, 2005, the above calculation does not include 184,320
and 609,320 shares, respectively, issuable from stock options or performance rights awards 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. For the 12 and 28 weeks
ended October 15, 2004, the above calculation does not include 2,032,124 and 961,769 shares issuable
from 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.
NOTE 9  EXIT AND CLOSURE EXPENSES AND DISCONTINUED OPERATIONS
The Company has made provisions for closed center lease obligations and discontinued operations in
connection with the closing of under-performing centers. A summary of the accrual and related expenses
is as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                          | Exit and Closure Expenses and Discontinued Operations Accrual Analysis |    
|----------------------------------------- | ---------------------------------------------------------------------- | ---
|                                         
|
|                                          |                                                                        |    
|Closed center lease obligations           | $                                                                      | 119
|                                          |                                                                        |    
|Discontinued operations lease obligations |                                                                        | 68 
|                                          |                                                                        |    
|Total                                     | $                                                                      | 187
|                                          |                                                                        |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The liability for the leases on closed centers during the 28 weeks ended October 14, 2005 has been measured at the fair value, which is determined by the present value of the remaining lease rentals and costs, to the extent that they exceed the reasonably attainable sublease rentals. The exit and closure expenses primarily relate to underperforming centers which have been closed. During the second and first quarters of fiscal 2006, there
were adjustments to the reserve in the amount of $0 and $50,000, respectively. There were no adjustments to the reserve for the second and first quarters of fiscal 2005. All exit and closure expenses are in the Childtime business segment.

|12
|--



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

|                                          |  | 12 Weeks Ended         |      | 28 Weeks Ended         |  
|----------------------------------------- |  | ---------------------- | ---- | ---------------------- | -
|                                          |  |                        |      |                        |  
|                                          |  | October 14,
      2005 |      | October 15,
      2004 |  
|                                          |  |                        |      |                        |  
|Revenues, net                             |  | $                      | 55   |                        | $
|Operating expenses of Learning Centers    |  |                        | 92   |                        |  
|                                          |  |                        |      |                        |  
|Gross profit (loss)                       |  |                        | (37  | )                      |  
|Depreciation and amortization expenses    |  |                        |     |                        |  
|Loss/(gain) on disposal of assets         |  |                        | (223 | )                      |  
|Provision for doubtful accounts           |  |                        | 1    |                        |  
|                                          |  |                        |      |                        |  
|Discontinued operations before income tax |  |                        | 185  |                        |  
|                                         
|Income tax provision                      |  |                        |     |                        |  
|                                          |  |                        |      |                        |  
|Discontinued operations, net of tax       |  | $                      | 185  |                        | $
|                                          |  |                        |      |                        |  

|                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10  INTANGIBLE ASSETS AND GOODWILL
The changes in the carrying amounts of goodwill and other intangible assets for the 28 weeks ended
October 14, 2005 were as follows (in thousands):

|                             |  |                              |        |           |   |           |  |              |   |                                 |   |             | 
|---------------------------- |  | ---------------------------- | ------ | --------- | - | --------- |  | ------------ | - | ------------------------------- | - | ----------- | 
|                             |  | Balance 
      April 1, 2005 |        | Additions |   | Disposals |  | Amortization |   | Balance 
      October 14, 2005 |   | Useful Life | 
|                             |  |                              |        |           |   |           |  |              |   |                                 |   |             | 
|Goodwill, net                |  | $                            | 18,932 |           | $ | 177       |  | $            |  |                                 | $ |            | 
|                             |  |                              |        |           |   |           |  |              |   |                                 |   |             | 
|Franchise Agreements         |  |                              | 7,865  |           |   |          |  |              |  |                                 |   | 244         | 
|Trade Name and Trademarks    |  |                              | 3,379  |           |   |          |  |              |  |                                 |   | 105         | 
|Curriculum                   |  |                              | 212    |           |   |          |  |              |  |                                 |   | 48          | 
|                             |  |                              |        |           |   |           |  |              |   |                                 |   |             | 
|Intangible assets, net       |  |                              | 11,456 |           |   |          |  |              |  |                                 |   | 397         | 
|                             |  |                              |        |           |   |           |  |              |   |                                 |   |             | 
|Total intangible assets, net |  | $                            | 30,388 |           | $ | 177       |  | $            |  |                                 | $ | 397         | 
|                             |  |                              |        |           |   |           |  |              |   |                                 |   |             | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|During the period ended October 14, 2005, the Company acquired one Tutor Time center from a franchisee for $250,000, adjusted for certain assets and liabilities, which resulted in an addition to goodwill. Estimated amortization of intangible assets is expected to be $0.7 million for fiscal 2006 and approximately $0.7 million annually for the next four years.
      NOTE 11  SEGMENT INFORMATION
    The Company has three reportable segments: Childtime, Tutor Time and Franchise Operations. 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 Operations licenses and provides developmental and administrative support to franchisees operating under the Tutor Time brand name. The accounting polices of the segments
are the same as those described in the summary of significant accounting policies. The Companys reportable segments are reported separately because the Companys chief operating decision maker uses the segment information in determining the allocation of resources among segments and appraising the performance of the segments.

|13
|--



|Information about the Companys operating segments is presented below (in thousands):
|-------------------------------------------------------------------------------------
|                                                                                     

|                                                                                   | 12
      Weeks Ended |                        | 28
      Weeks Ended |                             
|---------------------------------------------------------------------------------- | -------------------- | ---------------------- | -------------------- | ----------------------------
|                                                                                   |                      |                        |                      |                             
|                                                                                   |                      | October 14,
      2005 |                      | October
      15,
      2004
|                                                                                   |                      |                        |                      |                             
|Revenues:                                                                          |                      |                        |                      |                             
|Childtime                                                                          | $                    | 34,151                 |                      | $                           
|Tutor
      Time                                                                   |                      | 14,511                 |                      |                             
|Franchise
      Operations                                                         |                      | 1,780                  |                      |                             
|Revenue
      associated with the consolidation ofVariable
      Interest Entities |                      |                       |                      |                             
|                                                                                   |                      |                        |                      |                             
|Total                                                                              | $                    | 50,442                 |                      | $                           
|                                                                                   |                      |                        |                      |                             
|Operating
      income (loss):                                                     |                      |                        |                      |                             
|Childtime                                                                          | $                    | 3,512                  |                      | $                           
|Tutor
      Time                                                                   |                      | 930                    |                      |                             
|Franchise
      Operations                                                         |                      | 1,781                  |                      |                             
|Depreciation
      and amortization                                                |                      | (1,040                 | )                    |                             
|Corporate
      and other                                                          |                      | (6,291                 | )                    |                             
|                                                                                   |                      |                        |                      |                             
|Total                                                                              | $                    | (1,108                 | )                    | $                           
|                                                                                   |                      |                        |                      |                             
|Goodwill:                                                                          |                      |                        |                      |                             
|Childtime                                                                          | $                    | 7,215                  |                      |                             
|Tutor
      Time                                                                   |                      | 6,821                  |                      |                             
|Franchise
      Operations                                                         |                      | 5,073                  |                      |                             
|                                                                                   |                      |                        |                      |                             
|Total                                                                              | $                    | 19,109                 |                      |                             
|                                                                                   |                      |                        |                      |                             
|                                                                                   |                      |                        |                      |                             
|All other
      assets:                                                            |                      |                        |                      |                             
|Childtime                                                                          | $                    | 48,220                 |                      |                             
|Tutor
      Time                                                                   |                      | 10,790                 |                      |                             
|Franchise
      Operations                                                         |                      | 9,477                  |                      |                             
|                                                                                   |                      |                        |                      |                             
|Total                                                                              | $                    | 68,487                 |                      |                             
|                                                                                   |                      |                        |                      |                             

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12  FINANCIAL INSTRUMENTS
The Company has 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 October 14, 2005 and October 15, 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, and the fair value of $12,000 is included in prepaid expenses and other
current assets as of October 14, 2005 and $37,000 is included in other current liabilities as of
October 15, 2004.
NOTE 13  CONSOLIDATION OF VARIABLE INTEREST ENTITIES:
During the fourth quarter of fiscal 2004, the Company implemented FIN 46R. The Company concluded that
some of its franchise arrangements represented variable interest entities (VIEs) which
were subject to the provisions of FIN 46R. The Companys variable interest in these entities
included royalty fees and in some cases lease guarantees and debt due to the Company from the franchisee.
The Company analyzed these franchise agreements and determined that two franchises were entities
in which the Company was the primary beneficiary. As a result, these entities were consolidated as
of April 2, 2004. During the fiscal quarter ended October 15, 2004, the Company acquired the two
franchise entities that had previously been consolidated as VIEs. As a result, these entities are not

|14
|--



|considered VIEs as of October 14, 2005. The following is a summary of the effect of consolidating these entities for the period up to the acquisition date (in thousands).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                          

|28 Weeks Ended
      October  15, 2004
|--------------------------------------
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14 - ACQUISTION OF FRANCHISE CENTER
On September 26, 2005, the Company acquired the entire equity interest of a Tutor Time franchise center
in the Strongsville, Ohio area. The company made a cash payment of $0.2 million, resulting in recorded
goodwill of $0.2 million.
NOTE 15  SUBSEQUENT EVENT
On November 15, 2005, the Company announced its agreement to be acquired by A.B.C. Learning Centres
Limited (ASX: ABS), Australias largest provider of private child care services. A.B.C. will
pay approximately $159.1 million in cash for all outstanding equity of the Company at a per share
purchase price of $7.50. The merger agreement has been approved by the Companys board of directors.
Upon completion of the acquisition, the Company will be de-listed and become a wholly-owned subsidiary
of A.B.C.
ITEM 2. Managements Discussion and Analysis
GENERAL
The information presented herein refers to the 12 weeks (second quarter 2006) and the 28 weeks (year
to date 2006) ended October 14, 2005, compared to the 12 weeks (second quarter 2005) and the 28 weeks
(year to date 2005) ended October 15, 2004.
The results of Learning Centers opened, acquired or disposed of are included in the Companys
condensed consolidated financial statements from the date of opening or acquisition and through the
date of disposition, except for those centers treated as discontinued operations in accordance with
SFAS 144. The timing of such new openings, acquisitions or dispositions could influence comparisons
of year over year results.
During second quarter 2006, the Company sold two Learning Centers, closed one Learning Center, acquired
one center from a franchisee, opened three franchise centers, and closed three franchise centers.
During second quarter 2005, the Company acquired eight Learning Centers from a franchisee and a franchisee
opened one center.
During year to date 2006, the Company sold two Learning Centers, closed four Learning Centers, acquired
one center from a franchisee, opened eight franchise centers and closed four franchise centers. During
year to date 2005, the Company acquired eight Learning Centers from a franchisee, opened one franchise
center, closed three Learning Centers and sold two additional Learning Centers to franchisees.
The Company is subject to certain risks common to the providers of child care and early education,
including dependence on key personnel, dependence on client relationships, competition from alternate
sources or providers of the Companys services, market acceptance of work and family services,
the ability to hire and retain qualified personnel, the Companys ability to manage its overall
cost structure and general economic conditions.

|15
|--



|RESULTS OF OPERATIONS
    Second Quarter 2006 Compared to Second Quarter 2005
|-----------------------------------------------------------------------------
|                                                                             

|12 Weeks 
      Ended 
      October 14, 2005 |   | Percent 
      of 
      Revenues |   | 12 Weeks 
      Ended 
      October 15, 2004 |   | Percent 
      of 
      Revenues |        | Change 
      Amount 
      (in Dollars)
|--------------------------------------------- | - | --------------------------------- | - | --------------------------------------------- | - | --------------------------------- | ------ | ----------------------------------------
|                                              |   |                                   |   |                                               |   |                                   |        |                                         
|                                              |  
|Revenue from Learning Center Operations       | $ | 48,662                            |   | 96.5                                          | % | $                                 | 45,367 |                                         
|Revenue from Franchise Operations             |   | 1,780                             |   | 3.5                                           | % |                                   | 1,540  |                                         
|                                              |   |                                   |   |                                               |   |                                   |        |                                         
|Total revenue                                 |   | 50,442                            |   | 100.0                                         | % |                                   | 46,907 |                                         
|Operating expenses of Learning Centers        |   | 44,219                            |   | 87.7                                          | % |                                   | 41,719 |                                         
|                                              |   |                                   |   |                                               |   |                                   |        |                                         
|Gross profit                                  |   | 6,223                             |   | 12.3                                          | % |                                   | 5,188  |                                         
|General and administrative expenses           |   | 5,831                             |   | 11.6                                          | % |                                   | 4,239  |                                         
|Depreciation and amortization expenses        |   | 1,040                             |   | 2.1                                           | % |                                   | 933    |                                         
|Loss/(gain) on disposal of assets             |   | 66                                |   | 0.1                                           | % |                                   | (144   | )                                       
|Provision for doubtful accounts               |   | 366                               |   | 0.7                                           | % |                                   | 564    |                                         
|Exit and closure expenses                     |   | 28                                |   | 0.1                                           | % |                                   | 32     |                                         
|                                              |   |                                   |   |                                               |   |                                   |        |                                         
|OPERATING INCOME (LOSS)                       | $ | (1,108                            | ) | -2.3                                          | % | $                                 | (436   | )                                       
|                                              |   |                                   |   |                                               |   |                                   |        |                                         

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total revenue. Total revenue for second quarter 2006 increased $3.5 million, or 7.5%, from the same period last year
to $50.4 million. Learning Center revenues increased $3.3 million, or 7.3%, with comparable center
revenues (centers opened 18 months or longer) increasing 6.0%. Of this increase, approximately 3.0%
was a result of average tuition rate increases and approximately 3.0% was a result of enrollment
increases. Childtime Learning Centers revenues increased $2.3 million, or 7.3%, with comparable Childtime
center revenues increasing 5.8%. Tutor Time Learning Centers revenues increased $1.0 million, or
7.3%, with comparable Tutor Time center revenues increasing 6.4%. Franchise Operations revenues,
which consisted primarily of royalties, increased $0.2 million, or 15.6%, with comparable franchisee
revenues increasing 10.8%.
  Operating expenses of Learning Centers. Operating expenses for second quarter 2006 increased $2.5 million, or 6.0%, from the same period last
year to $44.2 million. The increase was a result of an increase in personnel expense ($1.5 million),
which increased with higher enrollments and general wage increases; an increase in center level operating
expenses ($0.8 million), which increased with higher enrollments and increased costs from a new curriculum
program, center maintenance improvements and utilities; and an increase in occupancy expense ($0.2
million). Operating expenses as a percentage of net revenue decreased to 87.7% for first quarter
2006, from 88.9% in the same period last year. This decrease is a result of a decrease in personnel
expenses as a percentage of net revenue, resulting from increased revenues and improved labor efficiencies,
and a decrease in occupancy costs as a percentage of net revenue, resulting from increased revenues.
Gross profit. Gross profit for second quarter 2006 increased $1.0 million, or 19.9%, from the same period last year
to $6.2 million. This increase consisted of a $0.8 million increase in Learning Center Operations
gross profit and a $0.2 million increase in Franchise Operations gross profit. Gross profit percentages
for second quarter 2006 by segment were 10.3% for Childtime centers (as compared to 8.8% for 2005),
6.4% for Tutor Time centers (as compared to 6.2% for 2005) and 100% for Franchise Operations for
both years. The second quarter gross profit and gross profit percentage changes were a result of
increased revenue and the changes in operating expenses described above.
General and administrative expenses. General and administrative expenses for second quarter 2006 increased $1.6 million, or 37.6%, from
the same period last year to $5.8 million. The increase was primarily a result of stock based compensation
expense ($0.9 million) caused by the market impact of the market based performance conditions that
were achieved in the quarter, increased incentive compensation ($0.3 million) resulting from improved
operating performance, and increased support staff and general wage increases ($0.2 million). General
and administrative expenses as a percentage of net revenue increased to 11.6% for second quarter
2006 from 9.0% in the same period last year, due to general and administrative expenses increasing
at a higher rate than revenues in the current period.

|16
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|Depreciation and amortization expense. Depreciation and amortization expense for second quarter 2006 increased $0.1 million, or 11.5%, from
the same period last year to $1.0 million. Depreciation and amortization expense as a percentage
of net revenue increased to 2.1% for second quarter 2005 from 2.0% in the same period last year.
Loss/(gain) on disposal of assets.Loss on disposal of assets in second quarter 2006 was a result of the disposal of assets in the ordinary
course of business. The gain on disposal of assets in second quarter 2005 was a result of the sale
of vacant land.
Provision for doubtful accounts. Provision for doubtful accounts for second quarter 2006 decreased $0.2 million from the same period
last year to $0.4 million. During second quarter 2005, there was a decline in collection experience.
Such a decline was not experienced during second quarter 2006.
Exit and closure expenses. Exit and closure expenses for second quarter 2006 relate to estimated costs to repair closed centers
to the landlords standards upon termination of the leases, and remained constant at less than
$0.1 million from second quarter 2005.
Interest expense. Interest expense for second quarter 2006 decreased $0.1 million from the same period last year to
$0.4 million. The decrease was due to the repayment of the Companys $3.5 million Subordinated
Notes on September 1, 2005, with funds available under the credit agreement, resulting in a reduction
of interest rate.
Income tax benefit. Income tax benefit for second quarter 2006 of $0.1 million was recorded on a loss before income taxes
and discontinued operations of $1.5 million, compared to an income tax benefit of $0.1 million on
a loss before income taxes and discontinued operations of $1.0 million for the same period last year.
Income tax expense for first quarters 2006 and 2005 varied from the U.S. statutory rate of 34% due
primarily to the utilization of net operating loss carryforwards for which a valuation allowance
has been recorded.
Discontinued operations, net of taxes. Discontinued operations, net of taxes, for second quarter 2006 was $0.2 million, compared to a loss
of less than ($0.1 million) for the same period last year. Centers sold during second quarter 2006
resulted in a gain which offset negative operating results.
Net income (loss). As a result of the foregoing changes, net loss increased to ($1.2 million) for second quarter 2006,
compared to net loss of ($0.9 million) for the same period last year.
Year to Date 2006 Compared to Year to Date 2005
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|28 Weeks 
      Ended 
      October 14, 2005 |   | Percent 
      of 
      Revenues |  | 28 Weeks 
      Ended 
      October 15, 2004 |   | Percent 
      of 
      Revenues |         | Change 
      Amount 
      (in Dollars)
|--------------------------------------------- | - | --------------------------------- |  | --------------------------------------------- | - | --------------------------------- | ------- | ----------------------------------------
|                                              |   |                                   |  |                                               |   |                                   |         |                                         
|                                              |  
|Revenue from Learning Center Operations       | $ | 115,711                           |  | 96.4                                          | % | $                                 | 107,621 |                                         
|Revenue from Franchise Operations             |   | 4,300                             |  | 3.6                                           | % |                                   | 3,874   |                                         
|                                              |   |                                   |  |                                               |   |                                   |         |                                         
|Total revenue                                 |   | 120,011                           |  | 100.0                                         | % |                                   | 111,495 |                                         
|Operating expenses of Learning Centers        |   | 102,338                           |  | 85.3                                          | % |                                   | 97,162  |                                         
|                                              |   |                                   |  |                                               |   |                                   |         |                                         
|Gross profit                                  |   | 17,673                            |  | 14.7                                          | % |                                   | 14,333  |                                         
|General and administrative expenses           |   | 12,518                            |  | 10.4                                          | % |                                   | 10,636  |                                         
|Depreciation and amortization expenses        |   | 2,404                             |  | 2.0                                           | % |                                   | 2,260   |                                         
|Loss/(gain) on disposal of assets             |   | 25                                |  | 0.0                                           | % |                                   | (713    | )                                       
|Provision for doubtful accounts               |   | 818                               |  | 0.7                                           | % |                                   | 821     |                                         
|Exit and closure expenses                     |   | 93                                |  | 0.1                                           | % |                                   | 136     |                                         
|                                              |   |                                   |  |                                               |   |                                   |         |                                         
|OPERATING INCOME                              | $ | 1,815                             |  | 1.5                                           | % | $                                 | 1,193   |                                         
|                                              |   |                                   |  |                                               |   |                                   |         |                                         

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total revenue. Total revenue for year to date 2006 increased $8.5 million, or 7.6%, from the same period last year to $120.0 million. Learning Center revenues increased $8.1 million, or 7.5%, with comparable center revenues (centers opened 18 months or longer) increasing 6.0%. Of this increase, approximately 3% was a result of average tuition rate increases and approximately 3% was a result of enrollment increases. Childtime Learning
Centers revenues increased $4.9 million, or 6.5%, with comparable Childtime center revenues increasing 5.9%. Tutor Time Learning Centers revenues increased $3.6 million, or 11.7%, with comparable Tutor Time center revenues increasing 6.1%. Revenue attributable to the consolidation of two franchise arrangements considered variable interest entities (VIEs as discussed in Note 13 of the Notes to Condensed Consolidated Financial Statements (unaudited) included in this

|17
|--



|Report under Item 1) decreased from $0.4 million for year to date 2005 to $0.0 million for year to date 2006. Franchise Operations revenues, which consisted primarily of royalties, increased $0.4 million, or 11.0%, with comparable franchisee revenues increasing 10.9%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Operating expenses of Learning Centers. Operating expenses for year to date 2006 increased $5.2 million, or 5.3%, from the same period last year to $102.3 million. The increase was a result of an increase in personnel expense ($3.2 million), which increased with centers acquired, higher enrollments and general wage increases; an increase in center level operating expenses ($1.5 million), which increased with centers acquired, higher
enrollments and increased costs from a new curriculum program, center maintenance improvements and utilities; and an increase in occupancy expense ($0.9 million), which was a result of rent on acquired and new center openings, and increased occupancy costs for existing centers; partially offset by a decrease in operating expenses associated with the VIEs (0.4 million). Operating expenses as a percentage of net revenue decreased to 85.3% for year to date 2006, from 87.1% in the same period last year. This decrease is
 a result of a decrease in personnel expenses as a percentage of net revenue, resulting from increased revenues and improved labor efficiencies, a decrease in center level operating expenses as a percentage of net revenue, resulting from primarily improved food costs, and a decrease in occupancy costs as a percentage of net revenue, resulting from increased revenues.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Gross profit. Gross profit for year to date 2006 increased $3.3 million, or 23.3%, from the same period last year to $17.7 million. This increase consisted of a $2.9 million increase in Learning Center Operations gross profit and a $0.4 million increase in Franchise Operations gross profit. Gross profit percentages for year to date 2006 by segment were 13.0% for Childtime centers (as compared to 11.1% for 2005), 8.2% for Tutor
Time centers (as compared to 6.4% for 2005) and 100% for Franchise Operations for both years. The year to date gross profit and gross profit percentage changes were a result of the changes in operating expenses described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|General and administrative expenses. General and administrative expenses for year to date 2006 increased $1.9 million, or 17.7%, from the same period last year to $12.5 million. The increase was primarily a result of stock based compensation expense ($0.9 million) caused by the market impact of the market based performance conditions that were achieved in the quarter, increased incentive compensation ($0.4 million) resulting from
improved operating performance, and increased support staff and general wage increases ($0.4 million). General and administrative expenses as a percentage of net revenue increased to 10.4% for year to date 2006 from 9.5% in the same period last year, due to general and administrative expenses increasing at a higher rate than revenues in the current period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Depreciation and amortization expense. Depreciation and amortization expense for year to date 2006 increased $0.1 million, or 6.4%, from the same period last year to $2.4 million. Depreciation and amortization expense as a percentage of net revenue remained unchanged at 2.0% from the same period last year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Loss/(gain) on disposal of assets. Loss on disposal of assets during year to date 2006 was a result of the disposal of assets in the ordinary course of business. The gain on disposal of assets during year to date 2005 was a result of the sale under a franchise agreement of two Tutor Time centers to an existing franchisee in first quarter 2005 and the sale of vacant land in second quarter 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Provision for doubtful accounts. Provision for doubtful accounts for year to date 2006 remained unchanged at $0.8 million from the same period last year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Exit and closure expenses. Exit and closure expenses for year to date 2006 relate to estimated costs to repair closed centers to the landlords standards upon termination of the leases, and remained constant at $0.1 million from the same period last year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Interest expense. Interest expense for year to date 2006 decreased $0.2 million, or 16.7% from the same period last year to $1.0 million. The decrease was due to the repayment of the Companys $3.5 million Subordinated Notes on September 1, 2005, with funds available under the credit agreement, resulting in a reduction of interest rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Income tax provision. Income tax provision for year to date 2006 of $0.1 million was recorded on income before income taxes and discontinued operations of $0.9 million, compared to an income tax provision of $0.1 million on income before income taxes and discontinued operations of less than $0.1 million for the same period last year. Income tax expense for year to date 2006 and 2005 varied from the U.S. statutory rate of 34% due
primarily to the utilization of net operating loss carryforwards for which a valuation allowance has been recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|18
|--



|Discontinued operations, net of taxes. Discontinued operations, net of taxes, for year to date 2006 was income of $0.1 million, compared
to income $0.1 million for the same period last year. Centers sold during both periods resulted in
gains which offset negative operating results.
Net income. As a result of the foregoing changes, net income increased to $0.9 million for year to date 2006,
compared to net income of less than $0.1 million for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Companys primary cash requirements currently consist of payment of operating expenses, repayment
of debt and capital expenditures. The Company expects to fund cash needs through the revolving credit
facility, described below, and cash generated from operations. The Company has also funded cash needs
through sale leaseback transactions. The Company may evaluate alternative forms of funding and new
arrangements may be entered into in the future. The Company experiences decreased liquidity during
the calendar year-end holidays due to decreased attendance. While new enrollments are generally highest
during the traditional fall back to school period and after the calendar year-end holidays,
enrollment generally decreases during the summer months and calendar year-end holidays. Should cash
flow generated from operations and borrowings available under the revolving credit facility not be
adequate to provide for its working capital and debt service needs, the Company will attempt to make
other arrangements to provide needed liquidity. No assurance can be given that such sources of capital
will be sufficient.
The Company has a credit agreement which provides a $22.5 million revolving line of credit that will
mature on July 31, 2007. It is collateralized by the Companys receivables, equipment and real
estate, with interest payable at a variable rate, at the Companys option, based on either the
prime rate or the Eurodollar rate. There were outstanding borrowings of $6.5 million at October 14,
2005, and outstanding borrowings of $4.3 million at April 1, 2005. Outstanding letters of credit
of $4.7 million at October 14, 2005, and $3.4 million at April 1, 2005, reduced the availability
under the line of credit. As October 14, 2005 and April 1, 2005, unused amounts available for borrowing
under this line of credit were $11.3 million and $9.8 million, respectively.
On August 2, 2005, the Company amended its credit agreement to, among other things, increase the amount
of the credit facility from $17.5 million to $22.5 million and permit optional redemption of all
of the Companys 15% Subordinated Notes due 2008 in the principal amount of $3.5 million. On
September 1, 2005, the Company redeemed the entire $3.5 million balance on the Subordinated Notes,
plus interest, primarily using borrowings under the credit agreement.
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. The Company was in compliance with the agreement as of
October 14, 2005.
Net cash provided by operating activities was $7.2 million for year to date 2006, compared to $2.0
million for the same period last year. During year to date 2006, cash used in financing activities
totaled $4.4 million and consisted primarily of net payments on the long term debt of $3.6 million
and reductions in drafts payable of $3.0 million offset by net borrowings on the revolving line of
credit of $2.2 million and issuance of common stock of $0.1 million. During year to date 2005, cash
used in financing activities totaled $0.7 million and consisted primarily of repayments under long-term
debt of $2.5 million and reductions in drafts payable of $2.0 million, offset by net borrowings on
the revolving line of credit of $3.8 million. Cash used in investing activities totaled $3.1 million
for year to date 2006, of which $3.6 million was used for capital spending and $0.2 million was used
to acquire a center from a franchisee, which was partially offset by $0.3 million of refunds of security
deposits and $0.4 proceeds from sales of centers. Cash used in investing activities totaled $2.4
million for year to date 2005, of which $2.8 million was used for capital spending, $0.3 was used
to acquire centers, which was partially offset by $0.7 million of proceeds from asset sales.
The Company has 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 October 14, 2005 and October 15, 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
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19
|--



|changes in interest rates, and the fair value of $12,000 is included in prepaid expenses and other current assets as of October 14, 2005 and a fair value of $37,000 is included in other current liabilities as of October 15, 2004.
      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 aggregate $65.6 million and $10.6 million, respectively, in case of default by the franchisee. Should the Company be required to make payments under these leases, it may assume obligations for operating the center. Should the center not be economically viable, the Company will make provision for the lease termination at that time. The
 Company does not not anticipate that it will be required to make payments under any of these lease arrangements, does not believe that any payments are likely and has not recorded any related liability.
    At October 14, 2005, aggregate potential payments on leases and guarantees over the next five fiscal years and thereafter are as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                            |  | Total          |        | Less Than
      1 Year |   | 2 to 3 
      Years |  | 4 to 5
      Years |        | After 
      5 Years |  
|--------------------------- |  | -------------- | ------ | ---------------------- | - | ------------------- |  | ------------------ | ------ | -------------------- | -
|                            |  |                |        |                        |   |                     |  |                    |        |                      |  
|                            |  | (In thousands) |       
|Franchise Lease Guarantees  |  | $              | 10,634 |                        | $ | 874                 |  | $                  | 1,824  |                      | $
|Franchise Lease Commitments |  |                | 65,581 |                        |   | 6,397               |  |                    | 12,314 |                      |  
|                            |  |                |        |                        |   |                     |  |                    |        |                      |  
|Total                       |  | $              | 76,215 |                        | $ | 7,271               |  | $                  | 14,138 |                      | $
|                            |  |                |        |                        |   |                     |  |                    |        |                      |  

|                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------
|At October 14, 2005, aggregate principal payments on short and long-term debt over the next five fiscal years and thereafter are as follows:
|                                                                                                                                            

|                |  | Total          |       | Less Than
      1 Year |   | 2 to 3 
      Years |  | 4 to 5
      Years |       | After 
      5 Years |  
|--------------- |  | -------------- | ----- | ---------------------- | - | ------------------- |  | ------------------ | ----- | -------------------- | -
|                |  |                |       |                        |   |                     |  |                    |       |                      |  
|                |  | (In thousands) |      
|Short-term debt |  | $              | 64    |                        | $ | 64                  |  | $                  |      |                      | $
|Long-term debt  |  |                | 6,546 |                        |   |                    |  |                    | 6,546 |                      |  
|                |  |                |       |                        |   |                     |  |                    |       |                      |  
|Total           |  | $              | 6,610 |                        | $ | 64                  |  | $                  | 6,546 |                      | $
|                |  |                |       |                        |   |                     |  |                    |       |                      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Related Party Transactions
For information regarding related party transactions, see the Companys Annual Report on Form
10-K for the fiscal year ended April 1, 2005 (see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations  Related Party Transactions),
and the Companys Current Report on Form 8-K dated November 11, 2005.
Contingencies
Various legal actions and other claims are pending or could be asserted against the Company including
pending claims relating to exposure to mold and other contaminants resulting from the condition of
one of the Companys former centers. In addition, the Company has and will continue to vigorously
protect its rights against parties that violate franchise agreements or infringe on its intellectual
property rights. Litigation is subject to many uncertainties; the outcome of individual litigated
matters is not predictable with assurance, and it is reasonably possible that some of these matters
may be decided unfavorably to the Company. Although there is a chance that any unfavorable decision
could have a material adverse impact on the Companys financial position, liquidity and results
of operations, it is the opinion of management that the ultimate liability, if any, with respect
to these matters

|20
|--



|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, which are same as the critical
accounting policies, see Note 2, Summary of Significant Accounting Policies, of the Notes
to 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 April 1, 2005.
Wage Increases
Expenses for center-level salaries, wages and benefits represented approximately 50% of net revenues
for second quarter 2006 and 2005. 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, labor issues 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 Quarterly Report on 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 the Companys consolidated financial position,
results of operations or cash flow. The Company is exposed to market risk due to changes in interest
rates and foreign currency exchange rates.
Interest Rates. The Company has exposure to market risk for changes in interest rates related to its debt obligations.
The Company has cash flow exposure on the revolving line of credit, with an outstanding balance of
$6.5 million, and its notes payable, with an outstanding balance of $0.1 million, each as of October
14, 2005. These exposures have been temporarily 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 less than $0.1 million
for second quarter 2006.
Foreign Currency Exchange Rates. The Companys exposure to foreign currency exchange rates is limited to royalties for 13 international
franchised centers. Based upon the relative size of its foreign operations, the Company
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|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.
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|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 October 14, 2005, 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.
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|PART II  OTHER INFORMATION
ITEM 1. Legal Proceedings
Information regarding this Item is set forth in Note 5 to the Notes of Condensed Consolidated Financial
Statements (unaudited) included in Part I, Item 1 of this Report.
ITEMS 2 through 4 are not applicable.
ITEM 5. Other Information
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                               

|a) | As previously reported, on November 15, 2005, the Company entered into a merger agreement (the Merger
Agreement) with A.B.C. Learning Centres Limited (ABC), pursuant to which the Company
will become a wholly-owned subsidiary of ABC and the shareholders of the Company will be entitled
to receive $7.50 in cash, without interest, with respect to each share of the Companys outstanding
common stock. The transactions contemplated by the Merger Agreement are subject to, among other things,
adoption of the Merger Agreement by the Companys shareholders, the termination or expiration
of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended,
and other customary closing conditions. Simultaneous with the execution of the Merger Agreement,
Benjamin R. Jacobson, the Companys Chairman of the Board, entered into a voting agreement in
favor of ABC to vote all shares of the Companys common stock owned directly or indirectly by
him in favor of the Merger Agreement.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In connection with the negotiation of the Merger Agreement, the Company also entered into a financial
advisory agreement, dated November 11, 2005, with Jacobson Partners, a New York-based private equity
firm, whose managing partner is Benjamin R. Jacobson. The financial advisory agreement provides for
payment by the Company to Jacobson Partners of a fee equal to 1% of the total merger consideration
paid by ABC under the Merger Agreement in exchange for investment banking and financial advisory
services provided to the Company by Jacobson Partners in connection with the merger. This fee is
payable only upon consummation of the merger.                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | For further information, as well as copies of the Merger Agreement, the Voting Agreement, the Financial
Advisory Agreement, and other documents, please see the Companys Current Report on Form 8-K
dated November 11, 2005, previously filed with the Securities and Exchange Commission on November
16, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|b) | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                
|----------------
|ITEM 6. Exhibits
|                

| | 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

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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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                    

| |                         |  | LEARNING CARE GROUP, INC.            
| | ----------------------- |  | -------------------------------------
| |                         |  |                                      
| |                         |  | (REGISTRANT)                         
| |                         |  |                                      
| | Date: November 28, 2005 |  | 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                                                                                               
|-------------------- |  | ----------------------------------------------------------------------------------------------------------
|                     |  |                                                                                                           
|                     |  |                                                                                                           
|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

|26
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