U.S. Securities and Exchange Commission

                             Washington, D.C. 20549

                                  Form 10-QSB


         [X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT OF 1934

             For the quarterly period ended January 19, 1997

                  Commission  file  number               1-14052

                       Kiddie Academy International, Inc.
       (Exact name of small business issuer as specified in its charter)


         DELAWARE                                     52-1938283
         (State or other jurisdiction                 (IRS Employer
         of incorporation or organization)            Identification No.)


                    108 Wheel Road, Bel Air, Maryland 21015
                    (Address of principal executive offices)

                                 (410) 515-0788
                          (Issuer's telephone number)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No


         The number of shares  outstanding  of common stock,  as of  January 19,
         1997:  2,025,000  shares of common stock.
                ----------------------------------

         Transitional Small Business Disclosure Format (check one):
                           Yes         ;     No        X


<PAGE>

KIDDIE ACADEMY INTERNATIONAL, INC.

Index

                                                                   Page

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements:

   Unaudited Consolidated Balance Sheets                              1

   Unaudited  Consolidated Statement of Operations                    2

   Unaudited Consolidated Statements of Cash Flows                    3

   Notes to Unaudited Consolidated  Financial Statements            4-5

Item 2.  Management's Discussion and Analysis of
              Financial Condition and Results of Operations        6-13

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                           14

Item 2.  Changes in Securities                                       14

Item 3.  Defaults Upon Senior Securities                             14

Item 4.  Submission of Matters                                       14

Item 5.  Other Information                                           14

Item 6.  Exhibits and Reports on Form 8-K                            14

         Exhibit 27 Financial Data Schedule

Signature                                                            15


<PAGE>



14

Part 1.  FINANCIAL INFORMATION
Item 1. Financial Statements

KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>

ASSETS                                                                    January 19,                September 29,
                                                                             1997                         1996
                                                                        -------------               --------------
<S> <C>
Current assets:
           Cash and cash equivalents                                         $639,079                   $1,232,098
           Accounts receivable                                                128,434                      127,972
           Prepaid expenses                                                   205,016                       60,024
           Inventories                                                         82,092                       90,347
           Notes receivable, current                                           35,113                       15,361
           Franchise development costs                                        779,025                      699,527
                                                                     -----------------           ------------------
                        Total current assets                                1,868,759                    2,225,329
                                                                     -----------------           ------------------

Property and equipment                                                      1,023,742                    1,057,066
Accumulated depreciation                                                    (342,485)                    (300,086)
                                                                     -----------------           ------------------
                        Net property and equipment                            681,257                      756,980
                                                                     -----------------           ------------------

Notes receivable, long-term                                                   148,161                      136,635
Goodwill                                                                      150,122                      116,910
Deposits                                                                       96,401                      105,437
                                                                     -----------------           ------------------
                        Total assets                                       $2,944,700                   $3,341,291
                                                                     =================           ==================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
           Accounts payable and accrued expenses                             $846,395                     $787,654
           Deferred franchise license fees                                  1,127,502                    1,125,002
           Current portion of long-term debt                                   52,042                      111,114
           Current portion of deferred rent credits                            93,992                       93,992
                                                                     -----------------           ------------------
                        Total current liabilities                           2,119,931                    2,117,762
                                                                     -----------------           ------------------

Long-term debt                                                                 92,436                      190,312
Deferred rent payments                                                        220,643                      159,005
Deferred rent credits                                                         253,055                      281,976
                                                                     -----------------           ------------------
                        Total liabilities                                   2,686,065                    2,749,055
                                                                     -----------------           ------------------
Stockholders' equity
           Preferred stock, par value $0.01 per share: authorized
            1,000,000 shares; no shares issued and outstanding                     --                           --
           Common stock, par value $0.01 per share: authorized
            10,000,000 shares; issued and outstanding 2,025,000                20,250                       20,250
           Additional paid-in capital                                       4,289,201                    4,260,280
           Accumulated deficit                                            (4,050,816)                  (3,688,294)
                                                                     -----------------           ------------------
                        Total stockholders' equity                            258,635                      592,236
                                                                     =================           ==================
                        Total liabilities and stockholders' equity         $2,944,700                   $3,341,291
                                                                     =================           ==================
</TABLE>

See notes to consolidated financial statements (unaudited).

                                       1

<PAGE>

KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED JANUARY 19, 1997 AND DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                                                          January 19,                December 31,
                                                                             1997                        1995
                                                                     -------------------        --------------------
<S> <C>
REVENUES:
           Company-owned mature centers                                        $542,795                    $367,188
           Company-owned new centers                                          1,020,286                     131,146
           Franchise license fees                                               125,000                     134,363
           Franchise royalties                                                  323,867                     153,981
           Product sales                                                        235,395                      45,731
           Administrative fees                                                   26,104                      18,500
                                                                     -------------------        --------------------
                        Total revenue                                         2,273,447                     850,909

OPERATING EXPENSES:
           Company-owned mature centers                                         477,659                     368,655
           Company-owned new centers                                          1,471,511                     255,894
           Cost of product sales                                                171,037                      27,571
           General and administrative                                           665,723                     453,461
                                                                     -------------------        --------------------
                        Total operating expenses                              2,785,930                   1,105,581
                                                                     -------------------        --------------------

                        Loss from operations                                  (512,483)                   (254,672)

INTEREST INCOME (EXPENSE)                                                         8,032                    (35,246)

OTHER INCOME, net                                                               141,929                       1,795

                                                                     -------------------        --------------------
NET LOSS                                                                     ($362,522)                  ($288,123)
                                                                     ===================        ====================

NET LOSS PER COMMON SHARE                                                       ($0.18)                     ($0.25)
                                                                     ===================        ====================

WEIGHTED AVERAGE SHARES OUTSTANDING                                           2,025,000                   1,135,418
                                                                     ===================        ====================
</TABLE>

See notes to consolidated financial statements (unaudited).

                                       2

<PAGE>


KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIOD ENDED JANUARY 19, 1997 AND DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                                                       January 19,                     December 31,
                                                                          1997                             1995
                                                                   --------------------             --------------------
<S> <C>
Cash flows from operating activities
           Net loss                                                      ($362,522)                       ($288,123)
           Adjustments to reconcile net loss to net cash used
             in operating activities:
               Depreciation and amortization                                 47,428                            6,907
               Amortization of debt issuance costs                              ---                           26,667
               Gain on disposal of asset                                   (77,388)                              ---
               Gain on extinguishment of debt                              (64,594)                              ---
           Changes in assets and liabilities:
               Accounts receivable                                            (462)                         (23,713)
               Inventory                                                      8,255                          (4,423)
               Notes receivable                                             (1,120)                            4,084
               Franchise development costs                                 (79,498)                          (8,178)
               Other assets                                               (134,582)                         (98,081)
               Accounts payable and accrued expenses                         58,741                         (40,572)
               Deferred franchise license fees                                2,500                         (92,278)
               Other liabilities                                             61,638                           46,995
                                                                --------------------             --------------------

               Net cash used in operating activities                      (541,604)                        (470,715)
                                                                --------------------             --------------------

           Cash flows from investing activities:
            Disposal (acquisition) of property and equipment                 33,324                          (5,000)


               Net cash (used) provided in investing activities              33,324                          (5,000)
                                                                --------------------             --------------------

           Cash flows from financing activities:
            Payments on notes payable                                           ---                        (149,861)
            Payments to shareholders                                            ---                         (87,722)
            Proceeds from IPO                                                   ---                        3,982,373
            Payments of long-term debt                                     (84,739)                              ---

                                                                --------------------             --------------------
               Net cash (used) provided in financing activities            (84,739)                        3,744,790

                                                                --------------------             --------------------
               Net (decrease) increase in cash                            (593,020)                        3,269,075

           Cash, beginning of period                                      1,232,098                           51,527
                                                                --------------------             --------------------

           Cash end of period                                              $639,079                       $3,320,602
                                                                ====================             ====================

           Non-cash investing and financing activities
           Early retirement of long-term debt                               $59,738                              ---
           Notes received in connection with sale of center                  98,815                              ---
           Notes   receivable   retired  in  connection   with
           purchase of center                                                68,657                              ---
                                                                --------------------             --------------------
               Total non-cash activities
                                                                           $227,210                              ---
                                                                ====================             ====================
</TABLE>

See notes to consolidated financial statements (unaudited).

                                       3

<PAGE>


                       KIDDIE ACADEMY INTERNATIONAL, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

                     JANUARY 19, 1997 AND DECEMBER 31, 1995


1.       Summary of Significant Accounting Policies

         (a)      Principles of Consolidation
         The  consolidated   financial  statements  included  herein  have  been
prepared by the Company, without audit, pursuant to the rules and regulations of
the  Securities  and  Exchange  Commission  (the  "Commission")  and include all
adjustments  which are,  in the  opinion  of  management,  necessary  for a fair
presentation.  The consolidated financial statements include the accounts of the
Company and its  subsidiaries.  Certain  information  and  footnote  disclosures
normally included in financial  statements prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures are adequate to
make the  information  presented not misleading;  however,  it is suggested that
these financial  statements be read in conjunction with the financial statements
and the notes thereto included in the Company's annual Form 10-KSB.

         The consolidated financial statements include the results of operations
of the Company and its wholly-owned subsidiaries.  All intercompany transactions
have been eliminated.

         (b)      Net Loss Per Common Share
         Net loss per common share is determined by dividing the net loss by the
weighted  average  number of common and common  share  equivalents  outstanding.
Weighted  average  shares used in  computing  net loss per common  share for the
period ended January 19, 1997 consist solely of 2,025,000 shares of common stock
issued,  as the  effect  of the  warrants  would be  antidilutive.  Pursuant  to
Securities  and  Exchange  Commission  Staff  Accounting  Bulletin No. 83, stock
options and warrants  granted  during the 12-month  period prior to the expected
date of the initial filing of the Registration  Statement,  with exercise prices
below the initial public offering  price,  have been included in the calculation
of the period  ended  December  31, 1995  common  share  equivalents,  using the
treasury stock method, for the period. Weighted average shares used in computing
net loss per common  share for the period  ended  December  31, 1995  consist of
1,135,418  weighted average shares of common stock  outstanding and common stock
equivalents.

         (c)      Fiscal Year-end
         During fiscal year 1996, the Company changed its fiscal year to a 52 or
53 week period which ends the Sunday  nearest to September 30. As a result,  the
first  quarter of fiscal  year 1997 ended on January 19, 1997 and the second and
third quarters will end on April 13 and July 6, 1997, respectively.

                                       4

<PAGE>


2.       Commitments and Contingencies

         In October  1996,  the Company  entered  into a  three-year  employment
agreement with Angelo D. Bizzarro,  the Company's new Chief  Executive  Officer.
The agreement calls for a minimum salary level, a bonus based on a percentage of
pre-tax profits and various stock options,  including 75,000 non-qualified stock
options (at an exercise price of $3.64) and 25,000  incentive  stock options (at
an exercise price equal to the per share fair market value on February 20, 1997,
the date he commenced  employment).  Mr. Bizzarro will further be entitled to an
additional  100,000  incentive stock options if the  stockholders of the Company
approve  a  proposed  increase  in the  number  of  shares  available  under the
Company's 1995 Incentive Compensation Plan. Also in October 1996, the employment
agreements  with George and Michael  Miller were  extended to expire on February
19, 2000.

         In  many  instances,  the  Company  has  guaranteed  some  or  all of a
franchisee's obligations under the lease for the franchisee's child care center.
In addition, during the period ended January 19, 1997 the Company entered into a
management agreement with two of its franchisees,  pursuant to which the Company
has agreed to operate the center and assume certain long-term commitments.

         The Company is subject to complaints and claims arising in the ordinary
course of business, including its business as a franchisor. The Company believes
that none of the current  claims or  complaints  are  material to the  Company's
consolidated financial position.

                                       5

<PAGE>


ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         The following  discussion  and analysis  should be read in  conjunction
with the Company's Consolidated Financial Statements and Notes (unaudited).  The
financial  information  and percentages set forth below in Results of Operations
and Liquidity and Capital Resources have been rounded to the nearest  thousandth
and to the nearest whole percent, respectively.

Forward-Looking Statements

         When used in this report, press releases and elsewhere by management of
the  Company  from  time to  time,  the  words  "believes,"  "anticipates,"  and
"expects"  and similar  expressions  are  intended  to identify  forward-looking
statements  that involve certain risks and  uncertainties.  A variety of factors
could cause actual results to differ  materially  from those  anticipated in the
Company's  forward-looking  statements,  some of  which  include  the  Company's
ability to identify and secure on acceptable  terms suitable  locations on which
to construct new Company-owned or franchised  centers;  the Company's  continued
ability to compete with this segment of the market;  the relatively small number
of Company-owned and franchised  centers  currently  operating which could cause
poor operating  results at any one center or any unsuccessful new center opening
to negatively  impact the  Company's  overall  results to a greater  result than
would be the case in a larger  chain;  the Company's  dependence on  franchisees
which could cause the Company's revenues from franchise fees and royalties to be
adversely  affected  if  the  Company's   franchisees   experience  business  or
operational difficulties;  the failure of one or more franchisees to meet its or
their  obligations under its or their leases which could have a material adverse
effect on the business, operations and financial condition of the Company to the
extent such obligations have been guaranteed by the Company;  the Company's need
to comply with numerous state and local  governmental  regulations and licensing
requirements; the availability of capital resources; and other risk factors that
are  discussed  from time to time in the  Company's  SEC  reports.  Readers  are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date  thereof.  The Company  undertakes  no  obligation  to
publicly  release  the  results  of any events or  circumstances  after the date
hereof or to reflect the occurrence of unanticipated events.

General

         The Company  derives  revenue from three  sources:  (i) weekly  tuition
generated  at  the  20  Company-owned  and  operated  centers;  (ii)  fees  from
franchisees,  including  one-time  franchise  licensing fees currently  totaling
$30,000  per  new  franchised  center,  ongoing  royalties  equal  to 7% of each
franchised   center's  gross  revenues,   and  weekly   administrative  fees  of
approximately $54 per franchised  center; and (iii) the sale of school supplies,
educational toys and equipment by Kid's Craft. The Company currently consists of
52 centers (20 of which are Company owned and 32 of which are  franchised).  The
number of  Company-owned  centers  increased  by three  during the period  ended
January 19, 1997.  The growth of  Company-owned  centers during the period ended
January  19,  1997  resulted  from  the  acquisition  of four  centers  from its
franchisees and one Company-owned center sold to a franchisee.

                                       6

<PAGE>

         During the period  ended  January  19, 1997 the  Company  entered  into
management  arrangements with two of its franchisees (included in the four noted
above)  pursuant to which the Company has agreed to operate the relevant  center
and receive all revenues and assume substantially all ongoing  obligations.  The
revenues received by the Company from each franchised center under management by
the  Company  are  included  in the  revenues  of  Company-owned  new centers as
reflected on the Company's Consolidated Financial Statements.

         The number of franchised  centers was impacted  during the period ended
January 19, 1997 by the opening of four new  centers,  the  acquisition  of four
franchised centers by the Company,  the purchase of a Company-owned  center by a
franchisee and the release of one center from the system following the Company's
determination  that due to  changes  in the  community  in which  the  center is
located, it no longer met the Company's minimum site criteria.

         Revenue  from  Company-owned  centers is  recognized  in the period the
child care  services  are  provided.  Revenue  derived  from  franchise  fees is
recognized  when the  franchise  center  opens.  Accordingly,  the amount of the
deferred franchise fee liability as shown on the Company's  consolidated balance
sheet is directly related to the number of centers in development. All franchise
fees collected by the Company for centers in development  are accounted for as a
current  liability  until the center  opens,  as required by generally  accepted
accounting principles.  Royalty income is recognized in the same period in which
the  related  revenue is  generated  by each  franchised  center.  Revenue  from
administrative  fees paid by franchisees for services provided by the Company is
recognized when the Company  provides such services.  During fiscal year 1997, a
change in the Company's  fee structure is expected to permit  $10,000 of initial
fees paid by each  applicant to be  recognized  approximately  30 days after the
applicant executes a Preliminary Agreement with the Company.

         The  significant  growth  experienced by the Company during fiscal year
1996 and  continued  growth  during  the  first  quarter  of  fiscal  year  1997
contributed significantly to the Company's losses. New centers typically require
up to 24  months  to  "ramp-up"  to  profitable  enrollment  levels  and  of the
Company's  centers,  only five had been operated by the Company for more than 24
months.  In  addition,  many  of  the  centers  purchased  by the  Company  from
franchisees  during  fiscal  years  1996 and 1997 have  required  a longer  than
average period to "ramp-up"  than that  experienced  with new centers.  This has
occurred  because the Company has not had the advantage of the enrollment  surge
which  accompanies a typical grand  opening,  and as a natural  repercussion  of
changing  ownership,  and the need to overcome any negative  reputation that may
have been  associated  with the former  management.  Because the  Company  began
fiscal  year 1997 with very few  mature  Company-owned  centers,  the  continued
expansion diluted the profitability of those centers.

         The Company is engaged in a dual growth strategy to increase its market
penetration, consisting of a strategic balance of Company-operated center growth
and  franchised-center  growth. By using the same corporate staff which develops
the new Company centers to assist  franchisees in locating and developing  their
new  centers,  the Company  can achieve  certain  economies  of scale,  expanded
expertise and efficiencies in the new center development process.

                                       7

<PAGE>


         Whether franchised or Company-operated, each Kiddie Academy center must
meet or exceed certain physical, trade area, location and demographic standards.
Each  location  for  a  potential   Kiddie  Academy  center  is  reviewed  by  a
multi-disciplinary  committee of the Company's key  executives  for adherence to
these  standards.  The Company limits its site selection  activities to selected
metropolitan areas which meet its standards and show potential for growth.

         The Company  continually  evaluates  its  strategy  with respect to the
balance of its  franchised-center  growth and  Company-operated  center  growth.
Given  the  number  of  franchised  centers  currently  under  development,  the
Company's  current plans are to focus on the "ramp-up" to profitable  enrollment
levels through  Company-operated  center growth and the  advancement of existing
franchised centers under development.

Results of Operations

         The following  table sets forth,  for the periods  indicated,  selected
information from the Company's Consolidated Statements of Operations (except for
systemwide centers open at end of period,  systemwide revenues, and the proforma
information for the period ended January 21, 1996), expressed as a percentage of
revenues  from  operations.  Due to the Company  changing to a 52/53 week fiscal
year end, in order to analyze  consistent  period to period results and in order
to be  comparable  to similar  practices in the  industry,  the first period for
fiscal year 1997  represents  16 weeks,  while the first  quarter of fiscal year
1996 is 13 weeks. Consequently,  the Company has also provided pro forma results
for the first quarter of fiscal year 1996, based upon a 16-week period.

<TABLE>
<CAPTION>
                                       Historical                     Historical                      Proforma
                                     16 Weeks Ended                 13 Weeks Ended                 16 Weeks Ended
                                    January 19, 1997               December 31, 1995               January 21, 1996
                                    ----------------               -----------------               ----------------
<S> <C>
Systemwide centers open               52                                  39                             39

Systemwide revenues.. . . . .     $6,190,000     ---            $2,698,000         ---         $3,345,000     ---
                                  ==========                    ==========                     ==========

Revenues from operations
   Company-owned centers. . .     $1,563,000     69%            $  498,000          59%        $ 625,000       59%
   Franchising operations . .       $475,000     21%            $  307,000          36%        $ 375,000       35%
   Product sales. . . . . . .       $235,000     10%            $   46,000           5%        $  62,000        6%
                                  ----------                    ----------                     ---------

       Total revenues . . . .     $2,273,000     100%           $  851,000         100%       $1,062,000      100%
                                  ----------     ----           ----------         ----       ----------      ----

 Operating expenses . . . . .     $2,786,000     123%           $1,106,000         130%       $1,415,000      133%
                                  ----------                    ----------                    ----------

 Net operating (loss) . . . .     $(512,000)    (23)%           $(255,000)        (30)%       $(353,000)     (33)%
 Interest income (expense). .         $8,000     ---%           $ (35,000)         (4)%       $ (27,000)      (3)%
 Other income . . . . . . . .       $142,000       6%             $  2,000           3%         $ 45,000        4%
                                  ----------                    ----------                    ----------

 Net loss . . . . . . . . . .     $(363,000)    (16)%          $ (288,000)        (31)%       $(335,000)     (32)%
                                  ==========                   ===========                    ==========
</TABLE>

                                       8

<PAGE>


Historical 16 Weeks Ended January 19, 1997 Compared to Proforma 16 Weeks Ended
January 21, 1996

         Management  believes a more  meaningful  comparison  of the  results of
operations  for the  period  ended  January  19,  1997 would be to the pro forma
information above, which reflects a period of comparable length,  rather than to
the  December  31,  1995  historical  information.   Therefore,   the  following
discussion  is based upon a  comparison  of the actual  results  for the 16-week
period ended January 19, 1997,  to the pro forma results for the 16-week  period
ended January 21,1996.  A comparison of the historical results of operations for
the  16-week  quarter  ended  January 19,  1997 and the  13-week  quarter  ended
December 31, 1995 would result in the same  explanations as shown below, plus an
additional  explanation  for  the  increase  or  decrease  as a  result  of  the
additional three weeks of operations being included in the current quarter.

         Revenues

         Systemwide  revenues  (tuition fees from  Company-owned  and franchised
centers) for the period ended  January 19, 1997  increased by 85%, to $6,190,000
from  $3,345,000 for the period ended January 21, 1996. This increase was due to
an increase in the total number of centers  open to 52 at January 19,  1997,  as
compared to 39 open at January  21,  1996 and an increase in average  enrollment
levels at centers which were open during both periods.

         The Company's revenues from operations for the period ended January 19,
1997  increased by 114%,  to  $2,273,000  from  $1,062,000  for the period ended
January 21, 1996. This increase was due to an increase in revenues  generated by
an  increased  number of  Company-owned  centers,  as well as an increase in the
average  enrollment  in those  centers,  an increase in  revenues  generated  by
franchising activities and increased revenues generated by Kid's Craft.

         Aggregate  revenues  generated by Company-owned  centers for the period
ended  January 19, 1997,  which  constituted  69% of revenues  from  operations,
increased by 150%, to $1,563,000  from $625,000 for the period ended January 21,
1996.  This  increase  was due to the  increase  in the number of  Company-owned
centers  owned and operated  during the period  ended  January 19, 1997 to 20 as
compared to the period ended January 21, 1996 with eight Company-owned  centers.
During the period ended  January 19, 1997 the Company  sold an existing  center,
purchased two centers from  franchisees  and entered into an agreement to manage
two other centers all of which have revenue  accounted for in Company-owned  new
centers.

         Revenues from franchising  activities  (franchising fees, royalties and
administrative  fees) for the period ended January 19, 1997,  which  constituted
21% of revenues from operations, increased by 27%, to $475,000 from $375,000 for
the period ended January 21, 1996.  Revenues from  franchise fees for the period
ended  January 19, 1997  decreased  by 23%, to $125,000  from  $162,000  for the
period ended  January 21, 1996.  Royalties for the period ended January 19, 1997
increased by 71%, to $324,000  from  $190,000  for the period ended  January 21,
1996.  Administrative  fees for the period ended  January 19, 1997  increased by
13%, to $26,000 from $23,000 for the period ended January 21, 1996. The decrease
in license fees is  attributable to the number of center opening each period and
potential  franchisees who leave the franchising system before opening a center.
There were four centers  opened in the period ended January 19, 1997

                                       9

<PAGE>


and five in the period ended January 21, 1996.  The increase  in  revenues  from
royalties  and  administrative  fees  resulted  from  changes  in the franchised
centers open during the period  ended  January  19,  1997 (which  included  four
new centers  opened reduced by the four that were acquired by the  Company,  one
that was bought from the Company, and one that was allowed to  drop  out  of the
system) compared to the period  ended  January 21,  1996,  and  the  increase in
enrollment  levels,  for centers open in both periods.

         Sales  revenues  generated by Kid's Craft for the period ended  January
19, 1997, which constituted 10% of revenues from operations,  increased by 279%,
to $235,000 from $62,000 for the period ended  January 21, 1996,  primarily as a
result of sales to new  franchised  centers  opened during this period,  ongoing
sales to existing franchise centers, and the opening of a retail store.

         Operating Expenses

         Operating  expenses include the expenses  associated with operating the
Company-owned  child care  centers  (including  payroll  and  related  expenses,
occupancy costs,  and the costs of food,  supplies,  utilities,  advertising and
insurance);  expenses associated with running the Company's franchise operations
(including   payroll,   commissions  and  related  expenses,   occupancy  costs,
advertising,  travel and utilities);  and expenses associated with the operation
of Kid's Craft (including costs of products,  freight, occupancy and utilities);
and other general and administrative expenses.

         Aggregate  operating  expenses  for the period  ended  January 19, 1997
increased by 97%, to $2,786,000  from $1,415,000 in the period ended January 21,
1996. As a percentage of operating  revenues,  operating  expenses  decreased to
approximately 123% for the period ended January 19, 1997 from approximately 133%
for the  period  ended  January  21,  1996.  These  expense  increases  were due
primarily to increases in expenses  associated  with "ramp-up"  costs for the 12
additional  centers  operated by the Company during the period ended January 19,
1997. The decrease as a percent is due to the economies of scale gained from the
increased revenue levels and the relatively fixed costs of corporate overhead.

         Operating  expenses  relating to  Company-owned  centers for the period
ended  January 19, 1997,  which  constituted  70% of total  operating  expenses,
increased by 148%, to $1,949,000  from $787,000 for the period ended January 21,
1996. The increase in operating  expenses for Company-owned  centers and managed
centers for the period  ended  January 19, 1997 as compared to the period  ended
January 21, 1996 is due to the increase in centers and the related  increases in
rent due to lease obligations,  payroll, food costs and other costs increased in
proportion to the number of centers operated. The Company expects that aggregate
expenses  relating to  Company-owned  centers  will  continue to increase as the
number of Company-owned  centers increases.  However,  over time, as the Company
achieves and capitalizes  upon economies of scale,  and as newly-opened  centers
mature beyond their initial period of start-up expenses and low enrollment,  the
Company expects expenses as a percentage of revenues derived from  Company-owned
centers to decrease.  Additionally, the Company is continually in the process of
enhancing  cost control  programs  that strive to manage and  minimize  variable
expenses such as payroll, food costs, and supplies.  The Company also intends to
focus on improving  operating

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<PAGE>

results at Company-owned  centers by implementing programs designed to  increase
revenues such as advertising and promotions.

         Costs of goods sold by Kid's  Craft for the period  ended  January  19,
1997, which  constituted 6% of total operating  expenses,  increased by 328%, to
$171,000 from $40,000 for the period ended  January 21, 1996.  This increase was
primarily due to an increase in product sales.

         General and  administrative  expenses,  which  constituted 24% of total
operating   expenses  and  which  include  the  costs  of  corporate   overhead,
franchising  operations and operating  expenses for Kid's Craft,  for the period
ended  January 19, 1997  increased  by 13%, to $666,000  from  $588,000  for the
period ended January 21, 1996. Increases occurred in all areas of expense due to
the growth in the  corporate  infrastructure  undertaken in order to support the
Company's efforts and the substantial increase in the number of centers open and
under development.


         Depreciation and Amortization

         Depreciation  and  amortization  expense  consist  of  depreciation  or
amortization  of  certain  equipment,   furniture  and  fixtures,  vehicles  and
leasehold improvements,  and organizational costs. Depreciation and amortization
expense,  for the period ended January 19, 1997  increased by $38,000 to $47,000
from $9,000 for the period ended  January 21, 1996.  This increase was primarily
due to  depreciation  expense  resulting  from  the  increase  in  property  and
equipment, and amortization of goodwill.

         Interest

         Interest income, net of interest expense,  for the period ended January
19, 1997 was $8,000 as  compared  to interest  expense of $27,000 for the period
ended January 21, 1996. This change was  attributable to the pay-off of the line
of credit in December 1995, overnight investments in the Company's sweep account
resulting from the proceeds of the initial public offering,  and the elimination
of capital lease  obligations and the  amortization of debt issuance costs which
was included in interest expense during the period January 21, 1996.

         Other Income

         For the period  ended  January 19,  1997,  the Company  recorded  other
income of $142,000,  and in the period ended  January 21,  1996,  $45,000.  This
increase is attributable to the gain on the sale of one Company-owned  center to
a franchisee,  the early  retirement of certain debt  obligations at a favorable
discount and the commission  earned from the transfer of one franchise center to
another franchisee.

         As  a  result  of the  foregoing,  the Company  recorded a net loss for
the period ended  January 19,  1997  of $363,000  as  compared  to a net loss of
$335,000 for the period ended January 21, 1996.

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<PAGE>


Liquidity and Capital Resources

         During the period ended January 19, 1997, the Company has satisfied its
cash  requirements from cash flow from operations,  the remaining  proceeds from
the  initial  public  offering  and the sale of one  Company-owned  center.  The
primary  uses of cash have been for the  purchase  of  supplies,  financing  the
start-up of one new Company-owned  center,  the acquisition of four centers from
franchisees and capital expenditures.

         Net cash used in operating  activities for the period ended January 19,
1997 totaled  approximately  $584,000,  reflecting,  primarily,  the net loss of
$363,000 increases in notes receivable and franchise  development costs,  offset
by increases in accounts payable and deferred  franchise fees. Net cash provided
for  investing  activities  for  the  period  ended  January  19,  1997  totaled
approximately $33,000, reflecting the sale of one Company-owned center.

         The  Company  has renewed  through  September  3, 1997 its bank line of
credit which permits the Company to borrow up to $200,000,  with interest at the
rate of 1.5% over the bank's prime rate. The line of credit is collateralized by
all   inventory,   equipment  and  accounts   receivables   of  Kiddie   Academy
International,  Inc.  The  Company  also has  available  the  ability  to borrow
$500,000 against a Certificate of Deposit (CD) for the same amount. The interest
cost is 2% greater  than the  interest  earnings  of the CD. This line of credit
expires on July 26, 1997. At January 19, 1997, there were no borrowings  against
any line of credit.

         As of January 19, 1997, the Company's total debt obligations (exclusive
of trade credit)  consisted of $144,000 which included a $42,000 equipment loan,
a $13,000  vehicle loan and various notes payable as a result of the purchase of
franchisee centers.

         The Company has been engaged in a variety of measures aimed at reducing
costs.  In September  1996, the Company  reduced its corporate staff by nine and
reduced its franchise  advertising  budget.  In January 1997 the Company reduced
its  corporate  and   administrative   staff  by  eight.  The  Company  is  also
investigating  and evaluating  various other cost saving measures  including the
selling or closing certain unprofitable centers.  Additionally,  the Company has
elected to concentrate  its efforts on improving the  profitability  of existing
centers and completing the development of centers already in the system,  rather
than on increasing the number of centers in the system.  In connection  with its
refocused  strategy,  the Company is evaluating  each of the markets in which it
currently  offers  franchises,  and has  elected to  concentrate  its efforts in
certain  selected  areas.  For example,  in the past the  Company's  goal was to
register its  franchise  operations in every state where such  registration  was
required,  it has  now  limited  its  registration  activities,  and  hence  its
marketing  efforts,  to key market areas. By narrowing its efforts,  the Company
expects to realize a cost  savings,  and  expects  to be more  efficient  in its
future sales and development activities.  Similarly,  the Company has elected to
eliminate the advertising of franchise opportunities for the foreseeable future,
and expects to realize another cost savings, in order to concentrate its efforts
on the development of existing  franchises.  The impact of these initial efforts
is  expected  to be a  reduction  of  approximately  $600,000  per  year  in the
Company's operating expenses (approximately,  $450,000 for the remainder of this
fiscal year).

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<PAGE>


         The Company  believes  that after  implementation  of these cost saving
measures,  the remaining net proceeds of the initial public offering,  available
cash flow from operations and its existing bank facilities will be sufficient to
satisfy  its  capital   expenditures,   debt  obligations  and  working  capital
requirements  for the remaining  portion of its fiscal year. The Company is also
actively seeking alternatives for raising additional financing.  There can be no
assurances,  however, that additional financings can be consummated at all or on
terms favorable to the Company.


Effects of Inflation

         The impact of general  inflation  on the  Company's  business  has been
insignificant  to date and the  Company  believes  that it will  continue  to be
insignificant for the foreseeable future.

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<PAGE>

PART II - OTHER INFORMATION



Item 1.  Legal Proceedings.

The  Company  is  involved  in  litigation  from time to time.  In  management's
opinion,  any  litigation  in which the Company is currently  involved  will not
result in liabilities  that will have a material adverse effect on its financial
condition or results of operations.

Item 2.  Changes in Securities.

Not applicable.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5.  Other Information.

None.

Item 6.  Exhibits and Reports on Form 8-K.

a.       Exhibits required by Item 601 Regulation S-K:

         Exhibit 27 - Financial Data Summary

b.       Reports on Form 8-K:

         Appointment of Angelo D. Bizzarro as CEO - October 21, 1996.  Change in
         accounting year - January 3, 1997.

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<PAGE>


SIGNATURE

In accordance with the  requirements of the Securities and Exchange Act of 1934,
the  registrant  has  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                Kiddie Academy International, Inc.


  March 4, 1997                 BY: /s/ Angelo D. Bizzarro
_______________                     __________________________________
Date                                    Angelo D. Bizzarro
                                        Chief Executive Officer



  March 4, 1997                 BY:  /s/ Guy A. Matta
_______________                      _________________________________
Date                                     Guy A. Matta
                                         Chief Financial Officer


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