<PAGE>   1
                   U.S. Securities and Exchange Commission
                                      
                            Washington, D.C. 20549
                                      
                                 FORM 10-QSB


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

     For the quarterly period ended July 06, 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 July 06, 1997:
2,025,000 shares of common stock.
---------------------------------

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

        
<PAGE>   2
KIDDIE ACADEMY INTERNATIONAL, INC.


Index                                                                       
----------------------------------------------------------------------------
                                                                       Page


PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS:

   Consolidated Balance Sheets for July 06, 1997 (Unaudited)
   and September 29, 1996                                                 1

   Unaudited Consolidated Statements 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                6-17

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS                                                18

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              18

ITEM 5. OTHER INFORMATION                                                19

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                 19

SIGNATURE

         EXHIBIT 3  SECOND AMENDED AND RESTATED BY-LAWS
         EXHIBIT 27 FINANCIAL DATA SCHEDULE
         EXHIBIT 99 ADDITIONAL EXHIBITS


<PAGE>   3
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements

KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                         July 06,                  September 29,
                                                                           1997                        1996     
ASSETS                                                                 (UNAUDITED)                 
                                                                     -----------------           -----------------
Current assets:
<S>                                                                          <C>                       <C>       
           Cash and cash equivalent                                           $36,446                   $1,232,098
           Accounts receivable                                                116,933                      127,972
           Prepaid expenses                                                   121,428                       60,024
           Inventories                                                         86,347                       90,347
           Notes receivable, current                                           28,822                       15,361
           Franchise development costs                                        756,556                      699,527
                                                                     -----------------           ------------------
                        Total current assets                                1,146,532                    2,225,329

Property and equipment                                                        958,577                    1,057,066
Accumulated depreciation                                                     (375,136)                    (300,086)
                                                                     -----------------           ------------------
                        Net property and equipment                            583,441                      756,980
                                                                     -----------------           ------------------

Notes receivable, long-term                                                   128,328                      136,635
Goodwill                                                                      139,508                      116,910
Deposits                                                                       58,901                      105,437
                                                                     -----------------           ------------------
                        Total assets                                       $2,056,710                   $3,341,291
                                                                     =================           ==================

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

Current liabilities:
           Notes payable                                                       $8,000                         --
           Accounts payable and accrued expenses                            1,276,725                     $787,654
           Deferred franchise license fees                                  1,083,001                    1,125,002
           Reserve for closed centers                                       1,306,814                         --
           Current portion of long-term debt                                   48,052                      111,114
           Current portion of deferred rent credits                            93,992                       93,992
                                                                     -----------------           ------------------
                        Total current liabilities                           3,816,584                    2,117,762

Long-term debt                                                                 69,203                      190,312
Reserve for closed centers                                                  4,563,039                         --
Deferred rent payments                                                        132,084                      159,005
Deferred rent credits                                                         209,674                      281,976
                                                                     -----------------           ------------------
                        Total liabilities                                   8,790,584                    2,749,055
                                                                     -----------------           ------------------
Stockholders' (deficit) 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                                       4,281,582                    4,260,280
           Accumulated deficit                                            (11,035,706)                  (3,688,294)
                                                                     -----------------           ------------------
                        Total stockholders' (deficit) equity               (6,733,874)                     592,236
                                                                     =================           ==================
                        Total liabilities and stockholders'
                        (deficit) equity                                   $2,056,710                   $3,341,291
                                                                     =================           ==================
</TABLE>

See notes to consolidated financial statements (unaudited).


                                       1

<PAGE>   4
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                12 weeks            13 weeks                40 weeks            39 weeks
                                             ended July 06,      ended June 30,          ended July 06,       ended June 30,
                                                  1997                1996                    1997                1996
                                            --------------------------------------      ----------------------------------------
<S>                                                 <C>                 <C>                  <C>                     <C>
REVENUES:                                                                                                                       
           Company-owned mature centers              $490,001            $451,700             $1,526,944             $1,238,601
           Company-owned new centers                  970,354             451,394              3,008,333                849,841
           Franchise license fees                      30,000              85,739                260,000                304,149
           Franchise royalties                        290,402             202,555                884,670                534,555
           Product sales                               74,180              65,665                412,834                178,513
           Administrative fees                         22,870              18,668                 70,003                 56,044
                                            --------------------------------------      ----------------------------------------
                 Total revenue                      1,877,807           1,275,721              6,162,784              3,161,703
                                                                                                                                
OPERATING EXPENSES:                                                                                                             
                                                                                       
           Company-owned mature centers               422,009             425,242              1,332,002              1,161,714
           Company-owned new centers                1,225,256             720,470              3,981,753              1,514,339
           Cost of product sales                       91,393              78,741                345,250                158,994
           Restructuring charge                     5,963,282                --                5,963,282                   --
           General and administrative                 689,345             502,606              2,038,082              1,501,725
                                            --------------------------------------      ----------------------------------------
                 Total operating expenses           8,391,285           1,727,059             13,660,369              4,336,772
                                            --------------------------------------      ----------------------------------------

                 Loss from operations              (6,513,478)           (451,338)            (7,497,585)            (1,175,069)

                                                                                                                                
INTEREST (EXPENSE) INCOME                              (4,064)             23,957                  4,238                 21,863
                                                                                                                                
OTHER (EXPENSE) INCOME, net                            (4,777)               --                  145,935                 59,187
                                            --------------------------------------      ----------------------------------------
NET LOSS                                          ($6,522,319)          ($427,381)           ($7,347,412)           ($1,094,019)
                                            ======================================      ========================================
                                                                                       
NET LOSS PER COMMON SHARE                              ($3.22)             ($0.21)                ($3.63)                ($0.63)
                                            ======================================      ========================================
                                                                                       
WEIGHTED AVERAGE SHARES OUTSTANDING                 2,025,000           2,051,909              2,025,000              1,746,353
                                            ======================================      ========================================
</TABLE>


See notes to consolidated financial statements (unaudited).

                                       2

<PAGE>   5
KIDDIE ACADEMY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  40 weeks ended                   39 weeks ended
                                                                  July 06, 1997                     June 30, 1996
                                                                -------------------              --------------------
<S>                                                                   <C>                            <C> 
    Cash flows from operating activities
           Net loss                                                    ($7,347,412)                   ($1,094,019)
           Adjustments to reconcile net loss to net cash                                                    
             used in operating activities:                                                                     
             Depreciation and amortization                                 132,797                         51,118
             Loss on disposal of asset                                     108,376                        (56,598)
             Gain on extinguishment of debt                                 66,092                           --
             Amortization of debt issuance costs                              --                           26,667
             Reserve for closed centers                                  5,574,853                           --
           Changes in assets and liabilities:
             Accounts receivable                                            11,039                        (35,584)
             Inventory                                                       4,000                        (70,305)
             Notes receivable                                               (5,154)                       (50,907)
             Franchise development costs                                   (57,029)                      (187,197)
             Other assets                                                  (14,868)                      (175,409)
             Accounts payable and accrued expenses                         598,307                       (170,160)
             Deferred franchise license fees                               (42,001)                       158,811
             Other liabilities                                                --                           89,874
                                                                -------------------              -----------------
             Net cash used in operating activities                      (1,103,184)                    (1,513,709)
                                                                -------------------              -----------------

           Cash flows from investing activities:
            Disposal of property and equipment                              36,872                           --
            Acquisition of property and equipment                          (33,862)                     (520,955)
                                                                                                
            Proceeds from disposal of property and equipment                 9,272                         40,000
                                                                -------------------              ----------------
             Net cash provided by (used in) investing                                  
             activities                                                     12,282                       (480,955)
                                                                -------------------              -----------------

           Cash flows from financing activities:
            Borrowings/(payments) on notes payable                           8,000                       (149,861)
            Payments to shareholders                                          --                          (87,722)
            Proceeds from IPO                                                 --                        3,998,613
            (Payments)/borrowings of long-term debt                       (112,750)                       224,055
                                                                -------------------              -----------------
             Net cash (used in) provided by financing                                  
             activities                                                   (104,750)                     3,985,085
                                                                -------------------              -----------------
                                                                                                
             Net (decrease) increase in cash                            (1,195,652)                     1,990,421

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

           Cash, end of period                                             $36,446                     $2,041,948
                                                                ===================              =================
           Non-cash investing and financing activities:
                                                                                                                  
           Write-off of deferred compensation                                 --                         $110,000
           Early retirement of long-term debt                             $110,386                           --
           Notes received in connection with sale of center                 98,815                           --
           Notes payable in connection with purchase of center              51,435                           --
           Notes receivable retired in connection with                                                             
             purchase of center                                             68,657                           --

</TABLE>
See notes to consolidated financial statements (unaudited).

                                       3

<PAGE>   6

                       KIDDIE ACADEMY INTERNATIONAL, INC.

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                        JULY 06, 1997 AND JUNE 30, 1996


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. All intercompany transactions have been
eliminated. 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.

        (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 July 06, 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 June 30, 1996 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 June 30, 1996 consist of 2,051,909
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, the second quarter
ended April 13, 1997, and the third quarter ended on July 06, 1997.

2.      COMMITMENTS AND CONTINGENCIES

        In October 1996, the employment agreements with George Miller and
Michael Miller were each extended and will expire on February 19, 2000. 




                                      4

<PAGE>   7

        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.                 

        The Company is subject to complaints and claims arising in the ordinary
course of business, including its business as a franchisor. Except as noted in
Part II, Item 1 the Company believes that none of the current claims or
complaints are material to the Company's consolidated financial position.

3.      EARNINGS PER SHARE

        In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (EPS)
which simplifies the standards for computing EPS previously found in APB
Opinion No. 15 and makes them comparable to international EPS standards. The
Statement is effective for financial statements issued for periods ending after
December 15, 1997. Had the following statement been effective for the quarters
and the nine months ended July 06, 1997 and June 30, 1996, earnings per share
would have been presented as follows:
<TABLE>
<CAPTION>
                                        12 weeks              13 weeks          40 weeks             39 weeks 
                                     ended July 06,         ended June 30,    ended July 06,       ended June 30,
                                        1997                    1996             1997                 1996
                                     --------------------------------------   -----------------------------------
    <S>                                <C>                  <C>                <C>               <C>
     1.  Earnings per common share      ($3.22)              ($0.21)            ($3.63)           ($0.63)
     2.  Earning per common share-
          assuming dilution             ($3.22)              ($0.21)            ($3.63)           ($0.63)
</TABLE>

4.      RESTRUCTURING CHARGE

        During the quarter ended July 6, 1997, the Company approved a plan to 
(i) close nine corporate centers located in areas where conditions no longer
support an economically viable operation and (ii) to restructure its operating
management to better serve the remaining centers. Accordingly, the Company
recorded a $6.0 million restructuring charge to provide for costs associated
with the center closures and restructuring. The charge includes approximately
$5.5 million to reflect the Company's full rent obligations and real estate
taxes for the remaining lease terms of the closed centers. The charge also
includes restructuring and other costs related to the closures as follows:


<TABLE>
<S>                                                                 <C>
Write-off of furniture, fixtures, equipment and 
leasehold improvements abandoned
in connection with closures                                            $169,085
Nonresidential real property lease obligations                        5,455,076
Write-off of accounts receivable                                         44,121
CEO severance benefit                                                   295,000
                                                                     ----------
Total Provision                                                       5,963,282

Asset write-offs                                                       (213,206)
Other - deferred rent payments                                          119,777
                                                                     ----------
Reserved for Closed Centers -- July 06, 1997                         $5,869,853
                                                                     ==========
</TABLE>

        Revenue and net operating loss of the centers that have been closed 
were $1,662,000 and $764,000, respectively, for the period ended July 06, 1997.

                                      5
<PAGE>   8
    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," "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; the most important of which is to negotiate
successful resolution of disputes and litigation with creditors as to amounts
owed them. Other factors include the Company's ability to "ramp-up" newly
opened centers to profitable enrollment levels within a reasonable period of
time; the Company's ability to identify and secure on acceptable terms suitable
locations on which to construct franchised centers; the Company's continued
ability to compete in 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 have a negative impact on the Company's overall results to a greater extent
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; 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 12 Company-owned and operated centers; (ii) fees from
franchisees, including one-time franchise licensing fees currently totaling
$40,000 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 has 49
centers, 12 of which are Company owned and 37 of which are franchised.


                                      6

<PAGE>   9

     The number of corporate centers decreased during the 12 week period ended
July 06, 1997, from 20 to 12, as nine centers were closed and one new center
was opened.

     The number of franchised centers increased from 36 to 37 during the 12
week period ended July 06, 1997 by the opening of one new center.

     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 in the number of Company-owned centers experienced
by the Company during fiscal year 1996 and continued growth during the first
three quarters of fiscal year 1997 contributed significantly to the Company's
continued losses. During this period, the number of Company-owned or operated
centers increased from seven to 20, but by the end of the quarter the number
decreased to 12 due to nine center closings and one new center opening. Of
these 21 centers, fifteen were not performing to expected levels at the end of
the period ended July 06, 1997 and the losses from these fifteen centers were
greater than the income earned by the remaining six centers. As a result, of
this the Company decided to close nine under-performing centers. Of the six
remaining under-performing centers, two are new (open less then one year) and
the remaining four are still in ramp-up. These six centers, while not yet
performing up to expected levels, were not closed because they were
logistically and geographically easier to manage as compared with the nine 
which were closed.

     The Company believes that its continued losses are attributable to three
major causes: first, the fixed rent structure which causes high expenses in
relation to revenue, second, new centers require up to twenty-four months to
"ramp-up" to expected performance levels, and, finally, all of the newly 
acquired centers are still in the "ramp-up" stage, approximately two-thirds of
the Company-owned centers were managed by or acquired from franchisees, and the
"ramp-up" period for those centers has been longer than anticipated.

     New centers typically require 24 months to "ramp-up." Of the Company-owned
centers, only five have been operated by the Company for more than 24 months.
In addition, many of the centers acquired by the Company during fiscal years
1996 and 1997 were pruchased from franchisees.




                                      7
<PAGE>   10



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 the period and systemwide revenues), and
amounts expressed as a percentage of revenues from operations. Due to the
Company changing to a 52/53 week fiscal year, the quarter ended July 06, 1997
consisted of 12 weeks and the quarter ended June 30, 1996 consisted of 13
weeks. The year to date comparisons include 40 weeks for the period ended July
06, 1997 and 39 weeks for the period ended June 30, 1996. While this has a
minor impact on comparability, it was not deemed material enough to provide a
pro forma of these results.









                                      8

<PAGE>   11
<TABLE>
<CAPTION>
                                                 12 WEEKS                 13 WEEKS       
                                              ENDED JULY 06,           ENDED JUNE 30,     
                                                   1997                   1996            
                                          -----------------------  -----------------------
                                                                                          
                                              1997                     1997               
<S>                                       <C>                        <C>                  
Systemwide centers open                            49                         46          
                                                                                          
                                                                                          
Systemwide revenues                        $5,609,000                 $3,797,000          
                                        ==============                =============       
                                                                                          
Revenues from operations:                                                                 
            Company-owned centers          $1,460,000         78%       $903,000        71%
            Franchise operations             $344,000         18%       $307,000        24%
             Product sales                    $74,000          4%        $66,000         5%
                                                                                          
                                                                                          
                                        --------------             --------------         
                 Total Revenues            $1,878,000        100%     $1,276,000       100%
                                                                                          
Operating Expenses                         $2,428,000        129%     $1,727,000       135%
Restructuring charge                        5,963,000      (318)%           --         --
                                                                                          
Net operating loss                        ($6,513,000)     (347)%      ($451,000)     (35)%
Interest (expense) income                     ($4,000)         0%        $24,000         2%
Other (expense) income                        ($5,000)         0%           --         --
                                        --------------             --------------         
                                                                                          
Net Loss                                  ($6,522,000)     (347)%      ($427,000)     (33)%
                                        ==============             ==============         
</TABLE>



<TABLE> 
<CAPTION>
                                               40 WEEKS                 39 WEEKS          
                                             ENDED JULY 06,           ENDED JUNE 30,      
                                                1997                      1996            
                                          ---------------------    -----------------------
<S>                                       <C>                        <C>                  
Systemwide centers open                               49                     40           
                                                                                          
                                                                                          
Systemwide revenues                          $17,173,000               $9,725,000         
                                         ===============              ===============     
                                                                                          
Revenues from operations:                                                                 
            Company-owned centers             $4,535,000     74%       $2,088,000       66%
            Franchise operations              $1,215,000     20%         $895,000       28%
             Product sales                      $413,000      6%         $179,000        6%
                                                                                          
                                                                                          
                                         ----------------         ----------------        
                 Total Revenues               $6,163,000    100%       $3,162,000      100%
                                                                                          
Operating Expenses                            $7,698,000    125%       $4,337,000      137%
Restructuring charge                           5,963,000   (97)%             --        --
                                                                                          
Net operating loss                           ($7,498,000) (122)%      ($1,175,000)    (37)%
Interest (expense) income                         $4,000      0%          $22,000        1%
Other (expense) income                          $146,000      2%          $59,000        2%
                                         ----------------         ----------------        
                                                                                          
Net Loss                                     ($7,348,000) (119)%      ($1,094,000)    (35)%
                                         ================         ================        
                                                                                             
</TABLE>


                                      9

<PAGE>   12


                TWELVE-WEEK PERIOD ENDED JULY 06, 1997 COMPARED
                  TO THIRTEEN-WEEK PERIOD ENDED JUNE 30, 1996


     Revenues

     Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the period ended July 06, 1997 increased by 48%, to $5,609,000
from $3,797,000 for the period ended June 30, 1996. This increase was due to an
increase in the total number of centers open for the majority of the period to
58 (this number includes nine corporate centers closed during the last two 
weeks of the quarter which resulted in 49 open centers as of July 06, 1997), as
compared to 46 open at June 30, 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 July 06, 1997
increased by 47%, to $1,878,000 from $1,276,000 for the period ended June 30,
1996. This increase was primarily due to the increase in revenues generated by
an increased number of Company-owned centers, as well as an increase in
revenues generated by franchising activities and increased revenues generated
by Kid's Craft, and increased enrollment at existing centers.

     Aggregate revenues generated by Company-owned centers for the period ended
July 06, 1997, which constituted 78% of revenues from operations, increased by
62% to $1,460,000, from $903,000 for the period ended June 30, 1996. This
increase was due primarily to the increase in (i) the number of Company-owned
centers owned and operated during the majority of the period ended July 06,
1997 to 21 (9 of the 21 were closed during the last two weeks of the quarter
ended July 06, 1997) as compared to 14 Company-owned centers at the end of the
period ended June 30, 1996 and (ii) the average enrollment in the centers open
during both periods.

     Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the period ended July 06, 1997, which constituted 18%
of revenues from operations, increased by 12%, to $344,000 as compared with
$307,000 for the period ended June 30, 1996. Revenues from franchise fees for
the period ended July 06, 1997 decreased by 65%, to $30,000 from $86,000 for
the period ended June 30, 1996. Royalties for the period ended July 06, 1997
increased by 43%, to $290,000 from $203,000 for the period ended June 30, 1996.
Administrative fees for the period ended July 06, 1997 increased by 21%, to
$23,000 from $19,000 for the period ended June 30, 1996. The decrease in
franchise fees is primarily attributable to the decrease in the number of
franchised centers opening during the applicable period. One franchised center
opened in the period ended July 06, 1997 as compared with four in the period
ended June 30, 1996. The increase in revenues from royalties and administrative
fees paid by franchisees resulted primarily from an increase in enrollment
levels for centers open in both periods and an increase in the number of
franchised centers to 37 as of the end of the period ended July 06, 1997 as
compared to 32 centers open as of June 30, 1996.

     Sales revenues generated by Kid's Craft for the period ended July 06,
1997, which constituted 4% of revenues from operations, increased by 12%, to
$74,000 as compared with $66,000 for the period ended June 30, 1996, primarily
as the result of sales to new franchised




                                      10
<PAGE>   13

centers opened during this period, improved ongoing sales to existing franchise 
centers, the opening of a retail store and the implementation of catalog sales.

     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 administering the Company's franchise
operations (including payroll and related expenses, occupancy costs, 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.

     Operating expenses for the period ended July 06, 1997 increased by 41%, to
$2,428,000 as compared with $1,727,000 in the period ended June 30, 1996. As a
percentage of operating revenues, operating expenses decreased to approximately
129% for the period ended July 06, 1997 from approximately 135% for the period
ended June 30, 1996. This decrease as a percent is due to higher revenues and
economics of scale gained on corporate overhead.


     A restructuring charge of approximately $6.0 million was incurred in
the third quarter of fiscal year 1997 due to the closure of nine
under-performing centers. This closure includes recognizing the future lease
obligations for these locations ($5.5 million), the write-off of all furniture
fixtures and leasehold improvements ($169,000), accounts receivable ($147,000)
and the severance benefit of the former CEO ($295,000) (Also see footnote
number four).  The Company intends to work with certain landlords to obtain
replacement tenants for these properties and enforce their legal rights with
respect to other landlords in an effort to mitigate the Company's damages under
these leases. The severance benefit of the former CEO is also subject to an
obligation to mitigate damages and the condition precedent that the CEO execute
a general release for the benefit of the Company. Neither the amount owing on
the Company's future lease obligations for these locations nor the amount owed
to the former CEO can be determined with certainty at this time. The Company
intends to raise all of its defenses, including mitigation, with regard to 
these amounts.

     Operating expenses relating to Company-owned centers for the period ended
July 06, 1997, which constituted 23% of total operating expenses, increased by
44%, to $1,647,000 from $1,146,000 for the period ended June 30, 1996. The
increase in operating expenses for Company-owned and operated centers for the
period ended July 06, 1997, as compared to the period ended June 30, 1996, is
due to the increase in the number of centers and the related increases in rent,
payroll, food costs and other cost increases in proportion to the number of
centers operated and the number of enrollees. As centers in the "ramp-up" phase
mature beyond their initial period of high start-up expenses and low
enrollment, the Company believes that expenses, as a percentage of revenues,
will decrease. Furthermore, the Company is continually in the process of
attempting to manage and minimize variable expenses such as payroll, food
costs, and supplies.

     Costs of goods sold by Kid's Craft for the period ended July 06, 1997,
which constituted 1% of total operating expenses, increased by 28%, to $91,000
from $79,000 for the period ended June 30, 1996. This increase was primarily
due to an corresponding increase in product sales. 




                                      11
<PAGE>   14

     General and administrative expenses, which constituted 9% of total
operating expenses and which included the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for the period
ended July 06, 1997 increased by 34%, to $675,000 from $503,000 for the period
ended June 30, 1996. Increases occurred due to the substantial increase in the
number of centers open and under development and because of additional legal,
accounting and consulting expenses resulting from the Company's attempts to
obtain additional financing.

     Depreciation and Amortization

     Depreciation and amortization expenses consisted of the depreciation or
amortization of certain equipment, furniture and fixtures, vehicles and
leasehold improvements, and goodwill. Depreciation and amortization expense,
for the period ended July 06, 1997 increased to $55,000 from $15,000 for the
period ended June 30, 1996. This increase was primarily due to depreciation
expense resulting from the increase in property and equipment, and amortization
of goodwill.

     Interest

     Interest expense, net of interest income, for the period ended July 06,
1997 was $4,000 as compared to interest income of $24,000 for the period ended
June 30, 1996. This change was attributable to the borrowings on the
Certificate of Deposit (CD) line of credit offset by interest earned on the CD.
In the quarter ended June 30, 1996 interest income was higher due to overnight
investments on available cash balances.

     Other Income

     For the period ended July 06, 1997, the Company recorded other expenses of
$5,000, and in the period ended June 30, 1996, $0.

     Summary

     As a result of the foregoing, the Company recorded a net loss for the
period ended July 06, 1997 of $6,522,000, which includes the $5,963,000
restructuring charge, as compared to a net loss of $427,000 for the period
ended June 30, 1996.

                   FORTY WEEKS ENDED JULY 06, 1997 COMPARED
                    TO THIRTY-NINE WEEKS ENDED JUNE 30, 1996


     Revenues

     Systemwide revenues (tuition fees from Company-owned and franchised
centers) for the period ended July 06, 1997 increased by 77%, to $17,173,000
from $9,725,000 for the period ended June 30, 1996. This increase was due to an
increase in the total number of centers open for the majority of the period to
58 (this number includes 9 corporate centers closed during the last two weeks of
the quarter which resulted in 49 open centers as of July 06, 1997) as compared 


                                      12

<PAGE>   15

to 46 open at June 30, 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 July 06, 1997
increased by 77%, to $6,163,000 from $3,162,000 for the period ended June 30,
1996. This increase was due to an increase in the number of Company-owned
centers, an increase in revenues generated by franchising activities, increased
revenues generated by Kid's Craft, and increased enrollment at existing
centers.

     Aggregate revenues generated by Company-owned centers for the period 
ended July 06, 1997, which constituted 74% of revenues from operations,
increased by 117%, to $4,535,000 as compared with $2,088,000 for the period
ended June 30, 1996. This increase was due primarily to the increase in the
number of Company-owned centers owned and operated during the period ended July
06, 1997 to 21 (nine of the 21 were closed during the last two weeks of the
quarter ended July 06, 1997) as compared to 14 Company-owned centers at the end
of the period ended June 30, 1996 as well as an increase in average enrollment.

     Revenues from franchising activities (franchising fees, royalties and
administrative fees) for the period ended July 06, 1997, which constituted 20%
of revenues from operations, increased by 36%, to $1,215,000 from $895,000 for
the period ended June 30, 1996. Revenues from franchise fees for the period
ended July 06, 1997 decreased by 14%, to $260,000 from $304,000 for the period
ended June 30, 1996. Royalties for the period ended July 06, 1997 increased by
65%, to $885,000 from $535,000 for the period ended June 30, 1996.
Administrative fees for the period ended July 06, 1997 increased by 25%, to
$70,000 from $56,000 for the period ended June 30, 1996. The decrease in
franchise fees is primarily attributable to an increase in the number of
franchise applicants who forfeited their franchise fee in the prior year before
opening a center. There were 10 franchised centers which opened in the period
ended July 06, 1997 and ten in the period ended June 30, 1996. The increase in
revenues from royalties and administrative fees paid by franchisees, was due to
an increase in enrollment levels for franchised centers open in both periods
and an increase in the franchised centers open as of the end of the period
ended July 06, 1997 (which included nine new franchised centers opened reduced
by the four that were acquired by the Company, increased by one that was bought
from the Company, and reduced by one that was allowed to drop out of the
system) compared to the period ended June 30, 1996.

     Sales revenues generated by Kid's Craft for the period ended July 06,
1997, which constituted 6% of revenues from operations, increased by 131%, to
$413,000 from $179,000 for the period ended June 30, 1996, primarily as a
result of sales to new franchised centers opened during this period, improved
ongoing sales to existing franchise centers, the opening of a retail store and
the implementation of catalog sales.

     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 administering the Company's 




                                      13
<PAGE>   16


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.

     Operating expenses for the period ended July 06, 1997 increased by 77%, to
$7,698,000 as compared with $4,337,000 in the period ended June 30, 1996. As a
percentage of operating revenues, operating expenses decreased to approximately
125% for the period ended July 06, 1997 from approximately 137% for the period
ended June 30, 1996. This decrease as a percent is due to higher revenues in
the period as compared to last period and some economies of scale gained on
corporate overhead.

     A restructuring charge of approximately $6.0 million was incurred in
the third quarter of fiscal year 1997 due to the closure of nine under
performing centers. This closure includes recognizing the future lease
obligations for these locations ($5.5 million), the write-off of all furniture,
fixtures, and leasehold improvement ($169,000), accounts receivable ($147,000)
and the severance benefit of the former CEO ($295,000) (Also see footnote
number four). The Company intends to work with certain landlords to obtain
replacement tenants for these properties and enforce their legal rights with
respect to other landlords  in an effort to mitigate the Company's damages
under these leases. The severance benefit of the former CEO is also subject to
an obligation to mitigate damages and the condition precedent that the CEO
execute a general release for the benefit of the Company. Neither the amount
owing on the Company's future lease obligations for these locations nor the
amount owed to the former CEO can be determined with certainty at this time.
The Company intends to raise all of its defenses, including mitigation, with 
regard to these amounts.

     Operating expenses relating to Company-owned centers for the period ended
July 06, 1997, which constituted 42% of total operating expenses, increased by
99%, to $5,314,000 from $2,676,000 for the period ended June 30, 1996. The
increase in operating expenses for Company-owned and operated centers for the
period ended July 06, 1997, as compared to the period ended June 30, 1996, is
due to the increase in the number of centers and the related increases in rent,
payroll, food costs and other cost increases in proportion to the number of
centers operated and the number of enrollees. As centers in the "ramp-up" phase 
mature beyond their initial period of high start-up expenses and low
enrollment, the Company believes that expenses, as a percentage of revenues,
will decrease. Furthermore, the Company is continually in the process of
attempting to manage and minimize variable expenses such as payroll, food
costs, and supplies.

     Costs of goods sold by Kid's Craft for the period ended July 06, 1997,
which constituted 3% of total operating expenses, increased by 117%, to
$345,000 from $159,000 for the period ended June 30, 1996. This increase was
primarily due to a corresponding increase in product sales.

     General and administrative expenses, which constituted 16% of total
operating expenses and which included the costs of corporate overhead,
franchising operations and operating expenses for Kid's Craft, for the period
ended July 06, 1997 increased by 35%, to $2,024,000 from $1,502,000 for the
period ended June 30, 1996. Expenses increased in all expense items due to 



                                      14

<PAGE>   17


the increase in the number of centers open and under development, and the 
legal, accounting and consulting expenses resulting from the Company's 
attempts to obtain additional financing.

     Depreciation and Amortization

     Depreciation and amortization expenses consisted of depreciation or
amortization of certain equipment, furniture and fixtures, vehicles and
leasehold improvements, and goodwill. Depreciation and amortization expense,
for the period ended July 06, 1997 increased to $133,000 from $51,000 for the
period ended June 30, 1996. This increase was primarily due to depreciation
expense resulting from the increase in property and equipment, and amortization
of additional goodwill.

     Interest

     Interest income, net of interest expense, for the period ended July 06,
1997 was $4,000 as compared to interest income of $22,000 for the period ended
June 30, 1996. This change was attributable to borrowings on a line of credit
in fiscal year 1997 as compared to fiscal year 1996 in which the Company's line
of credit was paid off in December 1995 and the Company had overnight 
investments in the Company's sweep account resulting from the proceeds of the
initial public offering, as well as the elimination of capital lease obligations
and the amortization of debt issuance costs which were included in interest
expense during fiscal 1996.

     Other Income

     For the period ended July 06, 1997, the Company recorded other income of
$146,000 as compared with $59,000 in the period ended June 30, 1996. This
income was 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 franchised center
to another franchisee.

     Summary

     As a result of the foregoing, the Company recorded a net loss for the
period ended July 06, 1997 of $7,348,000, which includes the $5,963,000
restructuring charge, as compared to a net loss of $1,094,000 for the period
ended June 30, 1996.

     Seasonality

     Due to the annual seasonal reduction in enrollment during the summer
months, which occurs throughout the child care industry, the Company has
historically experienced a decrease in tuition revenues during the fourth
quarter of each fiscal year (July through September). The Company expects to
continue to experience decreases in tuition revenues during the fourth quarter
of its current fiscal year. As a result, the Company's annual earnings have
been and will continue to be heavily dependent on the results of operations
during the first three quarters of each year.


                                      15

<PAGE>   18

LIQUIDITY AND CAPITAL RESOURCES

     During the period ended July 06, 1997, the Company satisfied its cash
requirements from cash flow from operations, the remaining proceeds from the
initial public offering, the sale of one Company-owned center and draws on the
line of credit secured by a CD. The primary uses of cash have been for
operations, the purchase of supplies, financing the start-up of two new
Company-owned centers, the acquisition of four centers from franchisees and
capital expenditures.

     Net cash used in operating activities for the period ended July 06, 1997
totaled approximately $1,103,000, reflecting, primarily, the net loss of
$7,348,000 (which included a $6.0 million restructuring charge), increases in
the reserve for closed centers and increases in accounts payable. Net cash
provided by investing activities for the period ended July 06, 1997 totaled
approximately $12,000, reflecting the sale of one Company-owned center, offset
by the acquisition of two centers and capital expenditures.

     The Company was advised on June 2, 1997 its $200,000 bank line of credit
(of which $8,000 was drawn on as of May 30, 1997) was withdrawn by Sparks State
Bank. During the period ended July 06, 1997, the Company used $112,000 to
re-pay long-term debts.

     As of July 06, 1997, the Company's total debt obligations (exclusive of
trade credit) consisted of $117,000 which included a $39,000 equipment loan, an
$11,000 vehicle loan and various notes payable as a result of the purchase of
franchisee centers.

     The Company continues to engage in a variety of measures aimed at
obtaining profitability. During this quarter the Company reduced its corporate
staff by six and has discontinued operations of nine non-profitable centers. As
of the end of this quarter, the existing company owned locations operate in the
States of Maryland and Pennsylvania which creates geographical economics of
scale with respect to administrative management costs.

     As a result of the reduction in corporate staff and closing the company
owned operations of the nine non-performing centers, aggregate annualized
revenue decreased 27%, payroll was decreased by 43% and rent expenses decreased
by 50%.

     The Company also faces a number of claims from creditors some of which
have been filed and some of which are threatened or pending litigation. These
claims if taken in the aggregate would create extreme liquidity problems.

     Despite the above measures the Company still faces a serious liquidity
problem. It is uncertain if the Company will be able to meet its debt
and working capital obligations. The Company believes that by the beginning of
the next fiscal year (September 29, 1997) a positive cash flow can be achieved
from current operations, but there is no certainty of this happening.



                                      16

<PAGE>   19


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.





                                      17
<PAGE>   20


PART II - OTHER INFORMATION
--------------------------------------------------------------------------------


ITEM 1.  LEGAL PROCEEDINGS.

The Company is a party to the following litigation:

Merrill Corporation v. Kiddie Academy International, Inc., Circuit Court for
Harford County, Maryland, Case No. 26591/59/681. This matter was instituted on
September 23, 1996 by Merrill Corporation in connection with financial printing
services rendered to the Company in connection with the Company's initial
public offering. Merrill asserted a claim for $129,000. This case has been
settled for $110,000.

Elgin Oaks II v. Kiddie Academy Child Care Learning Centers, Inc. and Kiddie
Academy International, Inc., In the Circuit of the Sixteenth Judicial Circuit,
Kane County, Illinois. Gen. No. L KA 97 0361 - Plaintiff, a landlord, filed a
complaint on June 20, 1997 alleging that the Company terminated its lease with
the Plaintiff prematurely and seeking possession of the property subject to
that lease and also seeking past and future rent in the amount of
$1,008,424.80, plus attorneys' fees and other expenses. The Company and
plaintiff have stipulated that the Company vacated the property and may be
liable for certain unpaid rent, but that the amount of damages cannot be
determined at this time. The Company intends to defend the damages component of
this case and to raise all its defenses, including the plaintiff's duty to
mitigate.

There have been no material developments in other previously reported
litigation. (See the Company's 10-QSB dated April 13, 1997).

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 30, 1997, the holders of 1,017,000 shares of the Company's issued and
outstanding common stock, constituting a majority of the Company's 2,025,000
shares of issued and outstanding common stock, executed and delivered a written
consent to shareholder action without a meeting pursuant to Section 228 of the
Delaware General Corporation Law. The holders of the 1,017,000 shares by
written consent (a) amended the by-laws to (i) remove a provision prohibiting
the removal of directors by less than two-thirds of the shareholders and (ii)
increase the number of directors from six to nine; (b) elected three new
directors: (i) Pauline J. Miller, (ii) Gary Miller, and (iii) Diane Amato; (c)
removed two existing directors: (i) Angelo D. Bizzarro, and (ii) Carl J. Meil,
Jr; and (d) elected two directors, Glenn J. Brainer and Larry V. Fila, to fill 
the vacancies created by the removal of Messrs. Bizzarro and Meil, contingent
upon the approval of Barington Capital Group, L.P. under the terms of the
Underwriting Agreement. All of the newly elected directors were elected by the
consent of the holders of 1,017,000 shares. No votes were cast against these
directors or the other actions referenced above, or withheld or abstained,
because of the nature of the written consent under Delaware law. No proxies
were solicited in connection with this action.




                                      18
<PAGE>   21


ITEM 5.  OTHER INFORMATION.

MANAGEMENT CHANGE

     On Thursday, June 12, 1997, the Board of Directors terminated the 
employment of Angelo D. Bizzarro, the Company's Chief Executive Officer, and
appointed George Miller as the Chief Executive Officer.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

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

        Exhibit 3 - Second Amended and Restated By-Laws
        Exhibit 27 - Financial Data Schedule
        Exhibit 99 - Additional Exhibits

b.      Reports on Form 8-K

        On June 11, 1997, the Company filed a report on form 8-K reporting a
        change in control of the Company.




                                      19
<PAGE>   22

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.

 
August 20, 1997                              BY: /s/ George Miller
----------------------                           -------------------------------
Date                                             Geeorge Miller  
                                                 Chief Executive Officer



August 20, 1997                              BY: /s/ Guy A. Matta
----------------------                           -------------------------------
Date                                             Guy A. Matta
                                                 Chief Financial Officer






                                      20