The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K filed for the fiscal year ended June 28, 2008 with the SEC.

The Company has made statements in this report that constitute forward-looking statements as that term is defined in the federal securities laws. These forward-looking statements concern the Company's operations, economic performance and financial condition and may include statements regarding:
opportunities for growth; the number of pre-elementary and elementary schools expected to be added in future years; the profitability of newly opened schools; capital expenditure levels; the ability to incur additional indebtedness; strategic acquisitions, investments and other transactions; and changes in operating systems and policies. The forward-looking statements are subject to various known and unknown risks, uncertainties and other factors. When words such as "believes," "expects," "anticipates," "plans," "estimates," "projects" or similar expressions are used in this Quarterly Report on Form 10-Q, the Company is making forward-looking statements.

Although the Company believes that any forward-looking statements are based on reasonable assumptions, expected results may not be achieved. Actual results may differ materially from the Company's expectations. Among other risk factors that are discussed in the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2008, filed with the SEC, and, from time to time in the Company's other SEC reports and filings, important factors that could cause actual results to differ from expectations include:

• the Company's ability to hire and retain qualified executive directors, principals, teachers and teachers' aides;

• the Company's ability to retain key individuals in acquired schools and/or successfully grow and integrate acquired schools' operations;

• the Company's inability to defend successfully against or counter negative publicity associated with claims involving alleged incidents at its schools;

• control of a majority of the outstanding common stock of the Company by a small number of shareholders;

• the effect of anti-takeover provisions in the Company's certificate of incorporation, bylaws and Delaware law;

• the impact on the Company's business and management stability related to the proposal by Knowledge Learning Corporation to acquire 100% of the Company;

• the impact on management time and resources directed towards the Company's strategic growth plans related to the proposal by Knowledge Learning Corporation;

• the impact on certain potential sellers of schools to the Company and their possible reluctance to do so with the uncertainty of this potential transaction related to the Knowledge Learning Corporation proposal;

• changing economic conditions;

• the Company's ability to find affordable real estate and renew existing locations on terms acceptable to the Company and the impact this may have on enrollment;

• the Company's ability to obtain the capital required to fully implement its business and strategic plan;

• competitive conditions in the pre-school and elementary school education and services industry, such as the growth of competitors as possible alternatives to the public school system, including virtual charter schools, charter schools and magnet schools;

• government regulations affecting school operations, including student/teacher ratios, accreditation and the acceptance of course credits from our special purpose high schools;

• the establishment of government-mandated universal pre-K or similar programs or benefits that do not allow for participation by for-profit operators or allow for participation at unprofitable reimbursement rates;

• environmental or health-related events that could affect schools in areas impacted by such events; and

• the Company's ability to maintain effective controls over financial reporting.

Negative developments in these areas could have a material adverse effect on the Company's valuation, business, financial condition and results of operations.

Readers are cautioned that these risks may not be exhaustive. The Company operates in a continually changing business and regulatory environment and new risks and requirements emerge from time to time. Readers should not rely upon forward-looking statements except as statements of management's present intentions and expectations that may or may not occur. Readers should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. The Company assumes no obligation to update or revise the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

During the first quarter of Fiscal 2009, the Company's Board of Directors received an unsolicited expression of interest from Knowledge Learning Corporation to pursue an acquisition of the Company for $17.00 per share in cash. The Company said that it had informed Knowledge Learning Corporation that its Board of Directors will evaluate this proposal carefully and promptly in consultation with financial and legal advisors in order to decide whether pursuing the possible transaction would be in the best interest of all of the Company's stockholders. Subsequently, during the first quarter of Fiscal 2009, the Company's Board of Directors authorized a committee consisting solely of independent directors to evaluate the previously-announced expression of interest from Knowledge Learning Corporation to pursue an acquisition of the Company. The independent committee is currently evaluating strategic alternatives to enhance stockholder value. The Company further announced that J.P.Morgan Securities Inc. had been engaged as financial advisor in connection with the evaluation process. There can be no assurance that an acquisition of the Company will result from the evaluation process, which is still ongoing.

Results of Operations

Results from operations are measured each fiscal period by reporting and analyzing results at the Company level. Additionally, the Company seeks to measure and balance revenue and profit growth in four growth initiative categories; (1) Comparable Schools, (2) Core Schools, (3) New Schools and (4) Acquired Schools or businesses. Management seeks to balance growth in order to improve revenue and gross profit while adding to overall system capacity and total company performance. These four categories are measured individually and through different metrics to help management better understand where growth is derived and facilitate the balance between growth, investment and profitability the Company seeks to achieve. It is important to note that the set of schools in each category may differ from reporting period to reporting period as schools may be opened, acquired, closed or become comparable at different times during the fiscal year. The four categories are more fully described below.

(1) Comparable Schools - an identical set of schools open for each of the entire periods being reported, sometimes referred to as "same schools." By definition, Comparable Schools are always the same number of schools in each period. Comparing results of the performance of these schools provides an "apples-to-apples" comparison of results between periods. Results are measured by revenue, operating expense and gross profit performance for this identical group of schools for the current period versus the prior period. Management seeks to grow revenue and increase gross margin in this category through annual tuition rate increases, enrollment growth, and expense management. Information related to Comparable Schools is included in each relevant section below and summarized in the Gross Profit sections below.

(2) Core Schools - consists of schools reported as Comparable Schools for each specific period presented. By definition, the population of Core Schools is schools open and comparable versus the prior period at a fixed point in time. The number and specific Core Schools may be different in each period presented as the Company continues to add or close schools. We measure Core Schools' performance as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts to grow the Core School base. The table presented in the gross profit sections below shows this information.

(3) New Schools - consists of newly developed schools. By definition the population of schools in each period should be different for each period as the Company continues to add schools.

New Schools are an integral part of the Company's business development strategy and are defined as newly developed schools as compared to "Acquired Schools" as discussed below. In planning New School development activity, management typically seeks to balance the pre-opening costs and start-up losses associated with the ramp up of new schools with achieving an appropriate growth and profitability balance for the Company as a whole.

New School revenue is measured by New School revenue as a percent of total operating revenue for each comparative period. This information is included in the revenue section below. We also measure New School gross profit, gross margin and expense items as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts from this activity when compared to the prior period. We seek to improve New School period over period performance by minimizing the impact of pre-opening and ramp up costs and the time it takes a new school to ramp up. The tables presented in the gross profit sections below show New School percent of revenue information for each period presented.

(4) Acquired Schools - purchased schools previously operated by independent third parties.

Acquired Schools are an integral part of the Company's business development strategy. Management seeks to acquire schools that fill out existing markets or provide platforms for additional growth in new markets within our demographic parameters. For acquired school activity, management seeks to add schools in pursuit of adding to the appropriate growth and profitability balance described above. While the Company has typically acquired schools that are already profitable, in some cases a school is acquired that may be either early in its respective ramp up period and so not yet profitable, or in the case of Camelback Desert Schools, in a well matched demographic but with issues that have made them not profitable but acquired for their potential as we believe our core competencies are appropriate to solve the school's issues and move them to profitability.

Acquired Schools' revenue is measured by the Acquired Schools' revenue as a percent of total operating revenue for each comparative period. This information is included in the revenue section below. We measure Acquired School gross profit, gross margin and expense items as a percent of revenue to develop period over period trends to understand the contribution provided by our efforts from this activity when compared to the prior period. We seek to improve Acquired School period over period performance by honing our screening and due diligence processes and streamlining our integration activities. The table presented in the gross profit sections below shows Acquired School percent of revenue information for each period presented.

At December 27, 2008, the Company operated 178 schools. Since June 28, 2008, the Company has opened two new preschools and acquired one elementary school and two preschools. During the twenty-six weeks ended December 29, 2007, the Company opened four new preschools and acquired six new preschools, one of which was subsequently closed during the same twenty-six week period. School counts for the twenty-six weeks ended December 27, 2008 and December 29, 2007 are as follows:

                                                     Twenty-six weeks ended
                                                   December 27,   December 29,
                                                       2008           2007
    Number of schools at the beginning of period            173            151
    Acquisitions                                              3              6
    Openings                                                  2              4
    Closings                                                 -              (1 )

    Number of schools at the end of the period              178            160

The following table sets forth certain statement of operations data as a percentage of revenue for the thirteen and twenty-six weeks ended December 27, 2008 and December 29, 2007 (dollars in thousands):

                                         Thirteen                        Thirteen
                                       weeks ended                     weeks ended
                                       December 27,    Percent of      December 29,    Percent of          Increase
                                           2008         Revenues           2007         Revenues       Dollar    Percent
Revenues                              $       56,354        100.0 %   $       51,207        100.0 %   $  5,147      10.1 %

Personnel costs                               27,220         48.3             24,778         48.4        2,442       9.9
School operating costs                         6,921         12.3              6,435         12.6          486       7.6
Rent and other                                13,708         24.3             12,129         23.7        1,579      13.0

Cost of services                              47,849         84.9             43,342         84.6        4,507      10.4

Gross profit                                   8,505         15.1              7,865         15.4          640       8.1
General and administrative expenses            4,709          8.4              4,463          8.7          246       5.5

Operating income                      $        3,796          6.7 %   $        3,402          6.6 %   $    394      11.6 %



                                        Twenty-six                      Twenty-six
                                       weeks ended                     weeks ended
                                       December 27,    Percent of      December 29,    Percent of          Increase
                                           2008         Revenues           2007         Revenues       Dollar    Percent
Revenues                              $      107,730        100.0 %   $       95,839        100.0 %   $ 11,891      12.4 %

Personnel costs                               52,429         48.7             46,635         48.7        5,794      12.4
School operating costs                        14,887         13.8             13,195         13.8        1,692      12.8
Rent and other                                27,268         25.3             24,030         25.1        3,238      13.5

Cost of services                              94,584         87.8             83,860         87.5       10,724      12.8

Gross profit                                  13,146         12.2             11,979         12.5        1,167       9.7
General and administrative expenses            9,651          9.0              8,923          9.3          728       8.2

Operating income                      $        3,495          3.2 %   $        3,056          3.2 %   $    439      14.4 %

The table below shows the number of schools included in each of the four growth initiative categories. Each section category is discussed below for the thirteen and twenty-six week periods ended December 27, 2008 and December 29, 2007, respectively:

                           Thirteen Weeks Ended         Twenty-Six Weeks Ended
                        December 27,   December 29,   December 27,   December 29,
      School Category       2008           2007           2008           2007
      Comparable                 155            155            149            149

      Core                       155            143            149            142
      New                          4              6              7              7
      Acquired                    19             11             22             11

      Total                      178            160            178            160

Revenue

Revenue for the thirteen weeks ended December 27, 2008 increased $5,147,000, or 10.1%, to $56,354,000 from $51,207,000 for the thirteen weeks ended December 29, 2007. The revenue increase for the thirteen weeks ended December 27, 2008, as compared to the same period in the prior year, is as follows (dollars in thousands):

                                  Thirteen weeks ended             Increase/(decrease)
                              December 27,     December 29,
                                  2008             2007           Dollar       Percent
  Total Company revenue      $       56,354    $      51,207     $  5,147           10.1 %

  Comparable Schools         $       49,462    $      50,009     $   (547 )         (1.1 )%


                                                Percent of                    Percent of
                                  2008            Revenue          2007        Revenue
  Core Schools               $       49,462             87.8 %   $ 46,406           90.6 %
  New Schools                           670              1.2 %      1,001            2.0 %
  Acquired Schools                    6,185             11.0 %      3,767            7.4 %
  Closed schools and other               37            < 0.1 %         33          < 0.1 %

                             $       56,354            100.0 %   $ 51,207          100.0 %

Revenue for the twenty-six weeks ended December 27, 2008 increased $11,891,000, or 12.4%, to $107,730,000 from $95,839,000 for the twenty-six weeks ended December 29, 2007. The revenue increase for the twenty-six weeks ended December 27, 2008, as compared to the same period in the prior year, is as follows (dollars in thousands):

                                  Twenty-six weeks ended           Increase/(decrease)
                              December 27,     December 29,
                                  2008             2007           Dollar       Percent
   Total Company revenue      $     107,730    $      95,839     $ 11,891           12.4 %

   Comparable Schools         $      92,269    $      92,329     $    (60 )         (0.1 )%


                                                Percent of                    Percent of
                                  2008            Revenue          2007        Revenue
   Core Schools               $      92,269             85.6 %   $ 86,127           89.9 %
   New Schools                        2,547              2.4 %      3,021            3.2 %
   Acquired Schools                  12,833             11.9 %      6,563            6.8 %
   Closed schools and other              81              0.1 %        128            0.1 %

                              $     107,730            100.0 %   $ 95,839          100.0 %

Revenue trends

Comparable Schools' net revenue decreased $547,000, or 1.1%, for the thirteen weeks ended December 27, 2008 as compared to the thirteen weeks ended December 29, 2007. Comparable Schools' net revenue decreased $60,000, or 0.1%, for the twenty-six weeks ended December 27, 2008 as compared to the twenty-six weeks ended December 29, 2007. As a percentage, revenue growth fell below that of tuition rate increases, due in large part to current economic activity affecting employment rates which has contributed towards an overall reduction in enrollment in certain geographic areas in which the Company operates. Comparable revenue decreases were due primarily to average tuition rate increases of between 3.0% and 3.3% offset by a decrease in average enrollments.

Personnel costs

Personnel costs primarily include wages, payroll taxes, employee benefits and vacation costs. This category of costs is partially variable and primarily affected by incentive compensation, health care benefit and participant rate increases, staffing ratio requirements and changes in enrollment. The category tends to be variable on a step function basis when staffing ratios indicate additional teachers are required without full enrollment in a class. In the case of New Schools, personnel costs tend to be higher as a percentage of revenue as a base level of personnel and associated costs are established in the early years of a school's life and which are expected to leverage as enrollments increase.

                              December 27,     December 29,
                                  2008             2007          Dollar        Percent
    Total                    $       27,220    $      24,778   $    2,442          9.9 %

    Comparable Schools       $       23,672    $      24,139   $     (467 )       (1.9 )%


                                 Twenty-six weeks ended          Increase/(decrease)
                              December 27,     December 29,
                                  2008             2007          Dollar        Percent
    Total                    $       52,429    $      46,635   $    5,794         12.4 %

    Comparable Schools       $       44,305    $      44,590   $     (285 )       (0.6 )%

Personnel costs for the thirteen weeks ended December 27, 2008 increased $2,442,000, or 9.9%, to $27,220,000 from $24,778,000 for the thirteen weeks ended December 29, 2007. The 9.9% increase was primarily driven by wages and benefits of $3,183,000 from schools opened or acquired subsequent to the first quarter of Fiscal 2008 and an increase in wage rates and benefit costs offset by more efficient utilization of payroll hours and personnel netting to a decrease of $467,000 for comparable schools which correlated with overall decreased revenues for comparable schools. Wage and benefit costs decreased $274,000 for schools closed subsequent to the first quarter of Fiscal 2008.

Personnel costs decreased to 48.3% of revenue for the thirteen weeks ended December 27, 2008 as compared to 48.4% for the thirteen weeks ended December 29, 2007.

Personnel costs for the twenty-six weeks ended December 27, 2008 increased $5,794,000, or 12.4%, to $52,429,000 from $46,635,000 for the twenty-six weeks ended December 29, 2007. The 12.4% increase was primarily driven by wages and benefits of $6,590,000 from schools opened subsequent to Fiscal 2007 and an increase in wage rates and benefit costs offset more efficient utilization of payroll hours and personnel netting to a decrease of $285,000 for comparable schools which correlated with overall decreased revenues for comparable schools. Wage and benefit costs decreased $511,000 for schools closed subsequent to Fiscal 2007.

Personnel costs for the twenty-six weeks ended December 27, 2008 and December 29, 2007 was 48.7% of revenue.

School operating costs

School operating costs primarily include food, utilities, transportation, maintenance, janitorial, supplies, school level marketing spending and ancillary programs. This category is partially variable with increases primarily driven by additional enrollment. In the case of New Schools, school operating costs tend to be higher as a percent of revenue as a base level of costs are incurred in the early period of a school's life and are expected to be leveraged as enrollments increase.

    (dollars in thousands)        Thirteen weeks ended           Increase/(decrease)
                              December 27,     December 29,
                                  2008             2007          Dollar        Percent
    Total                    $        6,921    $       6,435   $      486          7.6 %

    Comparable Schools       $        6,067    $       6,258   $     (191 )       (3.1 )%


                                 Twenty-six weeks ended          Increase/(decrease)
                              December 27,     December 29,
                                  2008             2007          Dollar        Percent
    Total                    $       14,887    $      13,195   $    1,692         12.8 %

    Comparable Schools       $       12,621    $      12,652   $      (31 )       (0.2 )%

School operating costs for the thirteen weeks ended December 27, 2008 increased $486,000, or 7.6%, to $6,921,000 from $6,435,000 for the thirteen weeks ended December 29, 2007. The increase was primarily driven by school operating costs of $741,000 from schools opened or acquired subsequent to the first quarter of Fiscal 2008 offset by a decrease in operating costs of

$191,000 for comparable schools which correlated with overall decreased revenues for comparable schools and more efficient operations and school management. Operating costs decreased $52,000 for schools closed subsequent to the first quarter of Fiscal 2008.

School operating costs decreased to 12.3% of revenue for the thirteen weeks ended December 27, 2008 as compared to 12.6% for the thirteen weeks ended December 29, 2007.

School operating costs for the twenty-six weeks ended December 27, 2008 increased $1,692,000, or 12.8%, to $14,887,000 from $13,195,000 for the twenty-six weeks ended December 29, 2007. The increase was primarily driven by school operating costs of $1,865,000 from schools opened or acquired subsequent to the Fiscal 2007 offset by a decrease in operating costs of $31,000 for comparable schools which correlated with overall decreased revenues for comparable schools and more efficient operations and school management. Operating costs decreased $130,000 for schools closed subsequent to the first quarter of Fiscal 2008.

School operating costs was 13.8% of revenue for the twenty-six weeks ended December 27, 2008 and December 29, 2007.

Rent and other

Rent and other costs primarily include property rent and property taxes, the portion of claims retained by the Company for workers' compensation and property damage, depreciation and amortization, regional and school marketing, vehicle and equipment rent, and pre-opening costs. This category of costs is relatively fixed in nature with increases related to contractual obligations, changes in marketing initiatives and the addition of new or acquired schools. In the case of New Schools, the Company expects these costs to be leveraged significantly as enrollments ramp up.

    (dollars in thousands)        Thirteen weeks ended           Increase/(decrease)
                              December 27,     December 29,
. . .