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 for the year ended June 28, 2008 filed 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 this Quarterly Report on Form 10-Q, 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, but are not limited to:

• the impact of unemployment rates on our current or potential customers;

• changing economic conditions;

• 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 our business and management stability related to the proposal by Knowledge Learning Corporation to acquire 100% of the Company and the continued interest of Knowledge Learning Corporation or potentially others, notwithstanding the rejection by the Company's Board of Directors, as the Company's Board of Directors will remain open to considering strategic transactions which fully and fairly recognize the Company's value and are in the best interest of stockholders;

• the impact on management time and resources directed towards the Company's strategic growth plans related to the proposal by Knowledge Learning Corporation or potentially others, notwithstanding the rejection by the Company's Board of Directors, as the Company's Board of Directors will remain open to considering strategic transactions which fully and fairly recognize the Company's value and are in the best interest of stockholders;

• the impact on certain potential sellers of schools to the Company and their possible reluctance to do so with the uncertainty of a potential transaction related to the Knowledge Learning Corporation proposal which, while rejected, does not prevent Knowledge Learning Corporation from showing continued interest;

• 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;

• the impact of the litigation with the U.S. Department of Justice concerning alleged violation of the Americans with Disabilities Act of 1990 on our results of operations or cash flows in future periods

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

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 informed Knowledge Learning Corporation that its Board of Directors would 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 Company also announced that J.P.Morgan Securities Inc. had been engaged as financial advisor in connection with the evaluation process.

During the third quarter of Fiscal 2009, the Company received another letter from Knowledge Learning Corporation proposing to acquire the Company for $13.50 per share which superseded Knowledge Learning Corporation's initial expression of interest to pursue an acquisition of the Company for $17.00 per share in cash. Subsequently, during the third quarter of Fiscal 2009, the Company announced that its Board of Directors, in consultation with its financial and legal advisors, unanimously determined to reject Knowledge Learning Corporation's proposal to acquire the Company. The Company confirmed that its Board of Directors will remain open to considering strategic transactions which fully and fairly recognize the Company's value and are in the best interest of stockholders.

There is no assurance a sale of the Company will result from this process.

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: (i) Comparable Schools, (ii) Core Schools, (iii) New Schools and
(iv) 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 several different metrics to help management better understand where growth is derived and manage 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.

i. Comparable Schools - consists of 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 identical schools in each comparable 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 section below.

ii. 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 identity of 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 percentage 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 section below shows this information.

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" which are 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 percentage 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 percentage 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.

iv. Acquired Schools - consists of 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 percentage of total operating revenue for each comparative period. This information is included in the revenue section below. We measure Acquired Schools' gross profit, gross margin and expense items as a percentage 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 Schools' period over period performance by honing our screening and due diligence processes and streamlining our integration activities. The table presented in the gross profit section below shows Acquired Schools' percentage of revenue information for each period presented.

At March 28, 2009 the Company operated 180 schools. Since June 28, 2008, the Company has opened four new preschools, closed one preschool, and acquired one elementary school and three preschools. During the thirty-nine weeks ended March 29, 2008 the Company opened four new preschools and acquired eighteen new preschools and seven before and after school program buildings. One of the acquired preschools was subsequently closed within the same fiscal quarter. School counts for the thirty-nine weeks ended March 28, 2009 and March 28, 2008 are as follows:

                                                     Thirty-Nine weeks ended
                                                     March 28,       March 29,
                                                       2009            2008
     Number of schools at the beginning of period           173            151

     Acquisitions                                             4             18
     Openings                                                 4              4
     Closings                                                (1 )           (1 )

     Number of schools at the end of the period             180            172

The following table sets forth certain statement of operations data as a percentage of revenue for the thirteen and thirty-nine weeks ended March 28, 2009 and March 29, 2008 (dollars in thousands):

                                  Thirteen                              Thirteen
                                 weeks ended                           weeks ended
                                  March 28,       Percentage of         March 29,       Percentage of          Increase/(decrease)
                                    2009            Revenues              2008            Revenues            Dollar          Percent
Revenues                        $      57,402             100.0 %     $      53,328             100.0 %     $    4,074            7.6 %

Personnel costs                        27,608              48.1              25,408              47.6            2,200            8.7
School operating costs                  7,165              12.5               6,384              12.0              781           12.2
Rent and other                         14,192              24.7              12,549              23.5            1,643           13.1

Cost of services                       48,965              85.3              44,341              83.1            4,624           10.4

Gross profit                            8,437              14.7               8,987              16.9             (550 )         (6.1 )
General and administrative
expenses                                4,347               7.6               4,657               8.7             (310 )         (6.7 )

Operating income                $       4,090               7.1 %     $       4,330               8.1 %     $     (240 )         (5.5 )%

                                 Thirty-Nine                         Thirty-Nine
                                 weeks ended                         weeks ended
                                  March 28,      Percentage of        March 29,      Percentage of       Increase/(decrease)
                                    2009           Revenues             2008           Revenues           Dollar       Percent
Revenues                        $     165,132            100.0 %    $     149,167            100.0 %    $    15,965       10.7 %

Personnel costs                        80,037             48.5             72,043             48.3            7,994       11.1
School operating costs                 22,052             13.4             19,579             13.1            2,473       12.6
Rent and other                         41,460             25.1             36,579             24.5            4,881       13.3

Cost of services                      143,549             86.9            128,201             85.9           15,348       12.0

Gross profit                           21,583             13.1             20,966             14.1              617        2.9
General and administrative
expenses                               13,998              8.5             13,580              9.1              418        3.1

Operating income                $       7,585              4.6 %    $       7,386              5.0 %    $       199        2.7 %

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 thirty-nine week periods ended March 28, 2009 and March 29, 2008, respectively:

                            Thirteen Weeks Ended     Thirty-Nine Weeks Ended
                           March 28,    March 29,    March 28,      March 29,
         School Category      2009        2008         2009           2008
         Comparable               157         157           148            148


         Core                     157         150           148            142
         New                        5           5             9              7
         Acquired                  18          17            23             23


         Total                    180         172           180            172

Revenue

Revenue for the thirteen weeks ended March 28, 2009 increased $4,074,000, or
7.6%, to $57,402,000 from $53,328,000 for the thirteen weeks ended March 29,
2008. The revenue increase for the thirteen weeks ended March 28, 2009, as
compared to the same period in the prior year, is as follows (dollars in
thousands):



                                   Thirteen weeks ended          Increase/(decrease)
                                 March 28,      March 29,
                                   2009           2008          Dollar       Percent
     Total Company revenue      $    57,402    $    53,328     $  4,074            7.6 %


     Comparable Schools         $    50,643    $    51,805     $ (1,162 )         (2.2 )%


                                               Percent of                   Percent of
                                   2009          Revenue         2008        Revenue
     Core Schools               $    50,643           88.2 %   $ 50,043           93.8 %
     New Schools                        569            1.0        1,172            2.2
     Acquired Schools                 6,101           10.6        2,080            3.9
     Closed schools and other            89            0.2           33            0.1

                                $    57,402          100.0 %   $ 53,328          100.0 %

Revenue for the thirty-nine weeks ended March 28, 2009 increased $15,965,000, or 10.7%, to $165,132,000 from $149,167,000 for the thirty-nine weeks ended March 29, 2008. The revenue increase for the thirty-nine weeks ended March 28, 2009, as compared to the same period in the prior year, is as follows (dollars in thousands):

                                            Thirty-Nine weeks ended                 Increase/(decrease)
                                         March 28,          March 29,
                                           2009               2008              Dollar            Percent
Total Company revenue                  $     165,132     $       149,167       $  15,965                10.7 %


Comparable Schools                     $     140,505     $       141,668       $  (1,163 )              (0.8 )%


                                                          Percentage of                        Percentage of
                                           2009              Revenue             2008             Revenue
Core Schools                           $     140,505                85.1 %     $ 132,750                89.0 %
New Schools                                    4,161                 2.5           4,930                 3.3
Acquired Schools                              20,014                12.1          11,325                 7.6
Closed schools and other                         452                 0.3             162                 0.1

                                       $     165,132               100.0 %     $ 149,167               100.0 %

Revenue trends

Comparable Schools' net revenue decreased $1,162,000, or 2.2%, for the thirteen weeks ended March 28, 2009 as compared to the thirteen weeks ended March 29, 2008. Comparable Schools' net revenue decreased $1,163,000, or 0.8%, for the thirty-nine weeks ended March 28, 2009 as compared to the thirty-nine weeks ended March 29, 2008. Comparable revenue decreases were due primarily to average tuition rate increases of between 3.0% and 4.0% offset by a decrease in average enrollments. As a percentage, revenue growth fell below that of tuition rate increases, due in large part to current economic activity affecting unemployment rates which has contributed towards an overall reduction in enrollment in certain geographic areas in which the Company operates.

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.

                                  Thirteen weeks ended         Increase/(decrease)
                                 March 28,      March 29,
      (dollars in thousands)       2009            2008        Dollar        Percent
      Total                    $      27,608    $   25,408   $    2,200          8.7 %


      Comparable Schools       $      24,147    $   24,663   $     (516 )       (2.1 )%


                                 Thirty-Nine weeks ended       Increase/(decrease)
                                 March 28,      March 29,
                                   2009            2008        Dollar        Percent
      Total                    $      80,037    $   72,043   $    7,994         11.1 %


      Comparable Schools       $      67,128    $   67,813   $     (685 )       (1.0 )%

Personnel costs for the thirteen weeks ended March 28, 2009 increased $2,200,000, or 8.7%, to $27,608,000 from $25,408,000 for the thirteen weeks ended March 29, 2008. The 8.7% increase was primarily driven by wages and benefits of $3,072,000 from schools opened or acquired subsequent to the second 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 $516,000 for comparable schools which correlated with overall decreased revenues for comparable schools. Wage and benefit costs decreased $356,000 for schools closed subsequent to the second quarter of Fiscal 2008.

Personnel costs for the thirty-nine weeks ended March 28, 2009 increased $7,994,000, or 11.1%, to $80,037,000 from $72,043,000 for the thirty-nine weeks ended March 29, 2008. The 11.1% increase was primarily driven by wages and benefits of $9,586,000 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 $685,000 for comparable schools which correlated with overall decreased revenues for comparable schools. Wage and benefit costs decreased $907,000 for schools closed subsequent to Fiscal 2007.

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 percentage 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.

                                  Thirteen weeks ended         Increase/(decrease)
                                 March 28,      March 29,
      (dollars in thousands)       2009            2008        Dollar        Percent
      Total                    $       7,165    $    6,384   $      781         12.2 %


      Comparable Schools       $       6,160    $    6,181   $      (21 )       (0.3 )%


                                 Thirty-Nine weeks ended       Increase/(decrease)
                                 March 28,      March 29,
                                   2009            2008        Dollar        Percent
      Total                    $      22,052    $   19,579   $    2,473         12.6 %


      Comparable Schools       $      18,406    $   18,460   $      (54 )       (0.3 )%

School operating costs for the thirteen weeks ended March 28, 2009 increased $781,000, or 12.2%, to $7,165,000 from $6,384,000 for the thirteen weeks ended March 29, 2008. The increase was primarily driven by school operating costs of $882,000 from schools opened or acquired subsequent to the second quarter of Fiscal 2008 offset by a decrease in operating costs of $21,000 for comparable schools which correlated with overall decreased revenues for comparable schools and more efficient operations and school management. Operating costs decreased $76,000 for schools closed subsequent to the second quarter of Fiscal 2008.

School operating costs for the thirty-nine weeks ended March 28, 2009 increased . . .