The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.

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 preschool 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 Annual Report on Form 10-K, 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. In addition to the risk factors described in Item 1A of this document and that are discussed 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 impact of unemployment rates on our current or potential customers;

• changing economic conditions, as demand for the Company's products is a lagging indicator of the economy;

• 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 ability to defend successfully against or counter negative publicity associated with claims involving alleged incidents at its schools;

• the impact on school enrollment of an outbreak of a pandemic health disease or H1N1 virus;

• 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 continued interest of Knowledge Learning Corporation and other third parties, 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;

• 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

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

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.

Introduction

The following discussion should be read in conjunction with "Item 6. Selected Historical Consolidated Financial and Other Data", the consolidated financial statements and the related notes presented in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this report.

Fiscal Year End

The Company fiscal year is either 52 or 53 weeks ending on the Saturday closest to June 30. The fiscal years ended June 27, 2009 ("Fiscal 2009"), June 28, 2008 ("Fiscal 2008") and June 30, 2007 ("Fiscal 2007") each include 52 weeks. The fiscal year to end July 3, 2010 ("Fiscal 2010") will include 53 weeks.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period's presentation. All significant intercompany balances and transactions have been eliminated.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and majority owned subsidiaries.

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. When presenting Comparable School results there may be schools included within Comparable School results that were subsequently classified as closed or discontinued operations. In each case, the results of activities from these schools are presented as discontinued operations in the Company's current Form 10K or as closed schools in the Results of Operations for all periods presented herein.

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. 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. When presenting Core School results there may be schools included within Core School results that were subsequently classified as discontinued operations. In each case, the results of activities from these schools are presented as discontinued operations in the Company's current Form 10K for all periods presented herein.

iii. 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" 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 table 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 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 demographic market 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.

Results of Operations-Fiscal 2009 compared to Fiscal 2008

At June 27, 2009, the Company operated 180 schools. Between June 29, 2008 and June 27, 2009, the Company opened four new preschools, acquired six preschools and acquired three elementary schools. Additionally, three preschools and three elementary schools were closed during Fiscal 2009.

School counts for Fiscal 2009 and Fiscal 2008 are as follows:

                                                              Fiscal
                                                          2009      2008
           Number of schools at the beginning of period    173       151
           New                                               4         5
           Acquired                                          9        20
           Closed                                           (6 )      (3 )

           Number of schools at the end of the period      180       173

As a result of certain school closures during Fiscal 2009 the Company has conformed amounts reported for Fiscal years 2008 and 2007 to the period ended June 27, 2009. Operating results include one preschool closed during the third quarter of Fiscal 2009, two preschools and one elementary school closed during the fourth quarter of Fiscal 2009, and two preschools closed during the fourth quarter of Fiscal 2008. In addition, the Company closed two elementary schools during the fourth quarter of Fiscal 2009; these two schools are included in the Company's income (loss) from discontinued operations.

The table below indentifies schools and the periods they were acquired or opened for Fiscal 2009 and Fiscal 2008. During Fiscal 2009 the results of one elementary school that was acquired during Fiscal 2008 and subsequently closed during Fiscal 2009 are not included in the Company's operating income, rather these results are included in the Company's income (loss) from discontinued operations. Additionally, during Fiscal 2008 the results of one preschool acquired and closed in the same fiscal quarter are not included in the Company's operating income; rather these results are included in the Company's income
(loss) from discontinued operations. Both schools are included in the count of Acquired Schools in the table below and in count of Acquired Schools and Closed Schools in the roll-forward above.

                                             Fiscal 2009
                              1st       2nd       3rd       4th
                            Quarter   Quarter   Quarter   Quarter   Total
                 New              2        -          2        -        4
                 Acquired         3        -          1         5       9

                                  5        -          3         5      13


                                             Fiscal 2008
                              1st       2nd       3rd       4th
                            Quarter   Quarter   Quarter   Quarter   Total
                 New              4        -         -          1       5
                 Acquired         6        -         12         2      20

                                 10        -         12         3      25

The following table sets forth certain statement of operations data as a percent of revenue for Fiscal 2009 and Fiscal 2008 (dollars in thousands):

                                                                                         Change         Percent
                                 Fiscal     Percent of       Fiscal     Percent of       Amount         Increase
                                  2009       Revenues         2008       Revenues       Increase       (decrease)
Revenues                        $ 220,103        100.0 %    $ 204,201        100.0 %    $  15,902             7.8 %

Personnel costs                   105,562         48.0         97,762         47.9          7,800             8.0
School operating costs             29,405         13.4         26,769         13.1          2,636             9.8
Rent and other                     56,152         25.5         49,019         24.0          7,133            14.6

Cost of services                  191,119         86.8        173,550         85.0         17,569            10.1

Gross profit                       28,984         13.2         30,651         15.0         (1,667 )          (5.4 )
General and administrative
expenses                           18,726          8.5         18,516          9.1            210             1.1

Operating income                $  10,258          4.7 %    $  12,135          5.9 %    $  (1,877 )         (15.5 )%

The table below shows the number of schools included in each of the four growth initiative categories for each section where they are respectively discussed below:

                                                                Fiscal
          School Category                                     2009   2008
          Comparable                                           144    144

          Core                                                 144    135
          New                                                    9      8
          Acquired                                              27     24

          Total                                                180    167

          Schools closed subsequent to reported fiscal year     -       6

          Schools operated during reported fiscal year         180    173

Revenue

Revenue for Fiscal 2009 increased $15,902,000 or 7.8% to $220,103,000 from
$204,201,000 from Fiscal 2008. This increase was primarily driven by revenues
from schools opened or acquired subsequent to the end of Fiscal 2007 of
$20,658,000 partially offset by a $2,403,000 decrease in revenues from
Comparable Schools from schools closed subsequent to the end of Fiscal 2007.



                                                    Fiscal               Increase (decrease)
                                              2009         2008        Dollar          Percent
Total Company revenue                       $ 220,103    $ 204,201    $ 15,902               7.8 %

Comparable Schools                          $ 185,103    $ 187,445    $ (2,342 )            (1.2 )%

Schools acquired, opened or closed after
June 30, 2007:
Acquired                                       26,894        9,670      17,224             178.1
New                                             5,959        2,525       3,434             136.0
Closed                                          1,963        4,366      (2,403 )           (55.0 )
Other                                             184          195         (11 )            (5.6 )

                                            $ 220,103    $ 204,201    $ 15,902               7.8 %

Comparable school revenue decreases were primarily driven by overall decreases in enrollment partially offset by average tuition increases between 3.0% and 4.0%. As a percentage, Comparable School 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.

Revenue trends

In comparing Fiscal 2009 to Fiscal 2008, revenue continues to be generated by each of the four growth categories. The revenue results of each of the four revenue growth categories for Fiscal 2009 (schools acquired, opened or closed subsequent to June 30, 2007) and Fiscal 2008 (schools acquired, opened or closed subsequent to July 1, 2006) are as follows:

                                            Percent of                       Percent of
                             Fiscal 2009    Revenue (1)       Fiscal 2008    Revenue (1)
 Core Schools               $     185,103          84.1 %    $     172,356          84.4 %
 New Schools                        5,959           2.7 %            7,035           3.4 %
 Acquired Schools                  26,894          12.2 %           20,249           9.9 %
 Closed schools and other           2,147           1.0 %            4,561           2.2 %

                            $     220,103         100.0 %    $     204,201         100.0 %

(1) Percent of revenue may not total due to rounding.

New Schools' revenue decreased as a percentage of total revenue to 2.7% in Fiscal 2009 as compared to 3.4% in Fiscal 2008. New schools for Fiscal 2009 include nine schools as compared to eight schools for Fiscal 2008. One of the new schools included in the Fiscal 2008 period was a "land banked" school where the Company held the rights to the land for a period of time prior to development so that the market would be more fully developed, hence it ramped up quickly due to this more mature market. Another of the schools included in the Fiscal 2008 period was an already operating corporate contract school taken over by the Company from a previous operator and had an existing enrollment and revenue stream. The remaining schools included in both fiscal periods were opened in newer "path-of-progress" markets in which management expects to continue to develop incremental enrollments.

Acquired Schools' revenue increased as a percentage of total revenue to 12.2% for Fiscal 2009 as compared to 9.9% for Fiscal 2008. Acquired Schools for Fiscal 2009 include twenty-seven schools, nine of which include significant before-and-after school programs that are not counted as separate schools.

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. It is important to note that preschool staffing ratios are mandated by state requirements which can result in very low teacher to student ratios when class sizes are not optimal. This is not the case in K+ schools where no such requirements exist.

For Fiscal 2009, personnel costs increased $7,800,000 or 8.0% to $105,562,000 from $97,762,000 for Fiscal 2008. This increase was primarily driven by an increase in personnel costs from acquired schools offset by decreased costs in Comparable, New and Closed Schools.

                                                    Fiscal               Increase (decrease)
                                               2009         2008       Dollar          Percent
Total Company                                $ 105,562    $ 97,762    $  7,800               8.0 %

Comparable Schools                           $  87,382    $ 88,363    $   (981 )            (1.1 )%

Schools acquired, opened or closed after
June 30, 2007:
Acquired                                        13,220       1,546      11,674             755.1
New                                              3,319       4,890      (1,571 )           (32.1 )
Closed                                           1,641       2,963      (1,322 )           (44.6 )

                                             $ 105,562    $ 97,762    $  7,800               8.0 %

Personnel costs increased to 48.0% of revenue for Fiscal 2009 as compared to 47.9% for Fiscal 2008. This increase of 10 basis points consisted of the following:

                                                               Percentage of Revenue
                                                             Fiscal             Fiscal
                                                              2009               2008
Total Company                                                    48.0 %            47.9 %

Comparable Schools                                               47.2 %            47.1 %
Schools acquired or opened subsequent to June 30,
2007 for Fiscal 2009 and July 1, 2006 for Fiscal
2008:
Core Schools                                                     47.2 %            47.1 %
Acquired Schools                                                 49.2 %            48.0 %
New Schools                                                      55.7 %            55.4 %

. . .