LEARNING TREE INTERNATIONAL INC, 10-K405, 1998-12-23

LEARNING TREE INTERNATIONAL INC
10-K405, 1998-12-23
EDUCATIONAL SERVICES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

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

FOR THE TRANSITION PERIOD FROM TO

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COMMISSION FILE NUMBER: 0-27248

LEARNING TREE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-3133814
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

6053 WEST CENTURY BOULEVARD
LOS ANGELES, CA 90045-0028
(310) 417-9700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]

The aggregate market value of the common stock, $.0001 par value, held by
non-affiliates of the registrant, as of December 14, 1998, was $84,542,000.
(Excludes 11,747,021 shares held by directors and officers of the Registrant
since such persons may be deemed to be affiliates.)

The number of shares of common stock, $.0001 par value, outstanding as of
December 14, 1998, was 21,994,507 shares.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the registrant to be delivered
to shareholders in connection with the 1999 Annual Meeting of Shareholders are
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form
10-K.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Part I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 16
Item 3. Legal Proceedings.......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18

Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters....................... 19
Item 6. Selected Consolidated Financial Data....................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 21
Item 8. Financial Statements and Supplementary Data................................................ 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures...... 50

Part III

Item 10. Directors and Executive Officers of the Registrant......................................... 50
Item 11. Executive Compensation..................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 51
Item 13. Certain Relationships and Related Transactions............................................. 51

Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 52
Signatures........................................................................................... 53
</TABLE>

Learning Tree, the Learning Tree and Professional Certification logos,
EDUCATION IS OUR BUSINESS, EDUCATION YOU CAN TRUST, WE BRING EDUCATION TO LIFE,
PRODUCTIVITY THROUGH EDUCATION, LearnTrack, Training Passport, Training
Advantage, Alumni Gold, TRAINING YOU CAN TRUST, SkillsTree, ENHANCING
PRODUCTIVITY Through Skills Development, TestTree, WE BRING LEARNING TO LIFE,
learningtree.com, 800-THE-TREE, 800-LRN-TREE and 888-CBT-TREE are trademarks and
service marks of the Company.

In addition to the trademarks and service marks of the Company, this Annual
Report on Form 10-K also contains trademarks and trade names of other companies.

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PART I

ITEM 1. BUSINESS

Except for historical information contained herein, the matters discussed in
this Annual Report on Form 10-K are forward-looking statements that are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those set forth in such forward-looking statements. Such risks
and uncertainties include, without limitation, the Company's dependence on the
timely development, introduction and customer acceptance of new courses and
products, the impact of competition and downward pricing pressures, the effect
of changing economic conditions, the Company's ability to attract and retain key
management and other personnel, risks in technology development, the risks
involved in currency fluctuations, and the other risks and uncertainties
discussed herein and in the caption "Risk Factors" in the Company's Registration
Statement on Form S-1 filed on September 20, 1996.

OVERVIEW

Learning Tree International, Inc. ("Learning Tree" or the "Company"), is a
leading worldwide provider of education and training to information technology
("IT") professionals in business and government organizations. The Company
develops, markets and delivers a broad, proprietary library of instructor-led
course titles focused on client/server systems, intranet/Internet technologies,
computer networks, operating systems, databases, programming languages,
graphical user interfaces, object-oriented technology and IT management. The
Company also tests and certifies IT professionals in 27 IT job functions. The
Company's instructor-led courses are recommended for college credit by the
American Council on Education (the "ACE").

During 1997, the Company expanded its instructor-led training activities
through the introduction of its Learning Solutions program. The Learning
Solutions program provides custom developed training for larger clients who need
to train large numbers of their IT professionals and end-users. The focus of
this program is on training that supports the roll-out and use of new
organization-wide information systems, tools and applications. The first
Learning Solutions program, for General Motors Corporation, was begun during
fiscal 1997 and completed in the first quarter of fiscal 1998. A smaller follow-
on program for General Motors was also completed during fiscal 1998. The Company
is seeking additional Learning Solutions contracts with other potential
customers. However, since this business is dependent upon obtaining a small
number of large contracts, its revenues are inherently subject to fluctuation.

In addition to its instructor-led courses, the Company develops, produces and
markets a line of interactive computer-based training courses incorporating
audio and graphical elements ("multimedia CBT") that are designed for both
stand-alone CD-ROM and network-based delivery. The Company has been marketing
its multimedia CBT products through direct mail and telemarketing methods, which
focus on high volumes of comparatively smaller unit sales. The Company also
markets its multimedia CBT products through field sales of higher value
multimedia CBT contracts. To date, the majority of the Company's multimedia CBT
revenues have been obtained through direct mail and telemarketing.

During fiscal 1998, the Company began to provide its customers with a skills
assessment service through its SkillsTree program. SkillsTree is a software
package that identifies the skills necessary to perform IT functions and
provides an organized, computer-based process for companies to assess the
technical proficiency of their staff to perform current and future functions.
Further, SkillsTree identifies areas where technical proficiency is lacking and
specifies which Learning Tree courses could best provide the training necessary
to meet the customers' training needs at individual, departmental and enterprise
levels.

In 1997, the Company introduced the "Power Seminars" product line which were
multi-day conferences consisting of a number of 1-day, multimedia lecture-style
seminars in key information technologies. In November 1997, the Company
announced that it was retiring its Power Seminars product line as of the end of
the first quarter of fiscal 1998.

The Company is paid directly by the employers of its course participants and

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does not receive funding from any government aid or loan programs. As a result,
the Company does not depend on government appropriations for those programs and
is not subject to certain governmental regulations.

THE INFORMATION TECHNOLOGY EDUCATION AND TRAINING MARKET

The market for IT training is driven by technological change as applications
evolve and the applications of technology expand. During periods of rapid
technological change, organizations may find themselves hampered in their
ability to exploit the latest information technologies because their IT
professionals lack up-to-date knowledge and skills. Most organizations address
this challenge by retraining their existing IT professionals and training new IT
professionals as they are hired. An International Data Corporation ("IDC") study
estimates that the 1997 worldwide market for all IT training was $18.6 billion.
The training of IT professionals, such as programmers, analysts, and engineers,
represents the majority of the market for IT training.

The market for training IT professionals is further influenced by several
factors. These factors include: (i) the introduction and evolution of new
client/server hardware, software and networking technologies; (ii) the
proliferation of Internet and intranet applications; (iii) the proliferation of
computers and networks throughout all levels of organizations; (iv) the shift
from legacy mainframe systems to new client/server technologies; and (v)
periodic corporate downsizing, resulting in increased training requirements for
employees who must perform new job functions or multiple job tasks that require
knowledge of varied software applications and technologies. Furthermore, since
many businesses use hardware and software products provided by a variety of
vendors, their IT professionals require training on an increasing number of
products and technologies which apply across vendors, platforms and operating
systems.

While much of the training for IT professionals continues to be provided by
internal training departments, many organizations have expanded their use of
external training providers due to the lack of internal trainers experienced in
the latest technologies, the cost of developing and maintaining internal
training courses in rapidly evolving technologies or corporate downsizing and
reorganizing and reallocation of resources. The choice of training delivery
formats and providers generally is made by individual IT professionals or their
immediate managers, even in large organizations. When choosing an IT training
provider, IT professionals and their managers seek a provider who can respond to
demanding requirements, including: (i) high quality training; (ii) course titles
that cover a broad range of topics and skill levels; (iii) the ability to
deliver an integrated training program through multiple delivery formats; (iv)
the willingness and ability to tailor the training to the customer's particular
needs; (v) timeliness of the delivery of course events; (vi) qualified,
technically current instructors; (vii) the willingness to deliver training at
convenient locations, including the customer's business site; (viii) course
titles covering areas undergoing rapid technological change; (ix) an effective
training methodology, which delivers the maximum amount of practical information
in the minimum amount of time; (x)training which is vendor-independent; (xi) the
ability to provide testing and certification of technical competency; (xii) the
ability to deliver training on a global basis; and (xiii) the ability to assist
customers in assessing their IT skills and formulating training plans to bridge
skills gaps.

IT training is primarily delivered by classroom instructors, video, computer-
based training and printed means. According to IDC, instructor-led classroom
training continues to dominate the worldwide IT training market comprising
approximately 78% of the market. The Company believes that instructor-led
training will continue to dominate the market because course participants value
the personalized interaction and problem-solving with their instructor and
fellow participants concerning their specific projects and applications as well
as the insulation from workplace interruptions afforded by classroom
instruction. However, the use of technology-based IT education and training
formats such as multimedia CBT desktop-based training and intranet/Internet
training are gaining acceptance in the IT training market.

THE LEARNING TREE APPROACH

The Company develops, markets and delivers proprietary course titles covering
a broad range of topics that it believes are designed to meet the continually
evolving training needs of IT professionals worldwide. The Company develops
course

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titles in an instructor-led format and in a multimedia CBT format.

The Company's instructor-led course events take place at the Company's
Education Centers, in hotel and conference facilities, and at customer sites. As
of September 30, 1998, Learning Tree had 149 multi-day instructor-led course
titles. These course titles are regularly presented worldwide and cover IT
topics such as client/server systems, intranet/Internet technologies, computer
networks, operating systems, databases, programming languages, graphical user
interfaces, object-oriented technology, IT management and related topics.

The Company's training services provide participants with skills and knowledge
that they can immediately apply in their jobs. The instructor-led course events
include extensive hands-on, interactive exercises using networked classroom
computers. Learning Tree's multi-day course events typically deliver the
equivalent of two semester hours of college credit in an intensive four-day
format, thus minimizing participants' time away from the job.

As of September 30, 1998, the Company had 820 course instructors. These
instructors are IT professionals possessing expert knowledge and practical
experience. They work in a variety of industries applying the IT skills and
knowledge that are the subjects of the courses they teach. On average, they
teach approximately eight to nine Learning Tree course events each year on an
"as needed" basis.

Learning Tree places particular emphasis on the quality of its course
offerings. The Company employs a course development process which is designed to
ensure that each course title represents multiple points of view concerning the
application of the technology, provides information on different uses of the
technology throughout the world, and provides training that is relevant to
course participants working in diverse applications in a broad range of
industries. Learning Tree also maintains a centralized and ongoing program of
updating its proprietary course titles to maintain the quality and relevance of
its courses. The Company tailors its instructor-led courses for customer-site
presentation as appropriate, and the Company's instructors further adapt the
course material to participants' needs based on feedback received in the
classroom.

Learning Tree meets customer demands for scheduling flexibility by holding
course events frequently at multiple locations around the world and by
delivering customer-site course events as required on short notice. The Company
believes that it has the resources to provide a rapid and flexible response to
its customers' needs by utilizing its large team of instructors, its course
development and customization processes, its team of customer support
specialists, its logistics team and its hundreds of classroom computer
workstations. In fiscal 1998, Learning Tree presented over 7,000 multi-day
course events worldwide.

The Company tests and certifies IT professionals in 27 IT job functions. Since
this program's inception in 1993, over 110,000 participants have completed one
or more certification examinations. In addition, the ACE recommends Learning
Tree course events for college credit to more than 1,500 North American
universities and colleges. See "Business--Learning Tree's Products." In the
United Kingdom, participation in some Learning Tree course events may be applied
toward post-graduate level university credit.

In response to the decentralized nature of IT training decision making, the
Company has developed a sophisticated direct mail marketing and telemarketing
capability, which it supplements by direct sales to corporations and government
organizations. The Company's direct mail marketing utilizes its proprietary list
of over 1,600,000 IT professionals and managers as well as rented lists. This
capability enables the Company to reach individual professionals and managers in
larger organizations and provides a cost-effective channel to reach IT personnel
in smaller organizations as well. The Company also uses its Internet Web site

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(http://www.learningtree.com) to market and communicate with prospective
participants. (Note: Information contained in the Company's web site shall not
be deemed to be part of this Annual Report on Form 10-K).

In addition to its instructor-led business, the Company introduced a line of
multimedia CBT course titles in 1996. During fiscal 1998, the Company expanded
its multimedia CBT library and as of September 30, 1998, had developed 114
multimedia CBT course titles. The Company's multimedia CBT courses can be
delivered to the workstation either by CD-ROM or over a customer's local area or
wide area network. The content and instructional design of the Company's
multimedia CBT course titles capitalize on its library of classroom course
content.

LEARNING TREE'S STRATEGY

The Company's objective is to strengthen its position as one of the leading
providers of IT training worldwide. To achieve this goal, the Company employs
the following key long-term strategies:

Continue Development of its Library of Proprietary Instructor-led Course
Titles. The Company intends to continue developing additional course titles and
certification programs in order to increase sales to its existing customer base
and to attract new customers. The Company expanded its multi-day course library
from 72 titles at September 30, 1994 to 149 titles as of September 30, 1998. The
increase in the size of the multi-day course library reflects the net effect of
the introduction of new titles and the retirement of old titles. Old titles are
retired when the profits they generate are not sufficient to justify the ongoing
cost of marketing them and maintaining their technological content. Based upon
the current trends in the introduction and evolution of technologies, the
Company expects the number of its course titles to decline somewhat in the first
two quarters of fiscal 1999 and then to grow modestly over the remainder of next
year. However, there can be no assurance that the Company will develop more
titles than it retires in any period.

Provide Flexible Training Solutions. The Company intends to continue its
strategy of providing training when, where and in the manner desired by the
customer. Participants can attend any of Learning Tree's 149 multi-day courses
which, on average, are presented approximately once per week around the world.
The Company also presents standard or customized courses on demand at its
customers' facilities. Through the Learning Solutions program, customized
courses are offered to customers whenever and wherever they desire. In addition,
the Company offers its own line of multimedia CBT courses which allow users the
flexibility of learning at their own desktop or on notebook computers.

Multimedia CBT Course Titles. Learning Tree is leveraging its highly
interactive instructor-led educational model through the development of its line
of multimedia CBT courses. The Company believes that it can leverage its
existing instructor-led course business by (i) developing its multimedia CBT
courses based upon the content of its hands-on classroom courses, (ii)
"piggybacking" the marketing and sales of its multimedia CBT products on its
existing marketing and sales programs, and (iii) providing its customers with
the flexibility to tailor a cost-effective combination of multimedia CBT and
classroom training to meet their needs. The Company also intends to continue to
explore the delivery of its multimedia CBT courses via on-line computer services
and over the Internet.

Integrated Marketing and Sales Programs. The Company uses an integrated
strategy of marketing both to individual IT professionals through its extensive
direct mail marketing and Internet capability and to their employers through its
direct sales force. These efforts are supplemented by its telemarketing sales
force. In response to the changes in the current and expected rate of growth in
course participants, the Company has and plans to continue to adjust the size of
the direct mailing campaigns. Generally, the Company intends to increase its
marketing and development activities more rapidly when it expects rapid growth
of the market and reduce the rate of increase in such activities when it expects
slower market growth. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of changes in sales and
marketing expenses during fiscal 1998.

Build Continuing Relationships. The Company seeks to build continuing
relationships both with its individual course participants and its corporate
customers. The Company stimulates demand for its course events by motivating

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individual IT professionals to purchase a series of course events through its
Training Passport, Professional Certification and College Credit Programs. In
addition to increasing revenues directly, the long-term relationships built by
these programs encourage participants to recommend the Company's course events
to their colleagues. The Company also seeks to create ongoing relationships with
its largest U.S. and international customers through the provision of its new
SkillsTree skills assessment services and through the Training Advantage
Program. The annually renewable Training Advantage agreements allow all the
employees of Training Advantage customers to receive training and special
services at negotiated prices.

Leverage International Operations. The Company maintains offices and education
centers in six countries outside the United States, and in fiscal 1998 presented
course events at its education centers and third-party and customer sites in a
total of 26 countries. In fiscal 1998, international revenues represented
approximately 47% of the Company's revenues. Learning Tree intends, on an
ongoing basis, to seek ways to expand its international operations and expects
that revenues derived from international sources will continue to account for a
significant portion of its revenues. The Company's centrally-developed course
titles currently are translated into French, Swedish and Japanese and sold
through its operations in Great Britain, France, Canada, Sweden, Japan and Hong
Kong to customers in those and other countries. The Company intends to open
Education Centers in additional territories as justified by local demand.
Inherent risks represented by the Company's international operations include
currency fluctuations, potential difficulties in translating course subject
matter into foreign languages, varying political and economic conditions,
unanticipated changes in regulation, trade barriers, staffing problems, adverse
tax consequences and potential costs associated with expansion into new
territories. There can be no assurance that such factors will not have a
material adverse effect on the Company in the future.

LEARNING TREE'S PRODUCTS

Learning Tree courses are designed to be highly interactive. Most of its
instructor-led, classroom courses involve "hands-on" training on networked
Pentium-based workstations, which allow participants to practice and better
assimilate the skills being taught. Participants spend a significant portion of
each course working on computer-based exercises and participating in group
workshops. Each participant typically receives extensive course materials that
facilitate learning and serve as a post-course reference. The Company's line of
multimedia CBT products are also designed to teach students through interaction,
and its multimedia CBT course titles incorporate interactive "learn-by-doing"
activities based on the Company's existing classroom courses.

Instructor-led Courses. Learning Tree strives to build job-related training
paths by developing a sequence of course titles that create cohesive programs
which impart the skills and knowledge required to perform key IT job functions.
Each job-related training path is comprised of course titles that proceed from
introductory to advanced, and cover the breadth and depth of skills and
knowledge required for a particular job. At September 30, 1998, Learning Tree's
multi-day course library included 149 proprietary course titles comprising over
3,400 hours of classroom instruction. This course library is recommended for
over 260 semester hours of undergraduate and graduate level college credit in
information systems by the ACE. In the Company's experience, the final decision
of each college or university to grant or deny credit for the Company's courses
as recommended by the ACE is made on a case-by-case basis, taking into account a
variety of factors such as the academic standing of the student making the
request, the requirements of the particular degree program and limits on the
number of credits that may be obtained outside of the college or university.
Subject to these rules generally applicable to transfer credits, the Company
believes that its course participants have generally been granted credit upon
application.

The following chart presents the Company's 149 proprietary multi-day course
titles and the number of training days for each title as of September 30, 1998:

CURRICULUM DAYS COURSES
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<S> <C> <C>
Client/Server 4 Introduction to Open Systems
4 Introduction to Client/Server Computing
4 Distributing Data in Client/Server Systems
4 Client/Server Application Development--Hands-On
</TABLE>

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<TABLE>
<CAPTION>
CURRICULUM DAYS COURSES
- ---------- ----- -------
<S> <C> <C>
Client/Server (cont.) 4 Client/Server Systems: Analysis and Design
4 Managing and Supporting Client/Server Systems--Hands-On
- ------------------------------------------------------------------------------------------
Intranet/Internet
Technologies 4 Internet and System Security
4 Deploying Internet and Intranet Firewalls--Hands-On
4 Internet for Business Applications--Hands-On
4 Internet E-Mail with UNIX Sendmail--Hands-On
4 Developing a Web Site--Hands-On
4 Java Programming--Hands-On
4 Advanced Java Programming--Hands-On
4 Java for Multimedia Applications Development--Hands-On
4 Developing an Intranet Site--Hands-On
4 Netscape Servers for Intranet/Internet Development--Hands-On
4 Visual J++ - Hands-On
4 Designing and Building Great Web Content--Hands-On
4 Implementing Web Security--Hands-On
4 Developing Electronic Commerce Applications with Java--Hands-On
4 Java for C++ Programmers--Hands-On
4 Visual Cafe for Java Development--Hands-On
- --------------------------------------------------------------------------------
Windows 4 Windows Networking--Hands-On
5 Windows 95 Support and Networking--Hands-On
5 Windows NT 4.0 Workstation and Server--Hands-On
5 Windows NT Optimization and Troubleshooting--Hands-On
4 Integrating Microsoft Office 97--Hands-On
4 TCP/IP Internetworking on Windows NT--Hands-On
4 Microsoft System Management Server--Hands-On
4 Microsoft Exchange--Hands-On
4 UNIX and Windows NT Integration--Hands-On
5 Implementing Windows NT Security--Hands-On
4 Microsoft Site Server--Hands-On
4 Microsoft Exchange 5 Server Administration--Hands-On
4 Microsoft Internet Information Server--Hands-On
4 Microsoft SQL Server Introduction--Hands-On
5 Microsoft SQL Server System Administration--Hands-On
4 Developing SQL Server Applications with Visual Basic 5--Hands-On
4 Optimizing SQL Server Database and Application Performance--Hands-On
2 Windows NT 5 Fast Start: A Comprehensive Introduction
5 Managing Windows 98 Systems & Networks--Hands-On
- ----------------------------------------------------------------------------------
Local Area Networks 4 Local Area Networks
4 PC Networking--Hands-On
4 LAN Troubleshooting--Hands-On
4 High-Performance Cabling Systems
4 High-Performance Ethernet--Hands-On
4 Fast LAN Technologies
- ----------------------------------------------------------------------------------
NetWare 5 NetWare 4.x Administration--Hands-On
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Wide Area Networks 4 Introduction to Datacomm and Networks
4 Computer Network Architectures and Protocols
4 X.25--Hands-On
4 Wide Area Networks Troubleshooting--Hands-On
4 SNMP--Hands-On
- ----------------------------------------------------------------------------------
Internetworking 4 Internetworking: Bridges and Routers
4 Data Network Design and Optimization
4 Routers--Hands-On
4 Cisco Routers: A Comprehensive Introduction--Hands-On
4 Configuring Cisco Routers: Advanced Workshop--Hands-On
4 Migrating to IPv6--Hands-On
4 Introduction to TCP/IP--Hands-On
4 Internetworking with TCP/IP--Hands-On
4 Troubleshooting Cisco Router Internetworks--Hands-On
- --------------------------------------------------------------------------------
Operating Systems 4 X Window System Programming--Hands-On
4 TCP/IP Programming--Hands-On
4 UNIX Programming--Hands-On
4 UNIX--Hands-On
4 UNIX Tools and Utilities--Hands-On
4 UNIX System and Network Security--Hands-On
4 UNIX Workstation Administration--Hands-On
4 UNIX Server Administration--Hands-On
4 KornShell Programming--Hands-On
4 Implementing Linux--Hands-On
- --------------------------------------------------------------------------------
</TABLE>

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<TABLE>
<CAPTION>
CURRICULUM DAYS COURSES
- ----------
<S> <C> <C>
Telecommunications 4 Telecommunications and Wide Area Networking
4 ISDN for Data Communications--Hands-On
4 Introduction to ISDN
4 Implementing Computer Telephony Integration
4 Wireless Networks
4 High-Speed Wide Area Networks
4 Implementing Fiber-Optic Communications
4 Defense Message System (DMS): A Comprehensive Introduction
3 Utilizing Frame Relay Networks
3 Deploying T1 and T3 Services
3 Implementing ATM
- --------------------------------------------------------------------------------
Database Systems 4 Relational Databases
5 Building a Data Warehouse--Hands-On
5 Oracle7--Hands-On
5 Oracle7 for Database Administrators--Hands-On
3 Oracle7 for Application Developers--Hands-On
2 Tuning Oracle7 Applications--Hands-On
3 Complex SQL Queries--Hands-On
4 PowerBuilder 5 and Oracle 7--Hands-On
5 Oracle Developer/2000--Hands-On
4 Building Oracle WebServer Applications--Hands-On
4 Lotus Notes Application Development--Hands-On
4 Lotus Notes System Administration--Hands-On
4 Lotus Notes R4.5 A Comprehensive Introduction--Hands-On
4 Lotus Domino Website Development--Hands-On
5 Oracle Designer/2000--Hands-On
5 Exploiting the New Features of Oracle 8--Hands-On
5 Oracle 8 Applications Development and Tuning--Hands-On
5 Oracle 8 Database Administration--Hands-On
5 Oracle 8 A Comprehensive Introduction--Hands-On
- --------------------------------------------------------------------------------
PC Support 4 PC Configuration and Troubleshooting--Hands-On
4 Advanced PC Configuration--Hands-On
- --------------------------------------------------------------------------------
Graphical User
Interfaces and
Programming 4 Windows Programming--Hands-On
5 Visual C++--Hands-On
4 Introduction to Programming--Hands-On
4 Advanced Windows Programming With MFC--Hands-On
4 Porting Applications from UNIX to Windows NT--Hands-On
4 Windows Open Services Architecture--Hands-On
4 Visual Basic--Hands-On
4 Microsoft Access--Hands-On
4 Microsoft Access Programming--Hands-On
4 PowerBuilder--Hands-On
4 Perl Programming--Hands-On
5 Visual Basic 4 for Enterprise Applications--Hands-On
4 Visual FoxPro Applications Development--Hands-On
4 C Programming--Hands-On
4 C Advanced Programming--Hands-On
4 C++ Object-Oriented Programming--Hands-On
4 Advanced C++ Programming--Hands-On
4 C++ for Non-C Programmers--Hands-On
4 Cobol Programming--Hands-On
4 Programming Office 97 Applications--Hands-On
4 Developing Windows CE Applications with Visual C++--Hands-On
4 Win32 Systems and Network Programming--Hands-On
4 FrontPage 98 Web Site Development--Hands-On
4 Enterprise Web Development with Active Server Pages--Hands-On
4 COM and ActiveX Programming with C++--Hands-On
4 Microsoft Transaction Server--Hands-On
4 Introduction to Visual InterDev--Hands-On
4 Exploiting the Advanced Features of MFC--Hands-On
4 Visual C++ and MFC for C++ Programmers--Hands-On
- --------------------------------------------------------------------------------
Software
Development
Methods 5 Object-Oriented Analysis and Design
4 Introduction to Object Technology
3 Implementing the Year 2000 Conversion--Hands-On
4 Software Quality Assurance
4 Identifying User Requirements
4 Practical Software Testing Methods
4 Software Systems Analysis and Design
</TABLE>

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<TABLE>
<CAPTION>
CURRICULUM DAYS COURSES
- ---------- ---- -------
<S> <C> <C>
Software Development
Methods (cont.) 4 Software Project Planning and Management
4 Software Configuration Management
- ---------------------------------------------------------------------------
IT Soft Skills 4 Business Process Re-engineering
4 Effective Skills for Technical Managers
3 Effective Communication Skills for IT Professionals
3 Teambuilding Skills for IT Professionals
4 Project Management--Hands-On
4 Influence Skills
3 Microsoft Project--Hands-On
</TABLE>

The Company also tailors the content of the foregoing courses for presentation
at customer sites to cover particular topics and applications requested by the
customer. Further, through its Learning Solutions program, custom course titles
are developed for its clients. Learning Tree typically provides all of the
software, hardware and networking systems required for use in customer-site
courses.

The Company presents its classroom courses at Learning Tree Education Centers
in Boston, Los Angeles, New York, Washington D.C., Toronto, Ottawa, London,
Paris and Stockholm, as well as in rented hotel or conference centers in other
cities worldwide. The Company's Education Centers include 100 classrooms, as of
September 30, 1998, that have been custom-designed to accommodate the technical
demands of Learning Tree's computer-based courses, including electronic
projection of computer screens, local area networks within the classroom and
multimedia presentation capability.

Multimedia CBT Courses. Learning Tree has expanded its line of multimedia CBT
course titles which are based on the interactive content of its computer-based
classroom courses. The Company uses the hands-on exercises from its classroom
courses, its accumulated experience with course participants and its large
instructor team as subject matter experts to support the development of
multimedia CBT products. The Company designed its multimedia CBT courses to be
interactive using a common interface across all course titles. In addition, the
Company structures its multimedia CBT courses to complement its classroom-based
offerings, thereby providing IT professionals with the flexibility to learn and
reinforce a given set of skills and knowledge, from introductory to advanced
levels, through a combination of multimedia CBT and hands-on classroom-based
training. The Company's multimedia CBT courses are delivered to the workstation
either by CD-ROM or over the customer's local area network.

The Company has also developed LearnTrack, a CBT management software package
that provides training administrators with the capability to install and
distribute Learning Tree CBT courses, enroll participants in the courses,
monitor usage and print reports on course utilization, learner progress and
course completion.

The Company began the initial marketing of its multimedia CBT product line in
January 1996. The number of new titles which the Company will produce and their
delivery dates are subject to a number of factors such as the hiring and
training of staff, perceived customer demand, continued refinements in the
development and production process and the availability of subject matter
experts who are also responsible for developing and teaching the Company's
instructor-led courses. The following chart presents the Company's 114
multimedia CBT course titles as of September 30, 1998:

<TABLE>
<CAPTION>
CURRICULUM COURSES
- ---------- -------
<S> <C>
Client/Server Client/Server Concepts and Architecture
Client/Server Connectivity and Implementation
Internet Technologies for Client/Server
Client/Server Analysis and Design
Client Server Middleware Technologies
- --------------------------------------------------------------------------------
Intranet/Internet
Technologies Using the Internet and Intranets
Internet and System Security
Internet and Network Security
Developing a Web Site
Configuring and Securing IIS Web Services
Web Server Programming and DBMS Interface
Introduction to Java Programming
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
CURRICULUM COURSES
- ---------- -------
<S> <C>
Intranet/Internet
Technologies (cont.) Java Database Programming with JDBC
Introduction to Programming in Visual J++
- --------------------------------------------------------------------------------
Local Area Networks Local Area Networks
Connecting LANs into an Enterprise Network
Introduction to PC Networking
PC Networking with Netware
LAN Troubleshooting
Improving LAN Performance
- --------------------------------------------------------------------------------
Wide Area Networks Introduction to Datacomm and Networks
Introduction to SNMP
Using SNMP to Manage Networks
- --------------------------------------------------------------------------------
Internetworking Introduction to Internetworking
Internetworking with Routers
Introduction to TCP/IP
Configuring TCP/IP Networks
OSPF Planning & Design
- --------------------------------------------------------------------------------
Microsoft Windows and
Windows NT Introduction to Windows NT 4
Administering Windows NT 4
Windows NT 4 Server Management
Windows NT 4 Policies, Profiles and Registry
Introduction to TCP/IP on Windows NT 4
Implementing TCP/IP on Windows NT 4
Configuring TCP/IP on Windows NT 4
Introduction to Windows NT 4 Optimization
Windows NT4 Monitoring and Planning
Windows NT4 Enterprise Optimization
Windows NT 4 Data Integrity
Installing and Using Windows 95
Networking with Windows 95
Systems Management Server
SQL Server 6.5 Using Transact-SQL
SQL Server 6.5 Stored Procedures and Triggers
SQL Server 6.5 Installation and Configuration
Introduction to Microsoft Exchange 5
Automation Capabilities of Microsoft Exchange 5
Messaging Systems in Microsoft Exchange 5
Windows NT4 and UNIX Integration
Introduction to Windows NT 4 Security
Introduction to Exchange 5 Server Administration
- --------------------------------------------------------------------------------
Graphical User
Interfaces and
Programming Introduction to C++ for Non-C Programmers
C++ Classes and Inheritance
C++ Power Programming
Windows Programming with Visual C++ and MFC
User Interfaces with Visual C++ and MFC
Visual C++ and MFC: Controls, Forms and ODBC
Introduction to Visual Basic 4
Visual Basic 4 Applications Development
Introduction to Visual Basic 5
Visual Basic 5 Applications Development
Access Application Development
Access 7 Applications Using VBA
C Programming: Building Blocks
C Programming: Loops, Pointers, and Arrays
Developing Components with Visual Basic 5
Database Applications with Visual Basic 5
- --------------------------------------------------------------------------------
Software Development
Methods Introduction to Object-Oriented Analysis
Object-Oriented Design
- --------------------------------------------------------------------------------
Operating Systems Introduction to UNIX
UNIX Files, Directories, & Documentation
Introduction to UNIX Korn Shell
Introduction to UNIX Filters and Shell Programming
UNIX Tools and Editors
Using Filters and Writing Shell Scripts
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
CURRICULUM COURSES
- ---------- -------
<S> <C>
Operating Systems Unix Development: Perl, Tcl/Tk, SCCS/RCS
UNIX Workstation Installation
UNIX Workstation User Services
UNIX Server Administration: Network Services
UNIX Server Administration: Server Management
- --------------------------------------------------------------------------------
Telecommunications ISDN for Data Networks
ISDN for Telecommunications
Fundamentals of WAN Telecommunications
Frame Relay and SMDS
ATM Networks
SONET/SDH and B-ISDN for WANs
- --------------------------------------------------------------------------------
Database Systems Relational Databases: A Comprehensive Introduction
Introduction Relational Databases: Analysis and Design
Oracle7 SQL
Building an Oracle7 Database
Oracle7 PL/SQL
Oracle7 Database Administration
Oracle7 Database Resources
Oracle7 Database Backup and Recovery
Oracle7 Database Tuning
Oracle7 Server Programming
Oracle7 Server Development Techniques
Oracle7 Application Tuning
Oracle7 Query Optimization
Advanced Queries for Oracle7
Developer/2000 Forms
Developer/2000 Advanced Forms
Developer/2000 Reports
Developer/2000 Graphics
Building Developer/2000 Applications
Introduction to Oracle WebServer
Integrating Web Sites with Oracle Databases
Integrating Java with Oracle WebServer
Oracle8: Introduction to Object-Relational Features
- --------------------------------------------------------------------------------
PC Support PC Configuration and Troubleshooting
PC Diagnostics
Configuring PC Devices
PC Disk and Data Recovery
PC Optimization Tools and Techniques
</TABLE>

Skills Assessment Services. During fiscal 1998, the Company began to provide
its customers with a skills assessment service through its SkillsTree program.
SkillsTree is a software package that identifies the skills necessary to perform
IT functions and provides an organized, computer-based process for companies to
assess the technical proficiency of their staff to perform current and future
functions. Further, SkillsTree identifies areas where technical proficiency is
lacking and specifies which Learning Tree courses could best provide the
training necessary to meet the customers' training needs at the individual,
departmental and enterprise levels.

DEVELOPMENT OF COURSES

Instructor-Led Courses. Learning Tree endeavors to identify and develop course
titles that satisfy market demand. Learning Tree seeks to accomplish this by (i)
building close working relationships with the development groups of leading IT
vendors in order to obtain information on upcoming products, (ii) canvassing its
expert instructors to identify general market trends and specific topics within
existing course titles that can be expanded to serve as new courses, (iii)
holding discussions with its customers to determine their upcoming project plans
and training requirements, and (iv) conducting market surveys of the Company's
course participants. Moreover, the members of executive management of the
Company have strong IT educational and professional backgrounds and stay closely
involved with the course selection and development process. See "Management--
Executive Officers and Directors."

Each Learning Tree course title is developed by a team comprised of a product
manager who manages the project and instructional design process, a product
marketing manager, and several subject matter experts who generally are selected
from the Learning Tree author and instructor team. Learning Tree endeavors to
select a group of experts from different countries and industries and with

12
<PAGE>

complementary applications backgrounds. The Company believes that its use of a
team of experts provides multiple points of view concerning the application of
the subject technology, information on different uses of that technology
throughout the world and training that is relevant to course participants
working in diverse applications in a broad range of industries worldwide. The
result is a set of proprietary course materials and several hundred pages of
presentation graphics for each course. To ensure its courses meet the needs of
the market place and provide a high quality of instruction, the Company requests
that each course participant complete an evaluation of the course content and
the instructor. Learning Tree course titles are updated regularly to incorporate
new technology and to improve their educational effectiveness. Learning Tree
courses currently are translated into French, Japanese and Swedish and are
taught by nationals in the local language in the Company's United States,
Canadian, United Kingdom, French, Swedish, Japanese and Hong Kong subsidiaries.

The Company's development of new course titles, or enhancements to existing
course titles, must anticipate and keep pace with the introduction in the
marketplace of new hardware, software and networking technologies. The need to
respond to technological changes may require the Company to make substantial,
unanticipated expenditures in order to develop new course titles and acquire
additional equipment in order to deliver such new course titles. There can be no
assurance that the Company will be able to respond successfully to technological
change. If, because of financial, technological or other constraints, the
Company could not adequately anticipate or respond to changes in computer
platforms, customer preferences and/or software technology, the Company's
business and results of operations would be materially adversely affected.

Multimedia CBT Courses. Learning Tree develops each multimedia CBT title using
its internal staff of project managers, instructional designers, programmers,
computer graphic artists, multimedia producers and testing personnel. The
Company develops its multimedia CBT courses based upon the proprietary content
of its hands-on, instructor-led courses and uses subject matter experts selected
from the Learning Tree instructor team as its CBT course authors. The Company
believes that this approach for developing its multimedia CBT courses enhances
the technical content, structure and educational benefit of its CBT products.

LEARNING TREE INSTRUCTORS

The Company believes that its instructors are vital to its success. Learning
Tree instructors work either full-time for other companies or as independent
consultants in a variety of industries applying the IT skills and knowledge that
are the subjects of the courses they teach. On average, the Company's
instructors teach eight to nine Learning Tree courses each year as needed. At
September 30, 1998, the Company had 820 instructors.

The Company's future success will also depend on its ability to attract and
retain highly-skilled instructors. Each Learning Tree subsidiary has an
Instructor Relations Department to recruit, train, coach and manage its
instructor team. The Company identifies new instructor candidates primarily
through referrals from its existing instructors. Instructor candidates undergo a
technical evaluation prior to participating in Learning Tree's proprietary
instructor training program. The Company believes that its instructor force is
relatively stable, and its recruitment and training program focuses primarily on
expanding the Company's instructor staff during periods of growing market demand
and to accommodate new technologies. There can be no assurance that the Company
will be successful in these recruitment and training efforts.

CUSTOMERS

Learning Tree has developed a broad customer base focusing on Fortune 1000-
level companies and their international equivalents and government organizations
worldwide. In fiscal 1998, the Company trained over 113,000 multi-day course
participants who were employed by over 14,000 organizations. In fiscal 1998, the
Company derived approximately 53% of its revenues in the United States and 47%
of its revenues internationally.

The Company's customers generally operate in the computer, communications,
electronics, systems integration, finance, aerospace, military, manufacturing
and energy sectors, and a number of the customers are government organizations.
The Company had over 200 customers worldwide that purchased over $100,000 of
Learning

13
<PAGE>

Tree training in fiscal 1998. Generally, each customer purchased this training
throughout the year in individual purchase decisions ranging from $2,000 to
$20,000 rather than through a single contract. No customer accounted for 10% or
more of the Company's fiscal 1998 revenues.

MARKETING AND SALES

Direct Mail Marketing and Advertising. Learning Tree markets its courses
primarily through direct mail marketing to its proprietary mail list of over
1,600,000 individuals (including course participants, their immediate
supervisors, department managers, training managers and other people who have
inquired about the Company's courses) as well as to rented mailing lists of IT
professionals. The Company has leveraged its direct mail program by including
promotional materials for its multimedia CBT product line in its mailing
package. The Company also advertises in industry trade magazines and
periodicals.

The Company believes that it achieves economies of scale by producing its
marketing materials centrally. Its centralized marketing department develops the
Company's catalogs, brochures and advertisements using color desktop publishing
and electronic pre-press technology. This in-house capability enables the
Company to make quick improvements to its marketing materials in order to
feature the latest technological developments and address market opportunities
in a timely manner.

The Company has built a strong brand image through the frequent and prominent
use of its trademarks in its marketing materials and course materials. These
trademarks include the Learning Tree and professional certification logos, its
name, and its trademarks, including EDUCATION IS OUR BUSINESS, EDUCATION YOU CAN
TRUST, WE BRING EDUCATION TO LIFE, PRODUCTIVITY THROUGH EDUCATION, Alumni Gold,
TRAINING YOU CAN TRUST, SkillsTree, ENHANCING PRODUCTIVITY Through Skill
Development, TestTree, WE BRING LEARNING TO LIFE, learningtree.com, LearnTrack,
Training Passport, Training Advantage, 800-THE-TREE, 800-LRN-TREE and 888-CBT-
TREE.

Internet Marketing. The Company maintains a web site for marketing its
products and services over the Internet (http://www.learningtree.com).
Information contained in the Company's web site shall not be deemed to be part
of this Annual Report on Form 10-K. The Company believes that the Internet will
become an increasingly significant marketing channel to prospective IT course
participants in the future.

Telemarketing Sales Force. At September 30, 1998, Learning Tree's
telemarketing sales force consisted of over 100 people who were responsible for
responding to phone, e-mail, web site and facsimile orders and inquiries
received by the Company and pursuing sales opportunities. These telemarketers
sell both to individual prospective course participants and to line managers and
training directors in assigned accounts. The Company has developed a proprietary
automated system which is integrated with its customer and course operations
databases and provides its telemarketers with on-line information that
facilitates rapid response to inbound callers, provides targeted lists for
outbound calling, records the results of calls and automates the sales follow-up
process.

Field Sales Force. The Learning Tree field sales force, which consisted of
over 70 sales people at September 30, 1998, generates a significant portion of
the Company's revenues. The field sales force concentrates its attention on the
Company's larger customers to sell multiple course customer-site training
programs, Learning Solutions programs, SkillsTree services, CBT products and to
sign Training Advantage Agreements covering all formats of Learning Tree
training. The Company's Training Advantage Agreements provide its nationwide and
international customers with negotiated pricing and special services.

The field sales force is assisted by the Company's Customer Support Group
which provides the administration and logistics support necessary to ensure the
successful presentation, at the customer's site, of Learning Tree's hands-on,
computer-based classroom courses. For large contracts requiring customization,
the customer support staff serve as team leaders to coordinate the instructor(s)
who modify and teach the courses, the internal development team who implements
the changes, the Company's technical support group which modifies the course
hardware and software as needed, and the logistics staff which assembles and
ships course equipment and materials for each course event.

14
<PAGE>

Multiple Enrollment Programs. The Company markets its Training Passport
programs to encourage course participants to enroll in multiple courses, and
thereby increase the average attendance in its Learning Tree-site courses.
Generally, the holder of a Learning Tree Training Passport may attend up to 8
courses (10 in the United Kingdom and France) during a 12-month period. The list
price for such Training Passports is approximately three times the list price
for an individual four-day course. Since 1997, the Company has offered a second
Training Passport program in its European subsidiaries consisting of a 4-course
Passport which is priced at approximately twice the list price for an individual
four-day course. The 4-course Passport program was introduced by the Company's
domestic and Canadian subsidiaries during 1998.

The Company has also developed the Learning Tree Professional Certification
Programs for certifying IT professionals in 27 job functions in the areas of the
Company's focus. Professional certification is important to many participants in
Learning Tree courses as it provides documentation of their qualifications. Each
professional certification program requires completion of a series of five
Learning Tree courses and an examination associated with each course. Since this
program's inception in fiscal 1993, over 110,000 participants have completed one
or more certification examinations.

COMPETITION

The IT education and training market is highly fragmented, with low barriers
to entry and no single competitor accounting for a dominant market share. The
Company's competitors are primarily company internal training departments,
independent education and training companies, computer hardware and software
vendors, systems integrators and others. Some of these competitors offer course
titles and programs similar to those of the Company at lower prices. In
addition, some competitors have greater financial and other resources than the
Company.

Internal Training Departments. Internal IT training departments generally
provide companies with the most control over the method and content of training,
enabling them to tailor the training to their specific needs. However, the
Company believes that industry trends toward downsizing and outsourcing continue
to reduce the size of IT training departments and increase the percentage of IT
training delivered by external providers. Because internal trainers find it
increasingly difficult to keep pace with new technologies, lack the hands-on
experience needed to teach the latest technological developments and lack the
capacity to meet demand, organizations supplement their internal training
resources with externally supplied training in order to meet their requirements.

Other Independent Education and Training Providers. The Company believes that
the majority of independent training providers are smaller organizations, which
often provide training as one of several services or product lines. Many are
"Authorized Training Centers" which present courses utilizing materials prepared
by computer hardware and software vendors such as Novell and Microsoft. The
Company differentiates itself from these providers based on its size; scope and
quality of its proprietary course offerings; worldwide delivery capability;
number, quality and experience of its instructors; and vendor independence.

Computer Hardware and Software Vendors. Many hardware and software vendors
supply training bundled in the prices of their product. In addition, their
knowledge of upcoming developments in their products is likely to be better than
that of other training providers. Learning Tree differentiates itself from
computer systems manufacturers and software vendors by maintaining a vendor-
independent posture and providing cross-platform training solutions.

CBT Providers. The market for IT education and training has historically
consisted primarily of instructor-led training. While multimedia and computer-
based IT training currently account for a smaller portion of the overall IT
training market. The Company introduced a line of multimedia CBT products in
fiscal 1996. During fiscal 1998, the Company was continuing to develop and
expand its multimedia CBT library and, as a result, a substantial majority of
its revenue in fiscal 1998 was derived from its instructor-led, hands-on
training courses. Accordingly, the Company's future success will depend upon,
among other factors, the extent to which the market continues to accept
instructor-led training as a method of delivery for IT training, the Company's
ability to develop and market instructor-led courses that compete effectively
against CBT courses offered by

15
<PAGE>

others and the Company's ability to develop its own curriculum of competitive
multimedia CBT course titles.

In the CBT market, many of the Company's current and potential competitors
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition in the CBT area than the Company.
In addition, the CBT area is characterized by significant price competition. As
a greater number of CBT providers enter the field, the Company anticipates that
it will face price pressure from competitors. The Company differentiates itself
from other CBT providers based on its field sales, telemarketing and direct mail
sales and marketing channels, its reputation for providing quality training, the
content of its multimedia CBT courses, the frequent feedback the Company
receives about its course content and teaching methods from its established
customer base and its ability to provide users with the flexibility to acquire a
given set of skills and knowledge through either multimedia CBT or classroom-
based training or an integrated combination of the two. However, there can be no
assurance that the Company's products will be more favorably viewed by the
marketplace than other interactive training software or that competitive
pressures will not require the Company to reduce its prices significantly.

INTELLECTUAL PROPERTY AND LICENSES

The Company regards its course development process and its course titles as
proprietary and relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. Notwithstanding the foregoing, a third party or parties
could copy or otherwise obtain and use the Company's course materials in an
unauthorized manner or use these materials to develop course titles which are
substantially similar to those of the Company. In addition, the Company operates
in countries that do not provide protection of proprietary rights to the same
extent as the United States. The Company's course materials generally do not
include any mechanisms to prohibit or prevent unauthorized use. If substantial
unauthorized use of the Company's products were to occur, the Company's business
and results of operations could be materially adversely affected. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar course titles or delivery methods. Additionally, there can be no
assurance that third parties will not claim that the Company's current or future
courses infringe on the proprietary rights of others. The Company expects that
it will be increasingly subject to such claims as the number of products and
competitors increases in the future. Any such claim could result in a material
adverse effect on the Company's business.

REGULATORY ENVIRONMENT

Many federal, state and international governmental authorities assert
authority to regulate providers of educational programs. Generally, the Company
is exempt from such regulation because the Company contracts with the employer
of the course participants and does not participate in any federal or state
student aid/loan programs. However, state laws and regulations affect the
Company's operations and may limit the ability of the Company to obtain
authorization to operate in certain states. If the Company were required to
comply with, or found to be in violation of, a state's current or future
licensing or regulatory requirements, it could be subject to civil or criminal
sanctions, including monetary penalties, and could be barred from providing
educational services in that state.

EMPLOYEES

As of September 30, 1998, the Company had a total of 613 full-time equivalent
employees, of whom 239 were employed outside the United States. The Company also
utilized the services of 820 instructors to teach its courses on an as-needed
basis. The Company considers its relations with its employees and its
instructors to be good.

Item 2. PROPERTIES

As of September 30, 1998, all of Learning Tree's education center classroom
facilities were leased by the Company. The leases expire at various dates over
the next ten years. The Company's headquarters is located at 6053 West Century
Boulevard, Los Angeles, California 90045. The Company owns a 38,500 square foot

16
<PAGE>

office facility which is used to house the sales, administrative and operations
groups of its U.S. subsidiary. The Company intends to lease additional
facilities for a number of its subsidiaries in the foreseeable future. The
Company has and expects to continue to supplement its education center classroom
facilities through the use of rented hotel and conference facilities as needed.
The table below sets forth certain information regarding Learning Tree's
facilities, comprised of classroom sites and offices as of September 30, 1998:

<TABLE>
<CAPTION>
LOCATION NO. OF AREA IN
(METROPOLITAN AREA) CLASSROOMS SQUARE FEET
- ----------------------------- ---------- -----------
<S> <C> <C>
Boston, MA.................... 6 13,717
Los Angeles, CA............... 3 57,229
New York, NY.................. 5 11,600 (a)
Washington, DC metropolitan
area (4 sites)............... 36 130,690
Miscellaneous other U.S....... N/A 1,200
Paris, France................. 14 36,814
London, England (2 sites)..... 12 48,031 (b)(c)
Ottawa, Canada................ 6 18,844
Toronto, Canada............... 5 10,830
Stockholm, Sweden............. 13 22,605
Tokyo, Japan.................. N/A 1,311
Hong Kong..................... N/A 574
</TABLE>

(a) Excludes a 22,190 square foot facility (10 classrooms) which was under
lease as of September 30, 1998 but had not begun operations until October
1998.

(b) Includes a 17,638 square foot facility (12 classrooms) being used as of
September 30, 1998. During 1998, the Company entered into a sublease to
dispose of this facility and vacated it in October 1998.

(c) Excludes a 112,000 square foot facility for which the Company had signed an
agreement to lease prior to September 30, 1998 and in which operations
began in October 1998. This facility has the capacity to provide
approximately 70 classrooms. Since this exceeds the Company's expected
needs for the first few years of the lease, the Company intends to build
out 39 classrooms and to sublease the remainder of the building. The
Company is presently in negotiations to sublease a portion of the building
and is marketing another portion for sublease.

Item 3. LEGAL PROCEEDINGS

On April 16, 1998, a class action lawsuit was filed against certain officers
and directors of the Company in the Superior Court of the State of California,
County of Los Angeles, (Sarah v. Collins et al., Case No. BC189499), purportedly
-----------------------
on behalf of persons who purchased the Company's Common Stock between May 8,
1997 and November 3, 1997. On June 29, 1998, a second class action lawsuit was
filed by the same law firms against the same officers and directors of the
Company in the Superior Court of the State of California, County of Los Angeles
(Guthrie v. Collins et al., Case No. BO193465), also purportedly on behalf of
-------------------------
persons who purchased the Company's Common Stock between May 8, 1997 and
November 3, 1997. On August 6, 1998, a third class action lawsuit was filed by
the same law firms against the Company and certain officers and directors of the
Company in the United States District Court for the Central District of
California (Schlagal v. Learning Tree International et al., Case No. 95-
----------------------------------------------
6384ABC), purportedly on behalf of persons who purchased the Company's Common
Stock between May 8, 1997 and May 13, 1998. On August 10, 1998, the Superior
Court dismissed the Sarah case. On October 27, 1998, the plaintiff filed a
notice of appeal in Sarah.
-----

On August 27, 1998, plaintiffs amended the Guthrie action to add the Company
and two additional officers as defendants and to expand the proposed class
period to include all persons who purchased the Company's Common Stock between
May 8, 1997 and May 13, 1998.

Each of the complaints makes similar allegations of misrepresentations in
certain public disclosures by the Company. Each complaint alleges that the
Company and the defendant officers and directors concealed an alleged
deterioration of business early in 1997 and that several of the officers and
directors realized profits by trading their shares of Company Stock while in
possession of the allegedly concealed material adverse information. Each
complaint seeks an unspecified amount of compensatory damages and, additionally,
seeks attorneys' and

17
<PAGE>

other costs, interest, and other relief.

The Company has agreements with officers and directors under which it is
indemnifying them in each of these proceedings. The Company is unable to
estimate the outcome of these matters or any potential liabilities it may incur.
The Company expects to incur legal and other defense costs as a result of such
proceedings in an amount which it can not currently estimate. These proceedings
could involve a substantial diversion of the time of some of the members of
management, and an adverse determination in, or settlement of, such litigation
could involve the payment of significant amounts or could include terms in
addition to such payments, which could have an adverse impact on the Company's
business, financial condition, results of operations and cash flows.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998, through the solicitation of proxies or otherwise.

18
<PAGE>

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's Common Stock began trading publicly on the Nasdaq National
Market under the symbol LTRE effective December 6, 1995. The following table
sets forth, for the periods indicated, the range of high and low sales prices
for the Common Stock on the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1997
First Quarter........................................... $32 $24
Second Quarter.......................................... 40 3/4 23 1/4
Third Quarter........................................... 45 1/4 27 1/2
Fourth Quarter.......................................... 48 3/8 24 1/2
Fiscal 1998
First Quarter........................................... 35 7/8 21 5/8
Second Quarter.......................................... 29 3/4 19
Third Quarter........................................... 25 1/4 15
Fourth Quarter.......................................... 20 5/8 8
</TABLE>

As of December 14, 1998 there were approximately 1,200 holders of record of the
Common Stock.

VOLATILITY OF STOCK PRICE

The Company's initial public offering was completed in December 1995 and a
secondary public offering was completed in September 1996. There can be no
assurance that a viable public market for the Common Stock will be sustained.
The market price of the Common Stock has fluctuated significantly since the
initial public offering. The Company believes that factors such as announcements
of developments related to the Company's business, announcements of new products
or enhancements by the Company or its competitors, sales of the Common Stock
into the public market, developments in the Company's relationships with its
customers, shortfalls or changes in revenues, gross margins, earnings or losses
or other financial results which differ from public market analysts'
expectations, fluctuations in results of operations and general conditions in
the Company's market or the markets served by the Company's customers or the
economy could cause the price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
market for shares of technology-related stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of the Common Stock will not continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.

DIVIDENDS

In December 1996, the Company declared a stock split which was effected in the
form of a 50% stock dividend to all holders of its Common Stock. To date, the
Company has not paid any cash dividends on its Common Stock and the Company
anticipates that it will not pay cash dividends on the Common Stock for the
foreseeable future and that it will retain any earnings for use in the operation
of its business. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and to compliance with
applicable laws. Any determination as to the payment of dividends in the future
will depend upon, among other things, general business conditions, the effect of
such payment on the Company's financial condition and other factors the
Company's Board of Directors may in the future consider to be relevant.

19
<PAGE>

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company is qualified
by reference to and should be read in conjunction with the consolidated
financial statements and notes thereto and other financial data included
elsewhere in this Annual Report on Form 10-K. The statement of operations data
set forth below for each of the three years in the period ended September 30,
1998 and the balance sheet data as of September 30, 1997 and 1998, are derived
from the Company's consolidated financial statements for those years which have
been audited by Arthur Andersen LLP, independent public accountants, whose
report thereon is included elsewhere herein. The statement of operations data
for each of the two years in the period ended September 30, 1995 and the balance
sheet data at September 30, 1994, 1995 and 1996 are derived from audited
financial statements of the Company not included herein. These historical
results are not necessarily indicative of the results to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $58,466 $78,818 $103,575 $164,483 $187,174
Cost of revenues............................ 23,665 30,731 40,879 70,439 80,016
------- ------- -------- -------- --------
Gross profit............................. 34,801 48,087 62,696 94,044 107,158
------- ------- -------- -------- --------
Operating expenses:
Course development......................... 3,978 4,954 6,248 11,048 11,942
Sales and marketing........................ 21,243 22,883 31,245 51,284 59,422
General and administrative................. 9,945 12,176 12,850 19,228 22,509
------- ------- -------- -------- --------
Total operating expenses................. 35,166 40,013 50,343 81,560 93,873
------- ------- -------- -------- --------
Income (loss) from operations............ (365) 8,074 12,353 12,484 13,285
Other income (expense), net................. 12 272 1,798 3,066 2,676
------- ------- -------- -------- --------
Income (loss) before provision
for income taxes........................... (353) 8,346 14,151 15,550 15,961
Provision for income taxes.................. 90 1,866 4,033 5,058 5,427
------- ------- -------- -------- --------
Net income (loss)........................ $ (443) $ 6,480 $ 10,118 $ 10,492 $ 10,534
======= ======= ======== ======== ========
Net earnings (loss) per common share
assuming dilution.......................... $ (0.03) $ 0.38 $ 0.49 $ 0.47 $ 0.48
======= ======= ======== ======== ========
Diluted shares outstanding.................. 17,268 17,046 20,609 22,099 22,015
======= ======= ======== ======== ========
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 2,774 $10,029 $ 24,541 $ 32,441 $ 36,055
Total current assets........................ 10,772 21,336 77,610 86,146 90,301
Total assets................................ 16,306 28,427 91,529 122,351 137,390
Total current liabilities................... 16,425 22,843 34,247 55,033 59,280
Long-term debt and capital leases,
net of current portion..................... 446 272 134 -- --
Total stockholders' equity (deficit)........ (3,054) 3,305 55,506 65,895 76,828
</TABLE>

20
<PAGE>

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Except for historical information contained herein, the matters discussed in
this Annual Report on Form 10-K are forward-looking statements that are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those set forth in such forward-looking statements. Such risks
and uncertainties include, without limitation, the Company's dependence on the
timely development, introduction and customer acceptance of new courses and
products, the impact of competition and downward pricing pressures, the effect
of changing economic conditions, the Company's ability to attract and retain key
management and other personnel, risks in technology development, the risks
involved in currency fluctuations, and the other risks and uncertainties
discussed below, elsewhere herein and in the caption "Risk Factors" in the
Company's Registration Statement on Form S-1 filed on September 20, 1996.

OVERVIEW

During fiscal 1998, the Company began to provide its customers with a skills
assessment service through its SkillsTree program. SkillsTree is a software
package that identifies the skills necessary to perform IT functions and
provides an organized computer-based process for companies to assess the
technical proficiency of their staff to perform current and future functions.
Further, SkillsTree identifies areas where technical proficiency is lacking and
specifies which Learning Tree courses could best provide the training necessary
to meet the customers' training needs at individual, departmental and enterprise
levels.

The Company is paid directly by the employers of its course participants and
does not receive funding from any government aid or loan programs. As a result,
the Company does not depend on government appropriations for those programs and
is

21
<PAGE>

not subject to certain governmental regulations.

Historically, the Company has focused on instructor-led IT training in multi-
vendor, multi-platform computer systems ("open systems") emphasizing computer
technologies such as internetworking, operating systems and advanced programming
languages. Until the early 1990's, these technologies were used almost
exclusively by IT professionals involved in research, development and
engineering. Beginning in the early 1990's and accelerating through the present,
management information systems ("MIS") departments began shifting from legacy
mainframe systems to new client/server technologies, thus expanding the market
for training of MIS personnel in areas covered by the Company's courses. These
technologies have contributed significantly to the increased use of computer
systems by businesses and government organizations.

Since 1993, the Company has offered a number of multiple enrollment programs,
including its Training Passport, College Credit and Professional Certification
Programs, which give participants an incentive to enroll in a series of Learning
Tree course events rather than just a single event. Recently, through its
SkillsTree program, the Company has begun assisting its customers in determining
their training needs by providing a skills assessment service. See "Business--
Marketing and Sales." Through its increased investment in course development,
the Company has expanded its curriculum of course titles in client/server
technology, networks and databases covering additional topics relevant to the
training market for MIS professionals. In management's view, these new course
titles provided an expanded role for the Company in the IT training market by
attracting MIS participants both to its new and existing course titles.

For the fiscal years ended 1996, 1997 and 1998, revenues increased over the
preceding years by 31%, 59% and 14%, respectively. In response to the changes in
the current and expected rate of growth in course participants, the Company has
and plans to continue to adjust its rate of development of new course titles, to
adjust the size of the direct mailing campaigns and to take steps to expand the
number of classrooms in its education centers. Generally, the Company intends to
increase its marketing and development activities more rapidly when it expects
rapid growth of the market and reduce the rate of increase in such activities
when it expects slower market growth. However, there can be no assurance that
the Company will be able to accurately predict its future growth rate to
optimize these measures or that the Company will achieve an increase in market
share after making such adjustments or expenditures or will maintain a growth in
revenues, profitability or market share in the future. The Company's revenues
and profitability are subject to general economic conditions and a significant
portion of the Company's revenues are derived from Fortune 1000-level companies
and their international equivalents. Such companies have historically adjusted
their expenditures for external IT training during economic downturns. Should
the economy weaken in any future period, these companies may not increase or may
reduce their expenditures on external IT training, which would have an adverse
impact on the Company. The Company expects its growth rate in fiscal 1999 will
be lower than it was for fiscal 1998. There can be no assurance that the
Company's revenues will grow in 1999.

The Company's instructor-led course events are taught in classrooms and
include extensive, hands-on exercises under the guidance of expert instructors.
The Company has structured its business so that the majority of its instructor-
led course costs depend upon the number of course events it conducts. The
Company schedules its multi-day course events throughout the year based on its
assessment of demand. Since the Company's instructors typically work full-time
in the IT industry and teach an average of eight to nine Learning Tree course
events each year, as needed, the Company's instructor-related costs are largely
variable. In addition, although the expenses associated with its own Education
Centers are fixed, the Company can impact its overall facility expenses by
varying its use of rented hotel and conference facilities. Because the cost for
each course event does not increase significantly as additional participants are
included, the Company utilizes a variety of techniques to maximize the number of
participants per course event, up to limits designed to preserve the quality of
each course event. These techniques include adding additional events for a
popular course title, combining two or more undersubscribed events into one
course event and adding an assistant instructor to increase the maximum number
of students that can be effectively taught in a course event. The extent to
which these techniques are used is subject to a number of factors within a
particular market segment.

22
<PAGE>

BACKLOG

At September 30, 1998, the Company had a backlog of orders for instructor-led
courses in the amount of $30.5 million, which represented a 2% increase over the
backlog of $30.0 million at September 30, 1997. The increase in the backlog
reflects a moderate growth of backlog for multi-day instructor-led courses. The
growth in multi-day instructor-led course backlog was partially offset by the
elimination of backlog, compared to the prior year, associated with the Learning
Solutions program, which had completed its contract with General Motors, and the
elimination of the Power Seminars business. Only a portion of the Company's
backlog is funded. There can be no assurance that the growth in the backlog
experienced in fiscal 1998 over fiscal 1997 will continue or that orders
comprising the backlog will be realized as revenue.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations as a percentage of revenues:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues......................... 100% 100% 100%
Cost of revenues................. 39 43 43
---- ---- ----
Gross profit.................. 61 57 57
Operating expenses:
Course development............. 6 7 6
Sales and marketing............ 30 31 32
General and administrative..... 13 12 12
---- ---- ----
Total operating expenses...... 49 50 50
---- ---- ----
Income from operations........ 12 7 7
Other income (expense), net...... 2 2 2
---- ---- ----
Income before provision for
income taxes.................... 14 9 9
Provision for income taxes....... 4 3 3
---- ---- ----
Net income.................... 10% 6% 6%
==== ==== ====
</TABLE>

23
<PAGE>

FISCAL 1998 COMPARED WITH FISCAL 1997

For the fiscal year ended September 30, 1998, revenues increased by $22.7
million or 14% to $187.2 million from $164.5 million for the fiscal year ended
September 30, 1997. The growth of revenues is due, in part, to an increase in
the number of multi-day course participants to 113,108 compared to 101,141 in
the corresponding prior year. The additional course participants are primarily
attributable to increased sales and marketing activities and an increase in the
number of multi-day course titles. The number of multi-day course titles
increased to 149 as of September 30, 1998, compared to 139 a year earlier. The
rate of growth in the number of course participants was less than the growth in
the prior year. The Company believes that the lower growth rate of course
participants may be due to a number of causes, including the pace of
introduction of major new software technologies, the effect of Year 2000 ("Y2K")
Compliance programs, and other possible factors. Certain independent as well as
internal market surveys have indicated that companies have reduced their
spending on IT training and on new software and hardware investments while
working to overcome their Y2K problems. There can be no assurance that the
Company's revenues will increase as more companies complete their Y2K Compliance
projects.

Revenues for fiscal 1998 also reflect a 3% increase in average revenue per
multi-day course participant, which in turn is attributable to an increase in
the average course duration, increases in prices, the introduction and expansion
of the 4-course Passport program, and a change in the mix of course events from
customer-site course events toward Learning Tree-site course events. The
increase in revenues also reflects increased revenues from the multimedia CBT
product line. The increases in revenues were partially offset by a decrease in
revenues produced by the Company's Learning Solutions program under its
contracts with General Motors to train General Motors' personnel and dealers on
the use and support of a new proprietary information system, GM ACCESS, and by
the elimination of revenues from the Power Seminars product line. The initial
contract with General Motors, which ran from June 1997 to November 1997, was
much larger than the follow-on contract which began in February 1998 and was
completed in August 1998. Further, a significant portion of the Company's
revenues is denominated in foreign currencies which have been translated into
dollars based upon the exchange rates prevailing when the revenues were earned.
Exchange rate changes during the year reduced revenues by approximately $2.0
million in fiscal 1998 compared to the exchange rates prevailing during fiscal
1997.

The Company's cost of revenues for its instructor-led courses primarily
includes the costs associated with the course instructors, course materials and
equipment, freight, classroom facilities and refreshments. For multimedia CBT
courses, cost of revenues primarily includes the costs of amortized development,
manufacturing, distribution and support. The cost of revenues was 42.7% of
revenues in fiscal 1998 compared to 42.8% in fiscal 1997. This reflects the
reduced impact of the lower margin Learning Solutions courses for General
Motors, an improvement in margins in our instructor-led base business, and the
elimination of the low margin Power Seminars business. These improvements were
partially offset by a decline in margins on certain multimedia CBT courses due
to the amortization of development costs.

For the fiscal year ended September 30, 1998, the cost of revenues increased
$9.6 million or 14% to $80.0 million from $70.4 million for the previous fiscal
year. The increase in the cost of revenues is primarily the result of the
increased number of course events as well as costs associated with the increased
sales in the multimedia CBT product line. The number of multi-day course events
increased 13% in fiscal 1998 to 7,066 from 6,278 course events in fiscal 1997.

Costs per multi-day course event increased by approximately 2% in fiscal 1998
compared to fiscal 1997. The change in the average cost per course event
primarily reflects a 2% increase in the average course duration. Further, the
higher costs per course event in fiscal 1998 compared to fiscal 1997 reflect
higher costs per event for classroom facilities, course equipment, and
recruiting and training instructors. To control the costs of classroom
facilities, the Company has increased its education center capacity in several
locations. In January 1998, the Company opened a new, larger education center in
Sweden and signed an agreement to lease a new education center in the United
Kingdom. In April 1998, the Company opened a new larger education center in
Boston and in July 1998, the Company signed a lease for a larger education
center in New York. The new education centers in the United Kingdom and New York
both opened in October 1998.

24
<PAGE>

Course development expense includes the costs of developing new course titles
and updating the Company's existing course library. The principal costs are for
internal product development staff and independent consultants who serve as
subject matter experts. For fiscal 1998, course development expense was 6.4% of
revenue compared to 6.7% in fiscal 1997. For the fiscal year ended September 30,
1998, course development expenses increased by $894,000 or 8% to $11.9 million
from $11.0 million for fiscal 1997. This increase reflects the costs associated
with the expansion of the multimedia CBT and multi-day instructor-led course
libraries and updating and maintaining the growing course title libraries. These
increases in costs were partially offset by the elimination of development costs
for the Power Seminars product line.

The number of multi-day course titles increased to 149 as of September 30,
1998, compared to 139 a year earlier. The increase in the size of the multi-day
course library reflects the net effect of the introduction of new titles and the
retirement of old titles. Old titles are retired when the profits they generate
are not sufficient to justify the ongoing cost of marketing them and maintaining
their technological content. Based upon the current trends in the introduction
and evolution of technologies, the Company expects the net number of its course
titles to decline somewhat in the first two quarters of fiscal 1999, and then
grow modestly over the remainder of the next year. However, there can be no
assurance that the Company will develop more titles than it retires in any
period.

The number of multimedia CBT course titles increased to 114 as of September
30, 1998 compared to 72 the year before. During the first quarter of fiscal
1998, the Company introduced an HTML-based engine for its multimedia CBT product
line. New multimedia CBT titles developed during the latter half of fiscal 1998
were developed using this engine and resources were allocated to adapt existing
courses based on prior engines to the new HTML-based engine. Accordingly, the
rate of the introduction of new multimedia CBT titles was less during fiscal
1998 than in fiscal 1997. The Company anticipates continued allocation of
resources to engine development and/or the acquisition of a new engine during
fiscal 1999.

The amount of course development expenses are expected to continue to increase
in fiscal 1999. The actual number of instructor-led and multimedia CBT course
titles which the Company will produce and their delivery dates are subject to a
number of factors such as the hiring and training of staff, perceived customer
demand, continued refinements in the CBT development and production process and
the availability of subject matter experts who are also responsible for teaching
the Company's instructor-led courses.

Sales and marketing expense consists of salaries, commissions and travel-
related costs for sales and marketing personnel, the costs of designing,
producing and distributing direct mail marketing and media advertisements, and
the costs of information systems to support these activities. Sales and
marketing expenses increased $8.1 million or 16% to $59.4 million in fiscal 1998
from $51.3 million in fiscal 1997. The increase in sales and marketing expenses,
for the 1998 fiscal year, occurred as a result of an increase in telemarketing
and field sales staff and increased direct mail marketing. The net increase in
sales and marketing expenses in fiscal 1998 over 1997 reflects the higher level
of sales and marketing expenditures during the first half of the fiscal year
than during the prior year. As discussed above, the Company adjusts its
marketing activities to correspond with its expected growth rate in course
participants. Accordingly, the Company reduced its marketing expenditures during
the second half of the 1998 fiscal year. Sales and marketing expenses for fiscal
1998 increased as a percentage of revenues to 31.7% compared to 31.2% in fiscal
1997.

In fiscal 1998, general and administrative expenses increased $3.3 million or
17% to $22.5 million from $19.2 million for fiscal 1997. The increase in general
and administrative expenses reflects increases in information systems and other
administrative staff and increases in facility related costs over the prior
year. As a percentage of revenue, general and administrative expenses were 12.0%
for fiscal 1998 compared to 11.7% in fiscal 1997.

Other income (expense) is primarily comprised of interest income, interest
expense and foreign currency gains and losses. For fiscal 1998, other income
decreased $0.4 million to $ 2.7 million from $3.1 million for fiscal 1997. This
decrease was primarily attributable to foreign exchange losses recorded during
the year and the write offs of certain course equipment in the United States and
the leasehold improvements in the education center facility in the United
Kingdom

25
<PAGE>

which is being replaced by a new facility. The Company recorded foreign exchange
losses of $288,000 in fiscal 1998, compared to $9,000 of foreign exchange losses
in fiscal 1997. These transaction gains and losses arose from receivables and
payables denominated in currencies other than the functional currencies of the
Company's foreign subsidiaries.

Although the Company's consolidated financial statements are stated in U.S.
dollars, several of the Company's subsidiaries have functional currencies other
than the U.S. dollar. Gains and losses arising from the translation of the
balance sheets of the Company's subsidiaries from the functional currencies to
U.S. dollars are reported as an adjustment to stockholders' equity. However,
fluctuations in exchange rates may have an effect on the Company's results of
operations, particularly its revenues and operating income, when translating the
income statements to dollars. The impact of future exchange rates on the
Company's results of operations cannot be accurately predicted. To date, the
Company has not sought to hedge the risks associated with fluctuations in
exchange rates and therefore continues to be subject to such risks. In the
future, the Company may undertake such transactions. There can be no assurance
that any hedging techniques implemented by the Company would be successful in
eliminating or reducing the effects of currency fluctuations.

In fiscal 1998, the income tax provision increased $369,000 to $5.4 million
from $5.1 million in fiscal 1997. This reflects the elimination of the valuation
allowance on deferred tax assets in fiscal 1997 and the different effective tax
rates in the international subsidiaries. Learning Tree International, Inc.
operates as a holding company with operating subsidiaries in several countries,
and each subsidiary is taxed based on the laws of the jurisdiction in which it
operates. Since taxes are incurred at the subsidiary level, and one subsidiary's
tax losses cannot offset the taxable income of subsidiaries in other tax
jurisdictions, the Company's consolidated effective tax rate may vary.
Accordingly, the Company's consolidated effective tax rate may increase in the
future. See Note 3 of the Notes to Consolidated Financial Statements.

The increase in revenues in fiscal 1998 compared to fiscal 1997 was greatest
in the Company's largest geographic segments, the United States and Europe. The
European segment recorded operating income of $13.8 million in fiscal 1998
compared to operating income of $10.8 million in fiscal 1997 as a result of
revenue increases primarily in Sweden and the United Kingdom. The operating loss
of the United States segment, which includes the results of the Corporate
headquarters, was $507,000 compared to a break-even level in 1997. See Note 8 of
Notes to Consolidated Financial Statements.

In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The Company does not believe that these
pronouncements will have a material effect on its reported financial position or
results of operations.

FISCAL 1997 COMPARED WITH FISCAL 1996

For the fiscal year ended September 30, 1997, revenues increased by $60.9
million or 59% to $164.5 million from $103.6 million for the fiscal year ended
September 30, 1996. The growth of revenues was due, in part, to an increase in
the number of multi-day course participants to 101,141 compared to 71,792 in the
corresponding prior year. The additional course participants were primarily
attributable to increased sales and marketing activities and an increase in the
number of multi-day course titles. The number of multi-day course titles
increased to 139 as of September 30, 1997, compared to 110 a year earlier.
Revenues for fiscal 1997 also reflected a 4% increase in average revenue per
multi-day course participant. The increase in the average revenues per course
participant was attributable to an increase in the average course duration and
increases in prices. The increase in revenues also reflected increased revenues
from the multimedia CBT product line as well as revenues from the Company's new
Learning Solutions program and, to a lesser extent, from its Power Seminars. A
significant portion of the Company's revenues is denominated in foreign
currencies which were translated into dollars based upon the exchange rates
prevailing when the revenues were earned. Exchange rate changes during the year
reduced revenues by approximately $375,000 in fiscal 1997 compared to the
exchange rates prevailing during fiscal 1996.

26
<PAGE>

For the fiscal year ended September 30, 1997, the cost of revenues increased
$29.5 million or 72% to $70.4 million from $40.9 million for the previous fiscal
year. The increase in the cost of revenues was primarily the result of the
increased number of course events as well as costs associated with the increased
sales in the multimedia CBT product line, the costs of delivering Learning
Solutions courses and Power Seminars. The number of multi-day course events
increased 39% in fiscal 1997 to 6,278 from 4,512 course events in fiscal 1996.
Costs per multi-day course event increased by approximately 11% in fiscal 1997
compared to fiscal 1996. The change in the average cost per course event
primarily reflected a 4% increase in the average course duration, the higher
costs of conducting more course events at sites other than education centers due
to education center capacity constraints and the cost of training new
instructors. To accommodate the growth in course enrollments during that time
period, the Company added additional education center facilities during fiscal
1997 and was seeking additional education center facilities in certain
locations.

The cost of revenues increased to 42.8% of revenues in fiscal 1997 compared to
39.5% in fiscal 1996, largely because of lower gross margins in the Power
Seminars and Learning Solutions product lines compared with the Company's
traditional multi-day instructor-led courses and multimedia CBT courses, and
also because of the increased cost per multi-day instructor-led course event as
described above.

For the fiscal year ended September 30, 1997, course development expenses
increased by $4.8 million or 77% to $11.0 million from $6.2 million for fiscal
1996. This increase reflected the costs associated with the Company's strategy,
at that time, of rapidly expanding its multimedia CBT and multi-day instructor-
led course libraries to meet its customers' growing technology training needs,
updating and maintaining the growing course title libraries, and developing
courses for Learning Solutions and Power Seminars. The number of multi-day
course titles increased to 139 as of September 30, 1997, compared to 110 a year
earlier. The number of multimedia CBT course titles increased to 72 as of
September 30, 1997 compared to 12 the year before.

Sales and marketing expenses increased $20.1 million or 64% to $51.3 million
in fiscal 1997 from $31.2 million in fiscal 1996. The increase in sales and
marketing expenses was due to an increase in direct mail marketing to a broader
range of potential multi-day instructor-led customers and to potential Power
Seminar customers, increased telemarketing to support the multi-day instructor-
led courses and Power Seminars and increased field sales staff for multi-day
instructor-led courses and multimedia CBT. Sales and marketing expenses for
fiscal 1997 increased as a percentage of revenues to 31.2% compared to 30.2% in
fiscal 1996.

In fiscal 1997, general and administrative expenses increased $6.3 million or
50% to $19.2 million from $12.9 million for fiscal 1996. The increase in general
and administrative expenses reflected increases in information systems and other
administrative staff and facilities which were necessary to support the growth
in revenues. As a percentage of revenue, general and administrative expenses
declined to 11.7% from 12.4% in the prior year.

For fiscal 1997, other income increased by $1.3 million to $3.1 million from
$1.8 million for fiscal 1996. This increase was primarily attributable to
additional interest income arising from higher average cash balances during the
year. In fiscal 1997, the Company recorded foreign exchange losses of $9,000
compared to $186,000 of foreign exchange losses in fiscal 1996. These
transaction gains and losses arose from receivables and payables denominated in
currencies other than the functional currencies of the Company's foreign
subsidiaries.

For fiscal 1997, the provision for income taxes increased by $1.1 million to
$5.1 million from $4.0 million for fiscal 1996. This increase, in part,
reflected an increase in income before taxes in fiscal 1997 compared to fiscal
1996. In addition, in fiscal 1996, certain of the Company's subsidiaries
utilized tax loss carryforwards to offset a portion of their taxable income for
the year whereas there were no loss carryforwards available in fiscal 1997.

The increase in revenues in fiscal 1997 compared to fiscal 1996 was greatest
in the Company's largest geographic segments, the United States and Europe. All
of the Company's geographic segments were profitable in fiscal 1997. The
European segment recorded operating income of $10.8 million in fiscal 1997
compared to operating income of $7.6 million in fiscal 1996 as a result of
revenue increases

27
<PAGE>

primarily in the United Kingdom and Sweden. The operating income of the United
States segment, which includes the results of the Corporate headquarters,
declined by $3.2 million to a break-even level. This reflects losses incurred in
the Company's Power Seminars activity as well as increased Corporate costs. See
Note 8 of Notes to Consolidated Financial Statements.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth unaudited quarterly financial data for each of
the eight consecutive fiscal quarters ended September 30, 1998, including such
data expressed as a percentage of the Company's revenues. The Company believes
that this information includes all adjustments (which consisted solely of normal
recurring adjustments) necessary for a fair presentation of such quarterly
information when read in conjunction with the consolidated financial statements
included elsewhere herein. The operating results for any quarter are not
necessarily indicative of the results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $36,010 $35,759 $43,881 $48,833 $45,179 $45,005 $47,946 $49,044
Cost of revenues....... 14,342 15,448 18,468 22,181 20,340 18,677 20,287 20,712
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 21,668 20,311 25,413 26,652 24,839 26,328 27,659 28,332
Operating expenses
Course development.... 2,382 2,372 3,254 3,040 3,165 2,721 3,024 3,032
Sales and marketing... 9,891 11,409 13,203 16,781 14,838 15,574 14,716 14,294
General and
administrative....... 3,749 4,151 5,268 6,060 5,445 5,562 5,586 5,916
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 16,022 17,932 21,725 25,881 23,448 23,857 23,326 23,242
------- ------- ------- ------- ------- ------- ------- -------
Income from
operations........... 5,646 2,379 3,688 771 1,391 2,471 4,333 5,090
Other income (expense). 587 810 913 756 567 730 535 844
------- ------- ------- ------- ------- ------- ------- -------
Income before
provision for income
taxes................ 6,233 3,189 4,601 1,527 1,958 3,201 4,868 5,934
Provision for income
taxes................. 2,119 1,085 1,564 290 666 1,088 1,655 2,018
------- ------- ------- ------- ------- ------- ------- -------
Net income............. $ 4,114 $ 2,104 $ 3,037 $ 1,237 $ 1,292 $ 2,113 $ 3,213 $ 3,916
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF
REVENUES:
Revenues............... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues....... 40 43 42 45 45 42 42 42
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 60 57 58 55 55 58 58 58
Operating Expenses
Course development.... 7 7 7 6 7 6 6 7
Sales and marketing... 27 32 30 35 33 35 31 29
General and
administrative....... 10 11 12 12 12 12 12 12
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 44 50 49 53 52 53 49 48
------- ------- ------- ------- ------- ------- ------- -------
Income from operations. 16 7 9 2 3 5 9 10
Other income (expense). 1 2 2 1 1 2 1 2
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes...... 17 9 11 3 4 7 10 12
Provision for income
taxes................. 6 3 4 1 1 2 3 4
------- ------- ------- ------- ------- ------- ------- -------
Net income........... 11% 6% 7% 2% 3% 5% 7% 8%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

The Company has in the past experienced fluctuations in its quarterly
operating results and expects such fluctuations to continue in the future. The
Company's course development and sales and marketing expenses are incurred based
on its

28
<PAGE>

expectations regarding future market conditions and there can be no assurance
that the attendant revenues will occur. Specifically, the Company intends to
increase the amount of its expenditures for course development and sales and
marketing in the future. The Company may be unable to adjust its expenditures in
a timely manner to compensate for any unexpected revenue shortfall. Any
significant revenue shortfall would therefore have a material adverse effect on
the Company's results of operations. In addition, the Company's operating
results may fluctuate based on other factors including: the frequency and
availability of course events; the number of weeks in a quarter during which
courses can be conducted; the timing, frequency, size of and response to the
Company's direct mail marketing and advertising campaigns; the timing of the
introduction of new course titles and alternate delivery methods; the mix
between customer-site course events and Learning Tree-site course events;
competitive forces within the current and anticipated future markets served by
the Company; the spending patterns of its customers; currency fluctuations;
inclement weather; and general economic conditions. Fluctuations in quarter-to-
quarter results may also occur depending on differences in the timing of, and
the time period between, the Company's expenditures on the development and
marketing of its courses and the receipt of revenues.

The Company's revenues and income have also varied significantly from quarter
to quarter due to seasonal factors. The Company generally has greater revenue
and operating income in the second half of its fiscal year (April through
September) than in the first half of its fiscal year. This seasonality is due in
part to seasonal spending patterns of the Company's customers arising from
budgetary and other business factors as well as weather, holiday and vacation
considerations. In addition, the seasonality of the Company's operating results
reflects the quarterly differences in the frequency and size of the Company's
direct mail marketing campaigns. There can be no assurance that these seasonal
factors or their effects will remain the same in the future.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased to $36.1 million at September 30, 1998
from $32.4 million at September 30, 1997. In addition, the Company's short-term
interest-bearing investments increased to $31.1 million at September 30, 1998
from $24.3 million at September 30, 1997. The change in the combined total of
cash, cash equivalents and short-term interest-bearing investments in fiscal
1998 primarily reflects the cash provided by operations and cash used for
additions to equipment, property and leasehold improvements and purchases of
long-term interest-bearing investments.

For fiscal 1998, cash provided by operations was approximately $31.6 million
compared to $23.9 million during fiscal 1997. The increase in cash provided by
operations reflects the increase in profitability before depreciation and
collections of accounts receivable which were partially offset by reductions in
accounts payable. At September 30, 1998, the Company had a net working capital
balance of $31.0 million.

During 1998, the Company entered into a lease agreement for a large education
center in the United Kingdom. The terms of the lease will require lease payments
of approximately $4.4 million per annum and require a cash deposit to be pledged
as collateral or a letter of credit in the amount of approximately $10.2
million. Any pledged cash deposit bears interest to the Company and the required
level of the cash deposit or letter of credit will decline if certain financial
ratios have been met. The Company has pledged a long-term interest-bearing
investment as collateral for this lease.

During fiscal 1998, the Company invested $10.4 million in equipment, property
and leasehold improvements compared to $22.2 million in fiscal 1997. This
reflects a reduced level of investments in course equipment, leasehold
improvements and computer equipment as a result of the lower year over year
revenue growth rate in 1998 compared to 1997, as well as the benefit to fiscal
1998 from the significant investments made in 1997. Although the Company expects
to continue to invest in additional equipment and facilities in fiscal 1999, as
of September 30, 1998, the Company had no material future purchase obligations,
capital commitments or debt. Accordingly, management believes that its cash,
cash equivalents and short-term interest-bearing investments together with the
cash provided by operations will be sufficient to meet the Company's cash
requirements at least until the end of fiscal 1999.

29
<PAGE>

It is contemplated that part of the Company's cash, cash equivalents and
short-term interest-bearing investments may be used for acquisitions. While the
Company has no current agreements in place or negotiations underway with respect
to any acquisition, the Company plans to regularly evaluate acquisition
opportunities that fit within its business plan. Acquisitions involve numerous
risks, including potential difficulties in the assimilation of acquired
operations, diversion of management's attention away from normal operating
activities, negative financial impacts based on the amortization of acquired
intangible assets, the dilutive effects of the issuance of Common Stock in
connection with an acquisition, and potential loss of key employees of the
acquired operation. The Company has had no experience in executing and
implementing acquisitions and no assurance can be given as to the success of the
Company in executing and implementing acquisitions in the future.

The Company has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future.

YEAR 2000 COMPLIANCE

The Year 2000 Problem. The Year 2000 ("Y2K") problem arose because many
existing computer programs use only the last two digits to recognize a year.
Therefore, when the year 2000 arrives, these programs may not properly recognize
a year beginning with "20" instead of the familiar "19". The Y2K problem may
result in the improper processing of dates and date-sensitive calculations by
computers and other microprocessor-controlled equipment as the year 2000 is
approached and reached.

State of Readiness. The Company has divided its review of Y2K problems into
three major areas: (1) internal systems, (2) Company products, including
components supplied by outside vendors, and (3) potential Y2K problems
associated with outside vendors.

The Company has focused most of its efforts on internal systems because it
believes this area could be its primary source of Y2K problems. The Company's
internal computer systems are the foundation for its business operations and
include such critical functions as order entry, shipping, purchasing, inventory
control, manufacturing, accounts receivable, accounts payable and general
ledger. The Company has completed a review of these critical systems and has
determined that they are not Y2K compliant. These systems are supported by
third parties who currently have software updates available at reasonable
prices. The Company expects to install and implement these updates by March 31,
1999. However, there can be no assurance that this schedule will not be delayed.
The Company is also in the progress of reviewing other equipment that contains
date-sensitive information. The Company expects to complete its review of all
other internal systems by April 30, 1999 and does not expect this review to
uncover a risk of a material effect on its operations from Y2K problems in this
area.

The Company has reviewed its products and believes that they are Y2K
compliant.

The Company is also in the process of identifying any potential Y2K problems
from outside vendors whose systems interface with the Company's internal
systems. The Company expects to complete this review by April 30, 1999. The
Company does not presently plan a general review of other outside vendors, such
as banks, utilities, telephone companies, airlines and shipping companies, and
is relying on general industry pressure to ensure Y2K compliance by these
vendors.

Based on a preliminary review of the Y2K problems associated with outside
vendors, the Company does not expect this issue to have a material adverse
effect on its operations. However, since third-party Y2K compliance is not
within the Company's control, the Company cannot be sure that Y2K problems
affecting the systems of other companies on which the Company's systems rely
will not have a material adverse effect on the Company's operations. For
example, any significant disruption in the banking system, public utilities,
local or long distance telephone service, airplane travel, mail and other common
carriers, or other external systems could severely impact the Company.

Costs to Address the Y2K Issue. Costs to address the Y2K problem include
hardware, software and implementation costs paid to outside consultants. These
costs to date have totaled less than $100,000, the majority of which has been
expensed. The Company expects to incur additional costs totaling less than
$100,000 to

30
<PAGE>

upgrade its internal systems.

Risks Presented by the Year 2000 Issue. To date, the Company has not
identified any Y2K problem that it believes could materially adversely affect
the Company or for which a suitable solution cannot be timely implemented.
However, as the review of its interfaces with other outside vendors progresses,
it is possible that Y2K problems may be identified that could result in a
material adverse effect on its operations. Furthermore, no assessment program
can guarantee identification of all potential issues.

Contingency Plans. Although the Company has not formulated a contingency plan
to date, the Company intends to continue to assess its Y2K risks to determine
whether it needs to do so. The Company will have to develop a contingency plan
if its implementation of internal systems or ongoing review of other outside
vendors identify a Y2K problem that poses a significant risk to its business
operation.

Possible Impact on Revenues. The Company's marketing and promotion programs
rely heavily on direct mail programs and telephone solicitation. An
interruption in mail delivery or telephone service could significantly reduce
the Company's marketing efforts with a possible material adverse impact on
revenues. Further, the services rendered by the Company are heavily reliant on
the ability of its customers to travel to the locations where the Company offers
its courses. An interruption in travel services could significantly reduce the
ability of the Company's customers to attend courses with a possible adverse
impact on revenues. The Y2K problem is also expected to result in some degree of
general economic dislocation which could decrease demand for the Company's
products and services resulting in a possible material adverse impact on
revenues. Certain independent as well as internal market surveys have indicated
that companies have reduced their spending on IT training and on new software
and hardware investments while working to overcome their Y2K problems. There can
be no assurance that the Company's revenues will increase as more companies
complete their Y2K Compliance projects.

31
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................................. 33
Consolidated Balance Sheets at September 30, 1997 and 1998........................................... 34
Consolidated Statements of Operations for the fiscal years ended September 30, 1996, 1997 and 1998... 35
Consolidated Statements of Stockholders' Equity for the fiscal years ended September 30, 1996,
1997 and 1998....................................................................................... 36
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 1996, 1997 and 1998... 37
Notes to Consolidated Financial Statements........................................................... 38
</TABLE>

32
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Learning Tree International, Inc.:

We have audited the accompanying consolidated balance sheets of Learning Tree
International, Inc. (a Delaware corporation) and subsidiaries as of September
30, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Learning
Tree International, Inc. and subsidiaries as of September 30, 1997 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.

Arthur Andersen LLP

Los Angeles, California
November 19, 1998

33
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 32,441,000 $ 36,055,000
Short-term interest-bearing investments................ 24,330,000 31,136,000
Trade accounts receivable, less allowances of
$312,000 and $408,000, respectively................... 23,201,000 18,265,000
Prepaid marketing expenses............................. 1,356,000 1,154,000
Prepaid expenses and other............................. 4,818,000 3,691,000
------------ ------------
Total current assets.................................... 86,146,000 90,301,000
------------ ------------
Equipment, property and leasehold improvements:
Education and office equipment......................... 33,299,000 37,960,000
Transportation equipment............................... 110,000 191,000
Property and leasehold improvements.................... 9,858,000 12,943,000
------------ ------------
43,267,000 51,094,000
Less: accumulated depreciation and amortization........ (15,838,000) (23,859,000)
------------ ------------
27,429,000 27,235,000
Long-term interest-bearing investments.................. -- 10,169,000
Deferred income taxes................................... 710,000 --
Other assets............................................ 8,066,000 9,685,000
------------ ------------
Total assets............................................ $122,351,000 $137,390,000
============ ============

LIABILITIES
Current liabilities:
Current portion of debt and capital leases............. $ 19,000 $ --
Trade accounts payable................................. 17,993,000 14,618,000
Deferred revenue....................................... 27,531,000 33,357,000
Accrued payroll, benefits and related taxes............ 3,250,000 2,925,000
Other accrued liabilities.............................. 2,514,000 4,309,000
Income taxes payable................................... 3,726,000 4,071,000
------------ -----------
Total current liabilities............................... 55,033,000 59,280,000

Deferred income taxes................................... -- 17,000
Deferred facilities rent................................ 1,423,000 1,265,000
------------ -----------
Total liabilities....................................... 56,456,000 60,562,000
------------ -----------
Commitments and Contingencies

STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value, 75,000,000 shares
authorized, 21,995,000 and 21,995,000 shares issued
and outstanding, respectively......................... 2,000 2,000
Preferred Stock, $.0001 par value, 10,000,000 shares
authorized, 0 and 0 shares issued and outstanding,
respectively.......................................... -- --
Additional paid-in capital............................. 42,992,000 42,992,000
Notes receivable from stockholders..................... (14,000) (9,000)
Deferred compensation--stockholders.................... (127,000) (47,000)
Cumulative foreign currency translation................ (1,066,000) (752,000)
Retained earnings...................................... 24,108,000 34,642,000
------------ -----------
Total stockholders' equity 65,895,000 76,828,000
------------ -----------
Total liabilities and stockholders' equity.............. $122,351,000 $137,390,000
============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

34
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues........................................ $103,575,000 $164,483,000 $187,174,000
Costs of revenues............................... 40,879,000 70,439,000 80,016,000
------------ ------------ ------------
Gross profit.................................... 62,696,000 94,044,000 107,158,000
------------ ------------ ------------
Operating expenses:
Course development............................. 6,248,000 11,048,000 11,942,000
Sales and marketing............................ 31,245,000 51,284,000 59,422,000
General and administrative..................... 12,850,000 19,228,000 22,509,000
------------ ------------ ------------
50,343,000 81,560,000 93,873,000
------------ ------------ ------------
Income from operations.......................... 12,353,000 12,484,000 13,285,000
------------ ------------ ------------
Other income (expense):
Interest expense............................... (45,000) (27,000) (18,000)
Interest income................................ 2,058,000 3,477,000 3,528,000
Foreign exchange............................... (186,000) (9,000) (288,000)
Other.......................................... (29,000) (375,000) (546,000)
------------ ------------ ------------
1,798,000 3,066,000 2,676,000
------------ ------------ ------------
Income before provision for income taxes........ 14,151,000 15,550,000 15,961,000
Provision for income taxes...................... 4,033,000 5,058,000 5,427,000
------------ ------------ ------------
Net income...................................... $ 10,118,000 $ 10,492,000 $ 10,534,000
============ ============ ============
Earnings per common share....................... $ 0.49 $ 0.48 $ 0.48
============ ============ ============
Earnings per common share assuming dilution..... $ 0.49 $ 0.47 $ 0.48
============ ============ ============
Weighted average number of shares outstanding... 20,609,000 21,995,000 21,995,000
============ ============ ============
Diluted shares outstanding...................... 20,609,000 22,099,000 22,015,000
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

35
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS CLASS NOTES FOREIGN
A B ADDITIONAL RECEIVABLE CURRENCY TOTAL
COMMON COMMON COMMON PAID-IN FROM DEFERRED TRANSLATION RETAINED STOCKHOLDERS'
STOCK STOCK STOCK* CAPITAL STOCKHOLDERS COMPENSATION ADJUSTMENT EARNINGS EQUITY
------- ------- ------- ---------- ------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1995...... $ -- $ 2,000 $ -- $ 1,216,000 $(679,000) $(287,000) $ (882,000) $ 3,935,000 $ 3,305,000
FISCAL YEAR 1996:
Conversion of Class
A and B Common Stock.... 2,000 (2,000) -- -- -- -- -- -- --
Sales of Common Stock... -- -- -- 41,816,000 -- -- -- -- 41,816,000
Repurchase of
Common Stock............ -- -- -- (40,000) 446,000 -- -- (437,000) (31,000)
Net income............... -- -- -- -- -- -- -- 10,118,000 10,118,000
Amortization of deferred
compensation............ -- -- -- -- -- 80,000 -- -- 80,000
Foreign currency
adjustments............. -- -- -- -- -- -- 129,000 -- 129,000
Collections on
notes receivable
from stockholders....... -- -- -- -- 89,000 -- -- -- 89,000
------ ------- ----- ----------- --------- --------- ----------- ----------- -----------
Balance,
September 30, 1996...... 2,000 -- -- 42,992,000 (144,000) (207,000) (753,000) 13,616,000 55,506,000
FISCAL YEAR 1997:
Net income............... -- -- -- -- -- -- -- 10,492,000 10,492,000
Amortization of deferred
compensation............ -- -- -- -- -- 80,000 -- -- 80,000
Foreign currency
adjustments............. -- -- -- -- -- -- (313,000) -- (313,000)
Collections on
notes receivable
from stockholders....... -- -- -- -- 130,000 -- -- -- 130,000
------ ------- ----- ----------- --------- --------- ----------- ----------- -----------
Balance,
September 30, 1997...... 2,000 -- -- 42,992,000 (14,000) (127,000) (1,066,000) 24,108,000 65,895,000

FISCAL YEAR 1998:
Net income............... -- -- -- -- -- -- -- 10,534,000 10,534,000
Amortization of deferred
compensation............ -- -- -- -- -- 80,000 -- -- 80,000
Foreign currency
adjustments............. -- -- -- -- -- -- 314,000 -- 314,000
Collections on
notes receivable
from stockholders....... -- -- -- -- 5,000 -- -- -- 5,000
------ ------- ----- ----------- --------- --------- ----------- ----------- -----------
Balance,
September 30, 1998...... $2,000 $ -- $ -- $42,992,000 $ (9,000) $ (47,000) $ (752,000) $34,642,000 $76,828,000
====== ======= ===== =========== ========= ========= =========== =========== ===========
</TABLE>

* Par value amounts round to less than one thousand dollars.

The accompanying notes are an integral part of these consolidated financial
statements.

36
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Cash flows--operating activities:
Net income............................................. $ 10,118,000 $ 10,492,000 $ 10,534,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 3,187,000 6,015,000 9,434,000
Deferred facilities rent charges..................... (358,000) (227,000) (159,000)
Amortization of deferred compensation................ 80,000 80,000 80,000
Unrealized foreign exchange (gains) losses........... 154,000 (53,000) 88,000
Losses on retirements of equipment................... 25,000 345,000 601,000
Change in net assets and liabilities:
Trade accounts receivable........................... (4,120,000) (10,834,000) 5,126,000
Prepaid marketing expenses.......................... (387,000) (291,000) 208,000
Prepaid expenses and other.......................... (408,000) (2,438,000) 1,181,000
Income taxes........................................ 1,270,000 1,128,000 886,000
Trade accounts payable.............................. 3,797,000 7,432,000 (3,548,000)
Deferred revenue.................................... 5,352,000 12,079,000 5,718,000
Accrued payroll, benefits and related taxes......... (528,000) 1,287,000 (347,000)
Other accrued liabilities........................... 2,021,000 (1,108,000) 1,762,000
------------ ------------ ------------
Net cash provided by operating activities............... 20,203,000 23,907,000 31,564,000
------------ ------------ ------------
Cash flows--investing activities:
Purchases of equipment, property and leasehold
improvements.......................................... (9,169,000) (22,248,000) (10,358,000)
Retirements of equipment............................... 31,000 23,000 630,000
Sales of short-term interest-bearing investments:
Investments held to maturity......................... -- 36,001,000 27,889,000
Investments held for sale............................ -- -- 5,100,000
Purchases of short-term interest-bearing investments:
Investments held to maturity......................... (12,500,000) (22,132,000) (30,195,000)
Investments held for sale............................ (24,500,000) (1,200,000) (9,600,000)
Purchases of long-term interest-bearing investments
held to maturity...................................... -- -- (9,934,000)
Other, net............................................. (1,159,000) (6,126,000) (1,612,000)
------------ ------------ ------------
Net cash used in investing activities................... (47,297,000) (15,682,000) (28,080,000)
------------ ------------ ------------
Cash flows--financing activities:
Principal payments of debt and capital leases.......... (185,000) (240,000) (19,000)
Sales of Common Stock.................................. 41,816,000 -- --
Repurchase of Common Stock............................. (31,000) -- --
Collections of stockholder notes....................... 71,000 130,000 5,000
------------ ------------ ------------
Net cash provided by (used in) financing activities..... 41,671,000 (110,000) (14,000)
------------ ------------ ------------
Effects of exchange rates on cash....................... (65,000) (215,000) 144,000
------------ ------------ ------------
Net increase in cash and cash equivalents............... 14,512,000 7,900,000 3,614,000
Cash and cash equivalents at the beginning of the period 10,029,000 24,541,000 32,441,000
------------ ------------ ------------
Cash and cash equivalents at the end of the period...... $ 24,541,000 $ 32,441,000 $ 36,055,000
============ ============ ============
Supplemental disclosures:
Income taxes paid...................................... $ 2,960,000 $ 3,558,000 $ 5,214,000
============ ============ ============
Interest paid.......................................... $ 44,000 $ 23,000 $ 2,000
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

37
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a. Nature of the Business:

Learning Tree International, Inc. and subsidiaries (the "Company") develop,
publish and deliver advanced technology training courses covering a broad range
of topics which are designed to meet the training needs of information
technology ("IT") professionals worldwide. These courses are delivered primarily
at the Company's leased Education Centers located in the United States, England,
Canada, France and Sweden. Such course events are also conducted in hotel and
conference facilities, and at customer sites throughout the world. The Company
provides courses that are regularly presented worldwide and cover such IT topics
as client/server systems, intranet/Internet technologies, computer networks,
operating systems, database systems, programming languages, graphical user
interfaces, object-oriented technology, IT management and related topics. In
addition to its instructor-led courses, the Company has developed and is
expanding a line of multimedia CBT versions of its courses designed for both
stand-alone CD-ROM and network-based delivery.

b. Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of
Learning Tree International, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Minority interests
in certain subsidiaries are not significant. Following is a summary of the
subsidiaries of the Company:

Learning Tree International USA, Inc. (U.S.)
Learning Tree International, K.K. (Japan)
Learning Tree International Ltd. (United Kingdom)
Learning Tree International S.A. (France)
Learning Tree International AB (Sweden)
Learning Tree Publishing AB (Sweden)
Learning Tree International Inc. (Canada)
Learning Tree International Ltd. (Hong Kong)
Advanced Technology Marketing, Inc. (U.S.)
Systems for Business and Industry, Inc. (U.S.)
Technology for Business and Industry, Inc. (U.S.)

c. Capital Stock:

In March 1997, the Company increased the authorized number of shares of Common
Stock, $.0001 par value ("Common Stock"), from 25,000,000 to 75,000,000 shares.
In addition, the Company's authorized capital stock includes an additional
10,000,000 shares of preferred stock, $.0001 par value ("Preferred Stock"). No
shares of Preferred Stock have been issued nor have the terms, conditions or
preferences for such Preferred Stock been established.

d. Stock Dividend and Stock Split:

In December 1996, the Company declared a stock split which was effected in the
form of a 50% stock dividend to all holders of its Common Stock. This dividend
was accounted for as a large stock dividend and, accordingly, all share and per
share amounts in the accompanying financial statements and footnotes have been
retroactively restated to reflect the stock dividend.

In October 1995, the Company effected a 3.66 for 1 split of the Company's
Class A and Class B Common Stock. All share and per share amounts in the
accompanying financial statements and footnotes have been retroactively restated
to reflect the stock split.

38
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

e. Revenue Recognition - Instructor-Led Courses:

The Company's revenues are received from corporate and governmental agencies
for the training of their employees. Course events range from two to five days
with an average of approximately four days. For individual course enrollments,
the Company recognizes revenues and the related direct costs of course events
upon commencement of each course event which, for each period presented,
approximates the amount recognized on a straight-line basis over the duration of
the course.

The Company offers a sales discount program referred to as the Passport
Program. The Passport Program allows an individual passport holder to attend up
to a specified number of courses held by the Company over a one year period for
a fixed price. Under the Passport Program, the amount of revenue recognized for
each attendance in one of the Company's courses is based upon the selling price
of the Passport and the estimated average number of courses passport holders
will actually attend. Upon expiration of a Passport, the Company records the
differences, if any, between the revenues previously recognized and the Passport
selling price. The estimated attendance rate is based upon the historical
experience of the average actual number of course events Passport holders have
been attending. The average of the actual attendance rate for all expired
Passports has closely approximated the estimated rate utilized by the Company.
If the Passport attendance rate changes, based upon this historical data, the
Company adjusts the revenue recognition rate for all active Passports and for
all Passports sold thereafter. Although the Company has seen no material changes
in the historical rates as its number of course titles has increased, it
monitors such potential effects. In general, determining the estimated average
number of course events that will be attended by a Passport holder is based on
historical trends that may not continue in the future. These estimates could
differ in the near term from amounts used in arriving at the reported revenue.

f. Revenue Recognition - Multimedia CBT Courses:

The Company derives its revenues from its multimedia computer based training
("CBT") products under license agreements under which customers license the
usage of products for periods of one, two or three years. On each anniversary
date during the term of multi-year license agreements, customers are allowed to
exchange any or all of the licensed course titles for an equal number of new
course titles. The first year license fee is generally recognized as revenue at
the time of delivery, provided there are no significant vendor obligations
remaining. Subsequent annual license fees are recognized on each anniversary
date, provided there are no significant vendor obligations remaining. If
significant vendor obligations exist at the time of delivery, revenue is
deferred and recognized ratably over the term of the license agreement. The cost
of satisfying any insignificant vendor obligations is accrued at the time
revenue is recognized. Unearned license revenues are recorded as deferred
revenues.

g. Deferred Revenues:

Deferred revenues primarily relate to unearned revenues associated with the
Passport Program, refundable advance payments received from customers for course
events to be held in the future and unearned revenues associated with multi-year
license agreements for multimedia CBT courses.

39
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

h. Prepaid Marketing Expenses:

Prepaid marketing expenses primarily include the external costs associated
with the design, printing, postage and handling of direct mail advertising
materials to be mailed in the future. These costs are expensed in the month in
which the advertising materials are mailed since the benefit period for such
costs is short and the amount of such future benefit is not practically
measurable. Marketing expenses for the fiscal years ended September 30, 1996,
1997 and 1998 were $21,612,000, $33,852,000 and $38,812,000, respectively.

i. Course Development Costs:

Instructor-led IT training course development costs are charged to operations
in the period incurred. Multimedia CBT development costs are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". SFAS No. 86 requires capitalization of certain software development
costs upon the establishment of technological feasibility. Based on the
Company's multimedia CBT product development process, technological feasibility
is established upon the completion of a working model or a detail course design.
For the fiscal years ended September 30, 1996, 1997 and 1998, $723,000,
$1,993,000 and $2,621,000 of multimedia CBT product development costs,
respectively, were charged to course development expense in the accompanying
consolidated statements of operations. Multimedia CBT development costs which
were capitalized as of September 30, 1997 and 1998 were approximately $6,160,000
and $8,298,000, respectively. Capitalized multimedia CBT development costs are
recorded as other assets in the consolidated balance sheets. Capitalized
multimedia CBT product development costs are amortized on a product-by-product
basis at the greater of the amount computed using (a) the ratio of current
revenues for a product to the total of current and anticipated future revenues
or (b) the straight-line method over the estimated economic life of the product
which is 24 months.

j. Foreign Currency:

The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to United States dollars in accordance
with SFAS No. 52 "Foreign Currency Translation". The rates of exchange at each
fiscal year end are used for translating the balance sheets and the average
monthly rates of exchange for each year are used for the statements of
operations. Gains or losses arising from the translation of the foreign
subsidiaries' financial statements are included in the accompanying consolidated
balance sheets as a separate component of stockholders' equity. Gains or losses
resulting from foreign currency transactions are included in the consolidated
statements of operations.

To date, the Company has not sought to hedge the risk associated with
fluctuations in currency exchange rates, and therefore continues to be subject
to such risk.

k. Equipment, Property and Leasehold Improvements:

Equipment, property and leasehold improvements are recorded at cost and
depreciated or amortized using the straight-line method over the following
useful lives:

<TABLE>
<S> <C>
Education and office equipment.............. 3 to 5 years
Transportation equipment.................... 4 years
Leasehold improvements...................... 10 years or the life of the
lease, if shorter
Property.................................... 30 years
</TABLE>

40
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Costs of normal maintenance and repairs and minor replacements are charged to
expense as incurred. The costs of assets sold or retired are eliminated from the
accounts along with the related accumulated depreciation or amortization and any
resulting gain or loss is included in income. Capitalized equipment leases are
recorded at the lower of the present value of the minimum lease payments or the
fair market value of the equipment at the beginning of the lease term.

l. Facilities Leases:

The Company leases its facilities under various operating lease agreements.
Certain provisions of these leases provide for cash incentives, graduated rent
payments and other inducements. The Company recognizes rent expense on a
straight-line basis which more closely reflects the benefits received. The value
of any lease incentives or inducements, along with the excess of rent expense
recognized over rentals paid is recorded as deferred facilities rent charges in
the accompanying consolidated financial statements.

m. Computation of Earnings per Common Share and Assuming Dilution:

In 1997, SFAS No. 128 "Earnings per Share" was issued. SFAS No. 128
establishes new standards for computing and presenting earnings per share and
was adopted by the Company in fiscal 1998. The adoption of SFAS No. 128 did not
have a material effect on the reported earnings per common share and earnings
per common share assuming dilution.

Earnings per common share and earnings per common share assuming dilution are
computed using the weighted average number of shares of Common Stock outstanding
during the period after giving retroactive effect to the 50% stock dividend paid
in December 1996 and the 3.66 to 1 stock split that occurred in October 1995.
Earnings per common share assuming dilution is calculated by including the
dilutive effect, if any, of all outstanding options to purchase Common Stock
using the treasury stock method.

n. Use of Estimates:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

2. PREPAID EXPENSES AND OTHER:

Prepaid expenses and other current assets at September 30, 1997 and 1998
consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1998
---------- ---------
<S> <C> <C>
Prepaid rent..................... $ 653,000 $ 403,000
GST and VAT on advance billings... 914,000 113,000
Miscellaneous receivables......... 856,000 856,000
Supplier deposits................. 56,000 51,000
Interest receivable............... 207,000 337,000
Other............................. 2,132,000 1,931,000
---------- ----------
$4,818,000 $3,691,000
========== ==========
</TABLE>

41
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. INCOME TAXES:

The Company files a consolidated U.S. Federal income tax return which includes
substantially all of its domestic operations. The Company files separate tax
returns for each of its foreign subsidiaries in the countries in which they
reside.

Income before provision for income taxes consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Domestic................................................................................ $ 4,577,000 $ 2,441,000 $ 1,757,000
Foreign................................................................................. 9,574,000 13,109,000 14,204,000
----------- ----------- -----------
Total.................................................................................. $14,151,000 $15,550,000 $15,961,000
=========== =========== ===========
</TABLE>

For the years ended September 30, 1996, 1997 and 1998, the provision for
income taxes was comprised of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current tax provision:
U.S. Federal........................................................................... $ 1,167,000 $ 498,000 $ 120,000
State.................................................................................. 247,000 254,000 190,000
Foreign................................................................................ 2,420,000 4,746,000 4,389,000
----------- ----------- -----------
3,834,000 5,498,000 4,699,000
----------- ----------- -----------
Deferred tax provision:
U.S. Federal........................................................................... 153,000 (404,000) 374,000
State.................................................................................. 9,000 (35,000) 40,000
Foreign................................................................................ 37,000 (1,000) 314,000
----------- ----------- -----------
199,000 (440,000) 728,000
----------- ----------- -----------
Total provision for income taxes........................................................ $ 4,033,000 $ 5,058,000 $ 5,427,000
=========== =========== ===========
</TABLE>

The following is a reconciliation of the provision for income taxes and the
credit for income taxes computed by applying the U.S. Federal statutory rate to
the income before taxes:

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at the statutory rate........ $4,811,000 $5,342,000 $5,587,000
Permanent differences..................... (192,000) (283,000) (214,000)
Change in valuation allowance............. (577,000) (429,000) --
Effect of current and foreign losses...... (131,000) -- --
Effect of foreign taxes and tax credits... (42,000) 260,000 (71,000)
State income taxes........................ 164,000 168,000 125,000
---------- ---------- ----------
Total provision for income taxes.......... $4,033,000 $5,058,000 $5,427,000
========== ========== ==========
</TABLE>

42
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Under SFAS No. 109 "Accounting for Income Taxes," deferred income tax assets
and liabilities arise from carryforwards and from temporary differences between
the tax basis of assets and liabilities and the book basis of such assets and
liabilities as reported in the financial statements. A valuation allowance may
be provided with respect to certain deferred tax assets to reduce the deferred
tax asset to a level which, more likely than not, would be realized. The net
deferred tax asset reflects management's estimates of the amount which will be
realized from the future profitability which can be predicted with reasonable
certainty.

The following is a summary of the tax effect of carryforwards and temporary
differences which give rise to deferred tax assets and liabilities:
<TABLE>
<CAPTION>

SEPTEMBER 30,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Domestic operations:
Deferred tax assets:
Deferred facilities rent charges... $ 389,000 $ 392,000
Foreign tax credit carryforwards... 435,000 77,000
Other.............................. 230,000 365,000
Deferred tax liabilities:
Depreciation and amortization...... (368,000) (561,000)
Other.............................. (18,000) (17,000)
--------- ---------
Net domestic deferred tax assets... 668,000 256,000
--------- ---------
Foreign operations:
Deferred tax assets:
Depreciation and other............. 42,000 (273,000)
--------- ---------
Net foreign deferred tax assets.... 42,000 (273,000)
--------- ---------
Net deferred tax asset (liability)..... $ 710,000 $ (17,000)
========= =========
</TABLE>

At September 30, 1998, the Company had approximately $77,000 of foreign tax
credit carryforwards available to offset U.S. Federal income taxes in future
years. The foreign tax credit carryforwards expire in 2003.

4. COMMITMENTS:

The Company leases its facilities and certain equipment under various
operating lease agreements which expire at various dates through 2019. The
minimum future rental payments for all operating leases, including the Company's
new facilities in New York and the United Kingdom which began operations in
October 1998, are as follows:

<TABLE>
<S> <C>
1999.............................................. $ 7,315,000
2000.............................................. 9,947,000
2001.............................................. 9,521,000
2002.............................................. 9,096,000
2003.............................................. 9,119,000
Thereafter........................................ 91,452,000
------------
$136,450,000
============
</TABLE>

For the years ended September 30, 1996, 1997 and 1998, rent expense was
$3,985,000, $4,573,000 and $5,296,000, respectively. The agreements generally
require the payment of property taxes, insurance and maintenance in addition to
the minimum base rent.

43
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. STOCKHOLDERS' EQUITY:

Common Stock Sold to Employees--

Prior to December 6, 1995, the Company's Common Stock was divided into two
classes: Class A Voting (Class A Stock) and Class B Non-Voting Common Stock
(Class B Stock). The Company sold shares of Class B Stock periodically to
certain employees prior to that date. The purchase price of these shares was
determined based on the formula as defined in the stock purchase agreements.
Effective as of the closing of the initial public offering on December 6, 1995,
each outstanding share of Class B Stock was converted into one fully paid and
non-assessable share of Class A Stock. Thereafter, the Common Stock ceased being
divided into series and has since consisted of a single class. There were
2,125,000 shares of Class B Stock outstanding at September 30, 1995.

As of September 30, 1998, approximately 150,000 shares of the Common Stock,
which were sold in fiscal 1995, are subject to repurchase options. The
repurchase option terms stipulate that the Company, at its sole option, may
repurchase these shares from the stockholder in the event the stockholder leaves
the employment of the Company for any reason. The Company can repurchase the
shares at an amount equal to the initial issue price plus seven percent per
annum. These repurchase options expire over a four-year period at a rate of 25%
per year.

During fiscal 1995, the Company recorded deferred compensation of $321,000,
which represented the excess of the appraised value of $0.94 per share in
January 1995 and $1.26 per share in June 1995 (as determined by an independent
appraisal) over the initial issue price of $.63 per share of 654,000 shares of
the Class B Stock sold to certain employees during fiscal 1995. The deferred
compensation is reflected as a reduction of stockholders' equity in the
accompanying financial statements and is being amortized as additional
compensation expense over the four-year term of the repurchase options. During
the fiscal years ended September 30, 1996, 1997 and 1998, the Company recorded
$80,000, $80,000 and $80,000 of additional compensation expense relating the
amortization of the deferred compensation, respectively.

In March 1996, the Company repurchased 39,590 shares of Common Stock from
employees for the cancellation of notes receivable from such stockholders in the
amount of $446,000. In addition, during March 1996, notes receivable from
stockholders in the amount of $19,000 were offset against the equivalent amount
of notes payable to such stockholders. In June 1996, the Company repurchased
49,333 shares from a former employee for $31,000 in cash under the terms of a
repurchase agreement.

Initial Public Offering--

In December 1995, 4,500,000 shares of the Company's Common Stock were sold in
an initial public offering, of which 3,750,000 shares were sold by the Company
and 750,000 shares were sold by certain stockholders of the Company. The Company
did not receive any proceeds from the sale of shares by its stockholders. In
January 1996, an additional 675,000 shares of Common Stock were sold by the
Company pursuant to a purchase option granted to the underwriters at the time of
the initial public offering to cover over allotments. The Company received
proceeds of approximately $30.8 million, net of expenses of approximately $4.6
million, from its sale of shares in the initial public offering.

44
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Secondary Public Offering--

In September 1996, the Company completed a secondary public offering whereby
3,899,000 shares of its Common Stock were sold to the public. The Company sold
600,000 shares and 3,299,000 shares were sold by certain stockholders of the
Company. The Company did not receive any of the proceeds from the sale of shares
by its stockholders. The Company received approximately $11.0 million from its
sale of shares in the secondary public offering after deducting underwriters'
commissions and its share of other stock issuance costs which aggregated
approximately $1.0 million.

6. EMPLOYEE STOCK OPTION PLAN:

In October 1995, the Company and its stockholders adopted the 1995 Stock
Option Plan (the "Stock Option Plan"), which provides for the issuance of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and non-qualified stock options to purchase an aggregate of up to
2,250,000 shares of the Common Stock of the Company. The Stock Option Plan
permits the grant of options to officers, employees and directors of the
Company. The exercise price of incentive stock options granted will be greater
than or equal to the fair market value of the Common Stock at the date of grant
and the maximum term of the options may not exceed ten years. The vesting
schedule and the period required for full exercisability of the stock options
are at the discretion of the Board of Directors but in no event can it be less
than six months.

No options were granted under the Stock Option Plan during fiscal 1996.
During the year ended September 30, 1997, non-qualified options were granted
under the Stock Option Plan to substantially all employees with at least one
year of service with the Company and during the year ended September 30, 1998,
additional options were granted to certain employees. The exercise price of all
options granted was equal to the fair market value of the Common Stock at the
date of the grants and the terms of the options are five years. The options are
subject to a four year vesting schedule at 25% per year on each anniversary
date. Following is a summary of the options granted under the Stock Option
Plan:

<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at September 30, 1996 -- $ --
Options Granted 901,000 25.66
Exercised during the year -- --
Forfeited during the year (65,000) 26.51
--------- ------
Outstanding at September 30, 1997 836,000 25.60

Options Granted 412,000 23.50
Exercised during the year -- --
Forfeited during the year (181,000) 25.20
--------- ------
Outstanding at September 30, 1998 1,067,000 $24.86
========= ======

Exercisable at September 30, 1998 180,000
=========
</TABLE>

The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" in accounting for the Stock Option Plan. Accordingly, no
compensation cost has been recognized for options granted during fiscal 1997 and
1998. Had compensation cost for the options granted been determined based upon
the estimated fair value at the grant dates in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per common share assuming dilution would have been reduced to the pro

45
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

forma amounts below:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net Income As reported $10,492,000 $10,534,000
Pro forma 10,014,000 9,762,000

Earnings per common
share assuming dilution As reported $ 0.47 $ 0.48
Pro forma 0.45 0.44
</TABLE>

The preceding pro forma amounts have been calculated using the Black-Scholes
option-pricing model to estimate the fair value of the options granted during
the years ended September 30, 1997 and 1998 with the following assumptions:
risk-free interest rates of 6.2% and 5.8% ; a dividend yield of zero; an
expected life of two and one-half years; and a volatility of 38% and 41%. Based
upon these assumptions, the pro forma weighted average fair value of the options
granted during fiscal 1997 was $7.62 and during fiscal 1998 was $7.27.

7. EMPLOYEE BENEFIT PLANS:

The Company has adopted a defined contribution plan for the benefit of its
domestic employees who have met the eligibility requirements. The Learning Tree
International, Inc. Profit-Sharing and Deferred Savings Plan (the Plan) is a
profit-sharing plan qualifying under Section 401(k) of the Internal Revenue
Code.

Qualified employees may elect to contribute up to 15% of their compensation to
the Plan on a pre-tax basis, subject to statutory limitations. During fiscal
1996, the Company made matching contributions at a rate of 25% of elective
contributions up to 1.5% of the compensation of such contributors. Additionally,
the Company made qualified nonelective contributions to the Plan on an annual
basis. The qualified nonelective contributions were equivalent to 1.5% of the
annual compensation of the qualified participants. As of October 1, 1996, the
Plan was amended such that the Company makes contributions at a rate of 75% of
elective contributions up to 4.5% of the compensation of such contributors. The
annual qualified nonelective contributions to the Plan have been eliminated. The
Company contributed $225,000, $540,000 and $697,000 to the Plan for the fiscal
years ended September 30, 1996, 1997 and 1998, respectively.

The Company has adopted similar plans for the benefit of its employees in
certain of its foreign subsidiaries. Contributions to these plans are subject to
various age, length of service and compensation level criteria as well as
certain limitations. For the fiscal years ended September 30, 1996, 1997 and
1998, the cost to the Company of these plans was approximately $162,000,
$195,000 and $194,000, respectively.

8. BUSINESS SEGMENT DATA:

The Company's sole business segment is the design and delivery of IT education
courses. There were no sales to any individual customers that accounted for 10%
or more of revenue in fiscal 1996, 1997 or 1998.

46
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Information about the Company's operations in different geographic locations
for the years ended September 30, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
United States and Corporate............ $ 49,790,000 $ 90,371,000 $ 98,776,000
Canada................................. 7,748,000 10,936,000 11,059,000
Europe................................. 43,746,000 61,214,000 75,310,000
Asia................................... 2,291,000 1,962,000 2,029,000
------------ ------------ ------------
Consolidated revenues................. $103,575,000 $164,483,000 $187,174,000
============ ============ ============
Income (loss) from operations:
United States and Corporate............ $ 3,173,000 $ 9,000 $ (507,000)
Canada................................. 958,000 1,466,000 101,000
Europe................................. 7,636,000 10,781,000 13,840,000
Asia................................... 586,000 228,000 (149,000)
------------ ------------ ------------
Consolidated income from operations... $ 12,353,000 $ 12,484,000 $ 13,285,000
============ ============ ============
Identifiable assets:
United States and Corporate............ $ 69,568,000 $ 89,433,000 $ 97,535,000
Canada................................. 2,634,000 4,891,000 3,538,000
Europe................................. 18,916,000 27,652,000 35,758,000
Asia................................... 411,000 375,000 559,000
------------ ------------ ------------
Consolidated assets................... $ 91,529,000 $122,351,000 $137,390,000
============ ============ ============
</TABLE>

9. VALUATION AND QUALIFYING ACCOUNTS:

For the years ended September 30, 1996, 1997 and 1998, activity with respect
to the Company's allowance for doubtful accounts receivable is summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1996 1997 1998
--------- --------- --------
<S> <C> <C> <C>
Beginning balance..... $ 259,000 $ 254,000 $ 312,000
Charged to expense.... 101,000 280,000 408,000
Amounts written off... (106,000) (222,000) (312,000)
--------- --------- ---------
Ending balance........ $ 254,000 $ 312,000 $ 408,000
========= ========= =========
</TABLE>

10. CASH, CASH EQUIVALENTS AND INTEREST-BEARING INVESTMENTS:

Cash Equivalents--

The Company considers highly liquid investments with original maturities of 90
days or less to be cash equivalents.

Short-Term Interest-Bearing Investments--

Investments held to maturity mature between one and twelve months. Investments
held for sale mature after ten years but are subject to put options, at par
value, every 28 days. Cost approximates market value for all classifications of
cash and short-term interest-bearing investments. There were no material
realized or unrealized gains or losses on such investments.

47
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Following is a summary of the Company's short-term interest-bearing
investments as of September 30, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Investments held to maturity:
Commercial paper................................ $13,419,000 $22,713,000
Less investments included in cash equivalents... 4,589,000 11,577,000
----------- -----------
Total held to maturity.......................... 8,830,000 11,136,000

Investments held for sale:
State and local government debt.................. 15,500,000 20,000,000
----------- -----------
Total interest-bearing investments................ $24,330,000 $31,136,000
=========== ===========
</TABLE>

Long-Term Interest-Bearing Investments--

The Company has a long-term interest-bearing investment, which will be held to
maturity by its subsidiary in the United Kingdom, in the amount of $10,169,000
(6,000,000 British Pounds). This investment has been pledged to secure the
Company's obligation under a lease for certain education center facilities in
the United Kingdom. The terms of the lease require the Company to pledge a cash
deposit or provide a letter of credit for the same amount as collateral for its
obligations thereunder. Interest earned by the cash deposit is received by the
Company. The required level of the cash deposit or letter of credit will decline
if certain financial ratios have been met.

Cash Flow Information--

The Company purchased Class B Stock from employees for cancellation of notes
receivable of $446,000 during the year ended September 30, 1996. In addition,
during March 1996, notes receivable from stockholders in the amount of $19,000
were offset against the equivalent amount of notes payable to such stockholders.

11. RELATED PARTY TRANSACTIONS:

Consulting Agreements--

In January 1995, the Company and M. Kane & Company, Inc. ("MKC") entered into
an agreement pursuant to which MKC agreed to provide financial advice and
assistance. In consideration for such services, MKC received 1.875% of the gross
proceeds of the initial public offering. This agreement terminated upon the
settlement date of the initial public offering in fiscal 1996. The president of
MKC is a Director of the Company.

In July 1996, the Company and MKC entered into a second agreement pursuant to
which MKC agreed to provide financial advice and assistance. As consideration
for such services, MKC received 1.805% of the gross proceeds of the secondary
public offering. In addition, MKC received approximately $5,000 for
reimbursement of nonaccountable expenses. This agreement terminated at the
completion of the secondary public offering in fiscal 1996.

Employment Agreements--

In October 1995, the Company entered into employment agreements with the Chief
Executive Officer and President of the Company, each for a period of three
years. These agreements were extended for one year from September 30, 1998.

48
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. LITIGATION:

Company in the United States District Court for the Central District of
California (Schlagal v. Learning Tree International et al., Case No. 95-
----------------------------------------------
6384ABC), purportedly on behalf of persons who purchased the Company's Common
Stock between May 8, 1997 and May 13, 1998. On August 10, 1998, the Superior
Court dismissed the Sarah case. On October 27, 1998, the plaintiff filed a
notice of appeal in Sarah.
-----

The Company has has agreements with officers and directors under which it is
indemnifying them in each of these proceedings. The Company is unable to
estimate the outcome of these matters or any potential liabilities it may incur.
The Company expects to incur legal and other defense costs as a result of such
proceedings in an amount which it can not currently estimate. These proceedings
could involve a substantial diversion of the time of some of the members of
management, and an adverse determination in, or settlement of, such litigation
could involve the payment of significant amounts or could include terms in
addition to such payments, which could have an adverse impact on the Company's
business, financial condition, results of operations and cash flows.

49
<PAGE>

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table provides biographical information regarding the directors
and executive officers of the Company as of September 30, 1998. All other
information regarding directors and executive officers of the Company required
by this item is incorporated by reference to the section entitled "Executive
Officers of the Registrant" of the Company's definitive Proxy Statement to be
delivered to shareholders in connection with the 1999 Annual Meeting of
Shareholders.

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
David C. Collins(1)...... 57 Chairman of the Board of Directors and Chief
Executive Officer
Eric R. Garen............ 51 President and Director
Max S. Shevitz........... 43 Executive Vice President and Director
Gary R. Wright........... 41 Vice President, Finance, Chief Financial
Officer and Secretary
Mary C. Adams............ 42 Vice President, Administration, Investor
Relations and Assistant Secretary
W. Mathew Juechter(1)......65 Director
Michael W. Kane(1)....... 47 Director
Alan B. Salisbury........ 61 Director and Chairman, Learning Tree
International USA, Inc.
</TABLE>
- --------

(1) Member of the Audit Committee and the Compensation Committee.

Dr. Collins, a co-founder of the Company, has been Chairman of the Board and
Chief Executive Officer since the Company's business began in 1974 (under the
name Integrated Computer Systems Publishing Co., Inc.). Dr. Collins has a
Bachelor of Science degree (with distinction) in Electrical Engineering from
Stanford University, and Masters and Ph.D. degrees in Electrical Engineering
from the University of Southern California.

Mr. Garen, a co-founder of the Company, has served first as Executive Vice
President and then as President of the Company since the Company's business
began in 1974. Mr. Garen holds a Bachelors degree in Electrical Engineering from
the California Institute of Technology and a Masters degree in Computer Science
from the University of Southern California, both with honors.

Mr. Shevitz has been Executive Vice President of the Company since July 1994,
and was General Manager of Learning Tree International U.S.A., Inc., a
subsidiary of the Company, from September 1988 to December 1993. From January to
July 1994, Mr. Shevitz was Executive Vice President at Sigma International,
Inc., a customer service training company. From 1986 to 1988, Mr. Shevitz was
the founder and President of MD Technology, Inc., a medical diagnostic equipment
company. Mr. Shevitz holds a Masters degree in Business Administration with
honors from the University of Virginia.

Mr. Wright has been Vice President, Finance and Chief Financial Officer of the
Company since January 1995, and from January 1990 to that time he was Corporate
Controller of the Company. From April 1983 to January 1990, Mr. Wright was
employed by The Flying Tiger Line Inc. and its parent company, Tiger
International, Inc., a publicly-held transportation company, where he held a
variety of financial executive positions, including Assistant Controller and
Director of Financial Reporting. Prior to April 1983, Mr. Wright worked at the
public accounting firm of Arthur Andersen LLP. Mr. Wright is a certified public
accountant.

Ms. Adams has served as Vice President, Administration since September 1995.
She began her association with the Company in September 1975 and has held a
variety of positions in the Company. Ms. Adams is also the President of Advanced
Technology Marketing, Inc., a wholly-owned subsidiary of the Company, and
manages the Company's Investor Relations Department.

Mr. Juechter has been a director of the Company since June 1987. From 1991 to
January 1998, he was Chairman of the Board and Chief Executive Officer of ARC
International Ltd., a management consulting and training company. Mr. Juechter
continues to serve as Chairman of the Board of ARC International Ltd. From 1986
to 1991, Mr. Juechter was Managing

50
<PAGE>

Director of IRA, Inc. in St. Paul, Minnesota, a management consulting company.
Mr. Juechter was President and Chief Executive Officer of Wilson Learning Corp.,
a multi-national training organization, from 1977 to 1986. From 1989 to 1997,
Mr. Juechter served as President of the Board of Governors of the American
Society for Training and Development (ASTD).

Dr. Kane has served as a director of the Company since February 1995. He is
President and Chief Executive Officer of M. Kane & Company, Inc., an investment
banking firm he founded in 1991 to serve primarily technology companies. Dr.
Kane is also Chairman and co-founder of Visual Purple LLC, a private company
developing and publishing reality-based interactive training simulations for
governmental and corporate clients. Previously, he was an investment banker with
Oppenheimer and Co., Inc. from 1988 to 1991, and with L.F. Rothschild & Co. from
1987 to 1988. From 1984 to 1987, Dr. Kane practiced primarily corporate and
securities law with the law firm of Irell & Manella, and prior to that he was a
Project Leader in the Systems Sciences Department of The Rand Corporation and an
independent consultant to the satellite telecommunications industry. Dr. Kane
has a Bachelor of Arts degree in Political Science from the University of
Wisconsin-Madison and a Master's degree in International Relations, a Ph.D.
degree in Political Science and a J.D. degree from the University of California,
Los Angeles.

Dr. Salisbury has been Chairman of Learning Tree International USA, Inc., the
Company's operating subsidiary in the United States, since August 1998, and
prior to that was President and General Manager from the time he joined the
Company in April 1993. From 1991 until 1993, Dr. Salisbury was Chief Operating
Officer of Microelectronics and Computer Technology Corporation (MCC), an
organization involved in the research and development of IT products located in
Austin, Texas. From 1987 to 1991, he was President of the Contel Technology
Center, the research and development group of an independent telephone company
located in Chantilly, Virginia. Dr. Salisbury is a director of Sybase, Inc., a
database software developer, Template Software, a vertical applications software
provider and Telepad Corporation, a computer manufacturer. The author of
numerous books and articles related to information technology and education, Dr.
Salisbury served in the United States Army from 1958 to 1987, when he retired as
Commanding General of the U.S. Army Information Systems Engineering Command. He
holds a Bachelor of Science degree (with distinction) from the U.S. Military
Academy, and Masters and Ph.D. degrees in Electrical Engineering and Computer
Science from Stanford University.

David C. Collins and Mary C. Adams are married. There are no other family
relationships among any of the directors or executive officers of the Company.

Item 11. EXECUTIVE COMPENSATION

The information regarding compensation of executive officers of the Company
required by this item is incorporated by reference to the section entitled
"Executive Compensation" of the Company's definitive Proxy Statement to be
delivered to shareholders in connection with the 1999 Annual Meeting of
Shareholders.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information regarding the security ownership of certain beneficial owners
and management required by this item is incorporated by reference to the section
entitled "Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be delivered to shareholders in
connection with the 1999 Annual Meeting of Shareholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information regarding certain relationships and related transactions
required by this item is incorporated by reference to the section entitled
"Certain Transactions" of the Company's definitive Proxy Statement to be
delivered to shareholders in connection with the 1999 Annual Meeting of
Shareholders.

51
<PAGE>

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements and Schedules

The financial statements of Learning Tree International, Inc. as set forth
under item 8 are filed as part of this report.

All Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are omitted because
such schedules are not required under the related instructions, are not
applicable or the required information is given in the financial
statements.

(b) Reports on Form 8-K

There were no reports on Form 8-K during the three month period ended
September 30, 1998.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant*

3.2 By-Laws of the Registrant*

4.1 Specimen of Common Stock Certificate**

10.1 Employment Agreement dated as of October 1, 1995 as amended, between
Learning Tree International, Inc. and Dr. David C. Collins

10.2 Employment Agreement dated as of October 1, 1995 as amended, between
Learning Tree International, Inc. and Eric R. Garen

10.3 Employment Agreement dated as of April 19, 1993 between Learning
Tree International (USA), Inc. and Alan B Salisbury*

10.4 Employment Agreement dated as of February 1978, as amended, between
Learning Tree International, Inc. and Mary C. Adams**

10.5 Employment Agreement dated as of July 18,1994, as amended, between
Learning Tree International, Inc. and Max S. Shevitz*

10.6 Employment Agreement dated as of January 8, 1990, as amended, between
Learning Tree International, Inc. and Gary R. Wright**

10.7 Form of Training Advantage Agreement*

10.8 1995 Stock Option Plan dated as of September 29, 1995**

21.1 Subsidiaries of the Registrant

23.1 Consent of Arthur Andersen LLP

27.1 Financial Data Schedule
</TABLE>
- --------

* Previously filed on October 6, 1995.
** Previously filed on November 13, 1995.

52
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE REGISTRANT, LEARNING TREE INTERNATIONAL, INC., A
CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, HAS
DULY CAUSED THIS ANNUAL REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF
CALIFORNIA, ON THE 18TH DAY OF DECEMBER, 1998.

Learning Tree International, Inc.

By: /s/ David C. Collins, Ph.D.
_______________________________________
Name: DAVID C. COLLINS, PH.D.
Title: Chairman of the Board of
Directors and Chief
Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David C. Collins, Ph.D. Chairman of the Board December 18, 1998
- ----------------------------------- and chief Executive
DAVID C. COLLINS, PH.D. Officer (principal
executive officer)

/s/ Eric R. Garen President and Director December 18, 1998
- -----------------------------------
ERIC R. GAREN

/s/ Max S. Shevitz Executive Vice December 18, 1998
- ----------------------------------- President and Director
MAX S. SHEVITZ

/s/ Gary R. Wright Vice President, December 18, 1998
- ----------------------------------- Finance, Chief
GARY R. WRIGHT Financial Officer and
Secretary (principal
financial officer and
principal accounting
officer)

/s/ W. Mathew Juechter Director December 18, 1998
- -----------------------------------
W. MATHEW JUECHTER

/s/ Alan B. Salisbury, Ph.D. Director December 18, 1998
- -----------------------------------
ALAN B. SALISBURY, PH.D.

/s/ Michael W. Kane, Ph.D. Director December 18, 1998
- -----------------------------------
MICHAEL W. KANE, PH.D.
</TABLE>

<PAGE>

EXHIBIT 10.1

September 30, 1998

David C. Collins, Ph.D.
Learning Tree International, Inc.

Dear Dr. Collins:

This will confirm our agreement to extend until September 30, 1999 the term
of your Employment Agreement dated as of October 1, 1995. All of the other
terms of the Employment Agreement will remain as they have been.

Very truly yours,

Learning Tree International, Inc.

By /s/ Mary C. Adams
-------------------------------------

Accepted and Agreed:

By /s/ David C. Collins
----------------------------------------
David C. Collins, Ph.D.

Dated September 30, 1998
---------------------------------

<PAGE>

EXHIBIT 10.2

September 30, 1998

Eric R. Garen
Learning Tree International, Inc.

Dear Mr. Garen:

Very truly yours,

Learning Tree International, Inc.

By /s/ Mary C. Adams
-------------------------------------
V.P. Administration

Accepted and Agreed:

By /s/ Eric R. Garen
-------------------------------------
Eric R. Garen

Dated October 5, 1998
-------------------------------

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<S> <C>
Learning Tree International USA, Inc. (U.S.)
Learning Tree International, K.K. (Japan)
Learning Tree International Ltd. (United Kingdom)
Learning Tree International S.A. (France)
Learning Tree International AB (Sweden)
Learning Tree Publishing AB (Sweden)
Learning Tree International Inc. (Canada)
Learning Tree International Ltd. (Hong Kong)
Advanced Technology Marketing, Inc. (U.S.)
Systems for Business and Industry, Inc. (U.S.)
Technology for Business and Industry, Inc. (U.S. Virgin Islands)
</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (No. 333-41325), pertaining to the Company's
1995 Stock Option Plan, filed on December 1, 1997 with the Securities and
Exchange Commission under the Securities Act of 1933.

ARTHUR ANDERSEN LLP

Los Angeles, California
November 19, 1998

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 36,055,000
<SECURITIES> 31,136,000
<RECEIVABLES> 18,265,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 90,301,000
<PP&E> 51,094,000
<DEPRECIATION> 23,859,000
<TOTAL-ASSETS> 137,390,000
<CURRENT-LIABILITIES> 59,280,000
<BONDS> 0
0
0
<COMMON> 2,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 137,390,000
<SALES> 187,174,000
<TOTAL-REVENUES> 187,174,000
<CGS> 80,016,000
<TOTAL-COSTS> 80,016,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,000
<INCOME-PRETAX> 15,961,000
<INCOME-TAX> 5,427,000
<INCOME-CONTINUING> 10,534,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,534,000
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48

</TABLE>