LEARNING TREE INTERNATIONAL INC, 10-K405, 2000-12-15

LEARNING TREE INTERNATIONAL INC
10-K405, 2000-12-15
EDUCATIONAL SERVICES

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<PAGE>

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

----------------

Washington, D.C. 20549

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, 2000

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

For the Transition Period from to

----------------

Commission File Number: 0-27248

LEARNING TREE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 95-3133814
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>

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 7, 2000, was $479,885,000.
(Excludes 8,418,283 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 7, 2000, was 21,748,427 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of the registrant to be delivered
to shareholders in connection with the 2001 Annual Meeting of Shareholders are
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form
10-K.
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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Page
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<C> <S> <C>
Part I

Item 1. Business................................................... 3
Item 2. Properties................................................. 16
Item 3. Legal Proceedings.......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........ 17

Part II

Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters........................................ 18
Item 6. Selected Consolidated Financial Data....................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 20
Item 8. Financial Statements and Supplementary Data................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................. 49

Part III

Item 10. Directors and Executive Officers of the Registrant......... 49
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........................................................ 51
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, FROM THE LEARNING TREE, Training
Passport, Training Advantage, Alumni Gold, TRAINING YOU CAN TRUST, WE BRING
LEARNING TO LIFE, WE BRING IT TRAINING TO YOU, learningtree.com, and 800-THE-
TREE are among the 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.

2
<PAGE>

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
courses and products; risks in technology development and introduction; risks
associated with the introduction of distance learning both by the Company and
its competitors; the impact of competition and pricing pressures; the
Company's ability to attract and retain key management and other personnel;
risks associated with international operations, including currency
fluctuations; the effect of changing economic conditions; the Company's
ability to maintain its current operating margins; the effect of adverse
weather conditions, strikes and other external events; and the other risks and
uncertainties discussed below, and in "Risk Factors," filed as Exhibit 99
which is incorporated by reference.

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, programming languages,
databases, object-oriented technology and IT management. In addition, the
Company provides custom developed training for larger clients who need to
train large numbers of their IT professionals and end-users, and tests and
certifies IT professionals in 34 IT job functions. The Company's instructor-
led courses are recommended for college credit by the American Council on
Education.

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 not subject to certain governmental regulations.

During fiscal 2000, the Company began and has since completed the conversion
of five instructor-led courses for delivery over the Internet and began
limited test marketing of its first Internet-based e-learning course,
"Introduction to Datacomm and Networks." The Company is currently converting
three additional instructor-led courses, and is working on tests of various
packaging and marketing approaches for this potential product line. The market
for e-learning for IT professionals is currently highly fragmented with no
established industry model for growth and profitability. Based on limited test
marketing and market research, the Company presently believes that many
customers expect e-learning to be less effective than instructor-led classroom
training and that many customers expect to pay significantly less for e-
learning than for instructor-led classroom training. In contrast, the Company
believes that the value of high-quality, effective training (by whatever
modality) significantly outweighs the higher cost of such training to its
corporate customers. Until the Company develops what it believes could be a
profitable e-learning business model, it expects to limit its ongoing
investment in e-learning. There can be no assurance that the Company will be
able to successfully develop or profitably implement its current or any other
distance learning strategy. See Exhibit 99, "Risk Factors."

The Company has only one material operating segment, which is the design and
delivery of advanced technology training courses and related services.

3
<PAGE>

The Information Technology Education And Training Market

The market for IT training is driven by technological change as the
applications of technology evolve and expand. Since the Company's founding in
1974, it has capitalized on significant waves of technology, each of which
created a demand for training that typically lasted for a number of years. In
the 1970's the Microprocessor Wave revolutionized electronic products and
systems and Learning Tree's microprocessor courses were primarily aimed at the
research and development design engineers within companies. In the 1980's
Local Area Network ("LAN") and Wide Area Network ("WAN") technologies allowed
companies to link together their computing resources. This wave created demand
for Learning Tree to develop new courses in networking technologies, and to
market its courses to networking and telecommunications personnel in addition
to design engineers. In the 1990's Client/Server Computing changed the
architecture of information systems, and opened the door for Learning Tree to
train information systems groups both in companies in which it was already
training engineers and networking personnel and also for new clients in the
service sector.

In recent years, another technological wave--the worldwide rollout of
Internet infrastructure has gathered momentum. Companies seek to capitalize on
opportunities provided by the Internet to increase their revenues, solidify
their client relationships, and reduce their costs. But to accomplish these
objectives, companies must redevelop their information systems to accommodate
web-technology. This is likely to require training in web-technologies, for
the web-support groups, as well as information systems staff, networking
personnel, and design engineers all of whom comprise the "IT professionals"
who are the Company's target market.

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 1999 worldwide
market for all IT training was $19.4 billion. The training of IT
professionals, such as programmers, analysts, and engineers, represents the
majority of the market for IT training. See Exhibit 99, "Risk Factors."

The market for training IT professionals is further influenced by several
factors. These factors include: (i) the introduction and evolution of new
hardware, software, networking and web 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 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 that applies 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, without limitation: (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.

4
<PAGE>

IT training is primarily delivered by classroom instructors; video;
technology-based training, including Internet-based distance learning and CD-
ROM; and printed means. According to IDC, instructor-led classroom training
continues to dominate the worldwide IT training market comprising
approximately 71% 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 Internet-based distance learning, appear to be 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'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, 2000, Learning Tree had 148 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, programming languages, databases,
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 Pentium-based servers and workstations. Learning Tree's multi-day
course events typically deliver the equivalent of one or two semester hours of
college credit in an intensive four-day format, thus minimizing participants'
time away from the job.

As of September 30, 2000, the Company had 873 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. They typically
teach an average of approximately eight to ten 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 2000, Learning Tree presented over 8,500 multi-day
course events worldwide.

The Company tests and certifies IT professionals in 34 IT job functions.
Since this program's inception in 1993, over 186,000 participants have
completed one or more certification examinations. The Company also provides
its customers with skills assessment services. In addition, the American
Council on Education 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.

5
<PAGE>

In addition to its instructor-led business, the Company introduced a line of
multi-media CBT course titles in fiscal 1996. On July 13, 1999, the Company
announced that it intended to shift its focus in technology-based training
from these CD-ROM based courses to other distance learning methodologies using
the Internet.

The Company believes that the content from its instructor-led courses can
also be delivered to customers through a variety of technology-based training
methods. During fiscal 2000, the Company began and has since converted five of
its instructor-led courses for delivery over the Internet and began limited
test marketing of its first Internet-based e-learning course. The market for
e-learning is currently highly fragmented with no established industry model
for growth and profitability. Accordingly, until the Company develops what it
believes could be a profitable e-learning business model, it expects to limit
its ongoing investment in e-learning. There can be no assurance that the
Company will be able to successfully develop or profitably implement its
current or any other distance learning strategy. See Exhibit 99, "Risk
Factors."

The Company markets its courses through a sophisticated direct mail
marketing and telemarketing program, supplemented by direct sales to
corporations and government organizations. The Company's direct mail marketing
utilizes its proprietary list of over 1,900,000 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 (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.)

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 87 titles at September 30, 1995 to 148 titles as of September 30,
2000. 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 typically retired when the profits they generate are not
sufficient to justify the ongoing cost of marketing them and maintaining their
technological content. The actual number of instructor-led 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,
and the availability of subject matter experts who are also responsible for
teaching the Company's instructor-led courses. There can be no assurance that
the Company will develop more titles than it retires in any period. In fiscal
2000, the Company developed 17 new titles and retired 12 titles.

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 148 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 whenever and wherever they desire.

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 its 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

6
<PAGE>

Analysis of Financial Condition and Results of Operations" for a discussion of
changes in sales and marketing expenses during fiscal 2000.

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
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 Training
Advantage and Voucher programs. The annually renewable Training Advantage
agreements allow all the employees of Training Advantage customers to receive
training and special services at negotiated prices. The Voucher program allows
customers to buy blocks of vouchers, at discounted prices, for future Learning
Tree courses over a 12-month period.

Leverage and Expand Geographic Presence. Domestically, the Company maintains
offices and education centers in Los Angeles, the Washington D.C. area, New
York City and Boston. In November 2000, the Company opened an education center
in Chicago and has plans to open another education center in Atlanta. The
Company intends, on an ongoing basis, to seek ways to expand its domestic
operations both within existing education center cities and in new cities.
There can be no assurance that Learning Tree will open education centers in
other locations.

In addition to its domestic education centers, the Company has offices and
education centers in six countries. In fiscal 2000, the Company presented
course events at its education centers and at third-party and customer sites
in a total of 26 countries. International revenues represented approximately
48% of the Company's revenues in fiscal 2000. 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 the
United States, the United Kingdom, 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;
changes in government regulation; trade barriers; difficulty in staffing
foreign offices, and in training and retaining foreign instructors; 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. See Exhibit 99, "Risk
Factors."

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 servers and 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.

Course Offerings. 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, 2000, Learning
Tree's multi-day course library included 148 proprietary course titles
comprising over 3,700 hours of classroom instruction. This course library is
recommended for nearly 270 semester hours of undergraduate and graduate level
college credit in information systems by the American Council on Education.

7
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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
American Council on Education 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 148 proprietary multi-day course
titles and the number of training days for each title as of September 30,
2000:

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Curriculum Days Courses
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Web Development 4 Internet for Business Applications--Hands-On
4 Developing a Web Site--Hands-On
4 Developing an Intranet Site--Hands-On
4 Designing and Building Great Web Content--Hands-On
4 JavaScrip: Building Interactive Web Sites--Hands-On
4 Building an E-Commerce Web Site--Hands-On
4 Apache Web Server--Hands-On
4 Building XML Applications--Hands-On
-----------------------------------------------------------------------------
Internet Security 4 Internet and System Security
4 Deploying Internet and Intranet Firewalls--Hands-On
4 Implementing Web Security--Hands-On
4 Building Virtual Private Networks--Hands-On
-----------------------------------------------------------------------------
Java Programming 4 Java Programming--Hands-On
5 Advanced Java Programming--Hands-On
4 Java for Multimedia Applications Development--Hands-
On
4 Developing Electronic Commerce Applications with
Java--Hands-On
4 Java for C++ Programmers--Hands-On
4 Web Application Development with Java
-----------------------------------------------------------------------------
Windows 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
5 TCP/IP Internetworking on Windows NT--Hands-On
5 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
5 Microsoft Exchange 5 Server Administration--Hands-On
4 Microsoft Internet Information Server--Hands-On
5 Windows NT4 Technologies for the Enterprise--Hands-On
5 Windows 2000--Hands-On
4 Windows 2000 Planning and Deployment--Hands-On
5 Windows 2000 Desktop Administration--Hands-On
5 Windows 2000 Optimization and Troubleshooting
5 Windows 2000 Security--Hands-On
5 Internet Information Services 5 for Windows
5 Exchange 2000 Administration--Hands-On
</TABLE>

8
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<TABLE>
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Curriculum Days Courses
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<C> <C> <S>
SQL Server 4 Microsoft SQL Server Introduction--Hands-On
5 Microsoft SQL Server System Adminstration--
Hands-On
5 Developing SQL Server Applications with
Visual Basic 5--Hands-On
4 Microsoft SQL Server 7 Comprehensive
Introduction--Hands-On
5 Microsoft SQL Server 7: Database
Administration--Hands-On
4 Microsoft SQL Server 7: Transact--SQL
Programming--Hands-On
4 Microsoft SQL Server 7 Data Warehousing--
Hands-On
-----------------------------------------------------------------------------
Datacomm and
Local Area Networks 4 Introduction to Datacomm and Networks
4 Local Area Networks
4 PC Networking--Hands-On
4 LAN Troubleshooting--Hands-On
4 High-Performance Ethernet--Hands-On
4 Fast LAN Technologies
5 Netware 5 System Adminstration--Hands-On
-----------------------------------------------------------------------------
Internetworking 4 Internetworking: Bridges and Routers
4 Data Network Design and Optimization
4 Computer Network Architectures and Protocols
4 SNMP--Hands-On
5 Implementing OSPF and BGP with Cisco
Routers--Hands-On
4 Cisco Routers: A Comprehensive
Introduction--Hands-On
5 Configuring Cisco Routers: Advanced
Workshop--Hands-On
4 Introduction to TCP/IP--Hands-On
4 Internetworking with TCP/IP--Hands-On
4 Troubleshooting Cisco Router Internetworks--
Hands-On
-----------------------------------------------------------------------------
WAN and Telecommunications 4 Telecommunications and Wide Area Networking
4 Introduction to ISDN
4 Wireless Networks
4 High-Speed Wide Area Networks
4 Defense Message System (DMS): A
Comprehensive Introduction
4 Implementing ATM
4 Fiber-Optic Systems--Hands-On
4 Voice Over IP
-----------------------------------------------------------------------------
UNIX/Linux/Solaris 4 UNIX--Hands-On
4 UNIX Tools and Utilities--Hands-On
4 TCP/IP Programming--Hands-On
4 UNIX Programming--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
4 Introduction to Linux--Hands-On
4 Providing TCP/IP Network Services with Linux
4 Introduction to Solaris--Hands-On
4 Solaris Workstation Administration--Hands-On
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Curriculum Days Courses
---------- ---- -------
<S> <C> <C>
Oracle Database Systems 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
5 Oracle Developer/2000--Hands-On
4 Building Oracle WebServer Applications--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
4 PL/SQL Programming--Hands-On
5 Building a Data Warehouse--Hands-On
4 Introduction to Client / Server Computing
4 Relational Databases
-------------------------------------------------------------------------------------------
Notes and Domino 4 Notes and Domino R5: A Comprehensive Hands-On Introduction
4 Notes and Domino R5 Application Development--Hands-On
5 Notes 5 System Adminstration
-------------------------------------------------------------------------------------------
PC Support 4 PC Configuration and Troubleshooting--Hands-On
4 Advanced PC Configuration--Hands-On
-------------------------------------------------------------------------------------------
Programming 4 Introduction to Programming--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 PowerBuilder--Hands-On
4 Perl Programming--Hands-On
4 Database and Web Programming with Perl
-------------------------------------------------------------------------------------------
Windows Programming 5 Visual C++--Hands-On
5 Visual Basic--Hands-On
4 Microsoft Access--Hands-On
4 Microsoft Access Programming--Hands-On
5 Visual Basic 4 for Enterprise Applications--Hands-On
4 Programming Office 97 Applications--Hands-On
4 Win32 Systems and Network Programming--Hands-On
4 FrontPage 98 Web Site Development--Hands-On
4 Programming Microsoft Access--Hands-On
5 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
5 Visual Basic Web Development--Hands-On
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
Curriculum Days Courses
---------- ---- -------
<S> <C> <C>
Windows Programming--
(continued) 4 Introduction to VBA
4 Designing and Building Windows DNA Applications
---------------------------------------------------------------------------
Software Development
Methods 5 Object-Oriented Analysis and Design
4 Introduction to Software Engineering
4 UML: A Comprehensive Introduction
4 Introduction to Object Technology
4 Software Quality Assurance
4 Identifying User Requirements
4 Practical Software Testing Methods
4 Software Systems Analysis and Design
4 Software Project Planning and Management
4 Software Configuration Management
---------------------------------------------------------------------------
IT Soft Skills 4 Business Process Re-engineering
4 Project Risk Management
4 Effective Skills for Technical Managers
4 Project Management--Hands-On
4 Influence Skills
3 Microsoft Project--Hands-On
2 Advanced Microsoft Project--Hands-On
</TABLE>

Learning Tree's Course Delivery

The Company presents its classroom courses at Learning Tree Education
Centers in Boston, Los Angeles, New York City, the Washington D.C. area,
Toronto, Ottawa, London, Paris and Stockholm, as well as in rented hotel or
conference centers in those and other cities worldwide. The Company's
Education Centers include 148 classrooms, as of September 30, 2000, 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. In November 2000, the Company opened an education center in
Chicago and plans to open an education center in Atlanta during fiscal 2001.

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. Learning Tree typically provides all of the
software, hardware and networking systems required for use in customer-site
courses.

Development Of Courses

The Company 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 instructor team. The Company endeavors to
select a group of experts from different countries and industries and with
complementary applications backgrounds. The Company

11
<PAGE>

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 marketplace 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. The Company's 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 must anticipate and keep pace with the introduction of new
hardware, software and networking technologies and develop courses that
effectively train customers in the technologies which they will be using. In
addition, the Company must adapt to changes in the technologies by which it
can deliver training to its customers' employees. There can be no assurance
that the Company will be able to respond successfully to technological change.
If, the Company does 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. See Exhibit 99, "Risk Factors."

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. The Company's instructors
typically teach an average of eight to ten Learning Tree courses each year as
needed. At September 30, 2000, the Company had 873 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. Competition for qualified
instructors is intense, and there are a limited number of people with the
requisite knowledge and experience that Learning Tree requires of its
instructors. There can be no assurance that the Company will be successful in
these recruitment and training efforts. See Exhibit 99, "Risk Factors."

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 2000, the Company trained over 137,000
multi-day course participants who were employed by over 17,000 organizations.
In fiscal 2000, the Company derived approximately 52% of its revenues in the
United States and 48% of its revenues internationally. See Note 7 of Notes to
Consolidated Financial Statements.

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 240 customers worldwide that purchased
over $100,000 of Learning Tree training in fiscal 2000. 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 2000
revenues.

12
<PAGE>

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
1,900,000 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 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, among others, 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, FROM THE LEARNING TREE, Training
Passport, Training Advantage, Alumni Gold, TRAINING YOU CAN TRUST, WE BRING
LEARNING TO LIFE, WE BRING IT TRAINING TO YOU, learningtree.com, and 800-THE-
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, 2000, Learning Tree's
telemarketing sales force consisted of over 170 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 50 sales people at September 30, 2000, 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, custom developed training for clients who need to train large
numbers of their IT professionals and end-users, large blocks of vouchers
under its Voucher program for future course attendances, 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.

13
<PAGE>

Multiple Enrollment Programs. The Company markets its Training Passport and
Voucher programs to encourage its customers to enroll in multiple courses, and
thereby increase overall revenues, as well as increase the average attendance
in its Learning Tree-site courses.

Learning Tree offers two Training Passport programs. Under the four-course
Training Passport program, a passport holder may attend up to four courses
during a 12-month period. This passport is priced at approximately twice the
list price for an individual four-day course. Under the eight-course (ten
courses in the United Kingdom and France) Training Passport program, the
holder of a passport may attend up to eight (or ten) courses during a 12-month
period. The list price for this passport is approximately three times the list
price for an individual four-day course.

Under the Company's Voucher program, customers purchase blocks of five or
more vouchers which are sold at various discounts off the list price. Each
voucher can be used to attend one Learning Tree course within a 12-month
period.

Through the Learning Tree Professional Certification Program, the Company
also certifies IT professionals in 34 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 Learning Tree 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 186,000
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. In
addition, many are "Authorized Training and Education Centers" ("ATECs") or
"Certified Training and Education Centers" ("CTECs") which present courses
utilizing materials prepared by computer hardware and software vendors such as
Novell and Microsoft. Learning Tree differentiates itself from these providers
based on the breadth and quality of its proprietary course library; worldwide
delivery capability; and the size, quality and experience of its instructor
force; and vendor independence. By being vendor-independent, the Company's
courses can address the weaknesses, as well as strengths of a product and
describe how to integrate a product with that of other vendors in a multi-
vendor network configuration.

Computer Hardware and Software Vendors. Many hardware and software vendors
supply training, and in some cases, 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.

14
<PAGE>

Distance Learning and CBT. The market for IT education and training has
historically consisted primarily of instructor-led training. Distance Learning
and CBT IT training currently account for a smaller portion of the overall IT
training market. However, the Distance Learning market has been projected by
IDC to grow at a faster rate than instructor-led training.

Beginning in fiscal 1996, the Company developed, produced and marketed a
line of CBT courses on CD-ROM. On July 13, 1999, the Company announced that it
intended to shift its focus in technology-based training from CD-ROM based
courses to other distance learning methodologies using the Internet
("e-learning"). The market for e-learning for IT professionals is currently
highly fragmented with no established industry model for growth and
profitability. Until the Company develops what it believes could be a
profitable e-learning business model, it expects to limit its ongoing
investment in e-learning. There can be no assurance that the Company will be
able to successfully develop or profitably implement its current or any other
distance learning strategy. See Exhibit 99, "Risk Factors."

Intellectual Property and Licenses

Learning Tree's course development process and course titles are
proprietary. The Company 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 those proprietary rights. The Company's course materials
generally do not include any mechanisms to prohibit or prevent unauthorized
use. As a result, a third party or parties could copy or otherwise obtain and
use the Company's course materials without authorization, either for
educational use or to develop competing courses. In addition, the Company
operates in countries that do not provide protection of proprietary rights to
the same extent as the United States. If substantial unauthorized use of the
Company's products were to occur, the Company's business and results of
operations could be materially adversely impacted. 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.

The Company may also have to defend against claims that its current or
future courses infringe on the proprietary rights of others. If such a claim
succeeded, the Company might have to change or eliminate courses, and could be
required to pay damages or royalties. In addition, litigation over
intellectual property rights, whether brought by the Company or by someone
else, could be time-consuming and expensive, even if the Company were
ultimately to succeed. Accordingly, defending and prosecuting these claims
could have a material adverse effect on the Company's operating results. See
Exhibit 99, "Risk Factors."

Regulatory Environment

Providers of educational programs to the public must comply with many laws
and regulations of Federal, state and international governments. Generally,
Learning Tree is exempt from that type of regulation because the Company does
not offer its services to the public. Learning Tree contracts with the
employer of the participants in its courses, and does not participate in any
Federal or state student aid or loan programs. However, state laws and
regulations targeting educational providers could affect the Company's
operations and may limit its ability to obtain authorization to operate in
certain states. If Learning Tree were required to comply with, or was found 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 also be barred from providing educational
services in that state. See Exhibit 99, "Risk Factors."

Employees

As of September 30, 2000, Learning Tree had a total of 586 full-time
equivalent employees, of whom 265 were employed outside the United States. The
Company also utilized the services of 873 instructors to teach its courses on
an as-needed basis. The Company considers its relations with its employees and
its instructors to be good.

15
<PAGE>

Item 2. Properties

As of September 30, 2000, all of Learning Tree's education center classroom
facilities were leased by the Company. The leases expire at various dates over
the next 18 years. The Company's headquarters is located at 6053 West Century
Boulevard, Los Angeles, California 90045. The Company owns a 38,500 square
foot office facility which is occupied by the sales, administrative and
operations groups of its U.S. subsidiary.

In September 2000, the Company leased additional space at its primary New
York City education center, and agreed to sublease the space in its secondary
New York City education center to a third party resulting in a net increase of
space in New York. In July 2000 and October 2000, the Company signed leases
for its first education centers in Chicago and Atlanta, respectively. These
leases commence in fiscal 2001. When the build-out of the education centers is
complete, the Company plans to have 22 classrooms in New York City, nine
classrooms in Chicago and nine classrooms in Atlanta. 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, 2000:

<TABLE>
<CAPTION>
Location No. of Area in
(Metropolitan Area)(a) Classrooms Square Feet
---------------------- ---------- -----------
<S> <C> <C>
Boston, MA.............................................. 6 13,717
Los Angeles, CA......................................... 6 57,229
New York, NY (2 sites).................................. 15 33,790(a)
Washington, DC metropolitan area (4 sites).............. 36 117,544
Miscellaneous other U.S................................. N/A 455
Paris, France........................................... 15 36,814
London, England (2 sites)............................... 41 106,394(b)
Ottawa, Canada.......................................... 6 19,965
Toronto, Canada......................................... 10 17,207
Stockholm, Sweden....................................... 13 22,605
Tokyo, Japan............................................ N/A 1,311
Hong Kong............................................... N/A 574
</TABLE>
--------
(a) Excludes 10,590 square feet of incremental lease space in New York, New
York and 15,779 and 15,213 for new education center leases in Chicago,
Illinois and Atlanta, Georgia, respectively.

(b) Excludes 36,117 square feet which the Company subleases to other tenants.

Item 3. Legal Proceedings

On April 16, 1998, a class action lawsuit was filed against certain officers
and directors of Learning Tree 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 Learning Tree'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 Learning Tree in the Superior Court of the State of
California, County of Los Angeles (Guthrie v. Collins et al., Case No.
BC193465), also purportedly on behalf of persons who purchased Learning Tree'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 Learning
Tree and certain officers and directors of Learning Tree in the United States
District Court for the Central District of California (Schlagal v. Learning
Tree International et al., Case No. 98-6384ABC), purportedly on behalf of
persons who purchased Learning Tree's Common Stock between May 8, 1997 and May
13, 1998. On February 2, 2000, plaintiffs and defendants stipulated to the
filing of an amended complaint in the Schlagal action which asserts the same
state law claims that are contained in the Sarah and Guthrie actions. On
February 7, 2000, the state court granted the

16
<PAGE>

parties' joint request to dismiss Sarah and Guthrie. Thus, only the amended
Schlagal class action remained pending against Learning Tree, its officers and
directors.

The complaints in Sarah, Guthrie and Schlagal made similar allegations of
misrepresentations in certain public disclosures made by Learning Tree at
various times during the class period. Each complaint alleged that Learning
Tree 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 Learning Tree Stock
while in possession of the allegedly concealed material adverse information.
Each complaint sought an unspecified amount of compensatory damages and,
additionally, sought attorneys' fees and other costs, interest, and other
relief.

In May 2000, plaintiffs and defendants executed a Stipulation of Settlement
("Settlement Stipulation") in the Schlagal Action, which was filed with the
Court. The Settlement Stipulation provides, among other things, for dismissal
of the Schlagal Action against all defendants. Counsel for plaintiffs provided
written notice of the Settlement Stipulation to class members, giving them the
opportunity to object to the Settlement Stipulation or to opt out of
participation in the settlement. Only four class members opted out.

On August 7, 2000, the Court gave its final approval to the Settlement
Stipulation and signed and filed a Judgment which, among other things,
dismissed the Schlagal action against all defendants. If the Judgment becomes
final, the Settlement will have no financial impact upon the Company, its
officers or its directors.

If the Judgment approving the Settlement Stipulation does not become final,
Learning Tree cannot estimate the outcome of further proceedings or any
potential liabilities it may incur. In such circumstances, Learning Tree may
incur legal and other defense costs in an amount which it cannot 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 Learning Tree's business, financial condition, results of
operations and cash flows. Learning Tree has agreements with its officers and
directors under which it is indemnifying them in these proceedings.

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 2000, through the solicitation of proxies or otherwise.

17
<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 1999
First Quarter............................................. $12 1/2 $ 7 9/16
Second Quarter............................................ 10 6
Third Quarter............................................. 11 1/8 8 7/8
Fourth Quarter............................................ 16 3/4 10 3/4

Fiscal 2000
First Quarter............................................. 32 5/8 15 1/2
Second Quarter............................................ 37 3/4 22 1/4
Third Quarter............................................. 63 1/4 28
Fourth Quarter............................................ 78 7/8 43 1/8
</TABLE>

As of December 7, 2000 there were approximately 3,400 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 Company's Common Stock price has fluctuated significantly since its
initial public offering and may continue to do so in the future. The Company
believes that some of the reasons for past fluctuations in the price of its
stock have included: announcements of developments related to the Company's
business; announcements concerning new products or enhancements by the Company
or its competitors; developments in the Company's relationships with its
customers; market perceptions of new means of delivering training, such as CD-
ROMs or the Internet; variations in the Company's revenues, gross margins,
earnings or other financial results from investors' expectations; fluctuations
in results of operations and general conditions in the economy, the Company's
market, and the markets served by the Company's customers; and the market
reaction to the "Y2K" problem, including delays in introducing new
technologies by both the Company's customers and technology vendors. In
addition, prices in the stock market, particularly for technology-related
stocks, have been volatile in recent years. In many cases, the fluctuations
have been unrelated to the operating performance of affected companies. Sales
of the Common Stock by the Company's officers, directors and employees,
especially the Company's founders could also adversely and unpredictably
affect the price of the Common Stock. Additionally, the price could be
affected even by the potential for sales by these persons. There can be no
assurance that the market price of the Company's Common Stock will not
continue to experience significant fluctuations in the future, including
fluctuations that are unrelated to the Company's performance. See Exhibit 99,
"Risk Factors."

Dividends

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.

18
<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, 2000 and the balance sheet data as of September 30, 1999
and 2000, 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,
1997 and the balance sheet data at September 30, 1996, 1997 and 1998 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,
--------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $103,575 $164,483 $187,174 $189,321 $224,008
Cost of revenues................ 40,879 70,439 80,016 76,598 80,839
-------- -------- -------- -------- --------
Gross profit.................. 62,696 94,044 107,158 112,723 143,169
-------- -------- -------- -------- --------
Operating expenses:
Course development............. 6,248 11,048 11,942 19,267 10,294
Sales and marketing............ 31,245 51,284 59,422 54,996 56,603
General and administrative..... 12,850 19,228 22,509 23,720 25,913
-------- -------- -------- -------- --------
Total operating expenses...... 50,343 81,560 93,873 97,983 92,810
-------- -------- -------- -------- --------
Income from operations.......... 12,353 12,484 13,285 14,740 50,359
Other income (expense), net..... 1,798 3,066 2,676 4,285 6,709
-------- -------- -------- -------- --------
Income before provision for
income taxes................... 14,151 15,550 15,961 19,025 57,068
Provision for income taxes...... 4,033 5,058 5,427 6,611 19,973
-------- -------- -------- -------- --------
Net income...................... $ 10,118 $ 10,492 $ 10,534 $ 12,414 $ 37,095
======== ======== ======== ======== ========
Net earnings per common share
assuming dilution.............. $ 0.49 $ 0.47 $ 0.48 $ 0.57 $ 1.65
======== ======== ======== ======== ========
Diluted shares outstanding...... 20,609 22,099 22,015 21,898 22,504
======== ======== ======== ======== ========

<CAPTION>
At September 30,
--------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....... $ 24,541 $ 32,441 $ 36,055 $ 33,059 $116,231
Short-term interest-bearing
investments.................... 37,000 24,330 31,136 58,357 37,882
Total current assets............ 77,610 86,146 90,301 114,338 186,652
Total assets.................... 91,529 122,351 137,390 150,781 220,353
Deferred revenue................ 15,611 27,531 33,357 37,618 53,327
Total current liabilities....... 34,247 55,033 59,280 62,247 85,159
Long-term debt and capital
leases, net of current
portion........................ 134 -- -- -- --
Total stockholders' equity...... 55,506 65,895 76,828 85,640 132,795
</TABLE>

19
<PAGE>

Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations

Overview

Learning Tree International, Inc. is a leading worldwide provider of
education and training to 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,
programming languages, databases, object-oriented technology and IT
management. In addition, the Company provides custom developed training for
larger clients who need to train large numbers of their IT professionals and
end-users, and tests and certifies IT professionals in 34 IT job functions.
The Company's instructor-led courses are recommended for college credit by the
American Council on Education.

The Company has delivered certain of its courses by using a computer-based
training method ("CBT") on CD-ROMs. On July 13, 1999, the Company announced
that it intended to shift its focus in technology-based training from these
CD-ROM based courses to other distance learning methodologies using the
Internet. As a result of this decision, the Company discontinued further
development of its CBT courses, and wrote-off approximately $6.0 million of
capitalized development costs and equipment in the third quarter of fiscal
1999. Earlier in that fiscal year, the Company wrote-off CBT product
development costs of approximately $1.2 million. During fiscal 2000, the
Company substantially reduced its CBT sales efforts, resulting in reduced
costs and revenues associated with the Company's CBT courses. As of September
30, 2000, sales of the Company's CBT courses were largely discontinued.

20
<PAGE>

In January 2000, the Company invested $1.0 million for a small minority
interest in eduprise.com, a private company that provides the distance
learning software and hosting services that are being used by Learning Tree
for delivery of its Internet-based e-learning course.

The Company's revenue growth rate has historically varied widely from year
to year. The Company adjusts its rate of development of new course titles,
adjusts the size of the direct mailing campaigns and takes steps to expand the
number of classrooms in its education centers in response to the changes in
the current and expected rate of growth in course participants. 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 growth in revenues, profitability or market
share in the future. A significant part of the Company's revenues are derived
from Fortune 1000-level companies, and their international equivalents, and
government organizations. Historically, some of these customers have reduced
their expenditures for external IT training during economic downturns. If the
domestic and/or international economy weakens 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 plans
to increase its sales and marketing expenditures in fiscal 2001. However,
there can be no assurance that the Company's revenues will grow in fiscal
2001. See Exhibit 99, "Risk Factors."

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 are variable and depend primarily 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 approximately eight to ten 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 moderate its overall facility expenses by varying its
use of rented hotel and conference facilities.

Results Of Operations

The following table sets forth, for the periods indicated, a summary of the
Company's consolidated statements of operations expressed as percentages of
revenues:

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................... 100% 100% 100%
Cost of revenues............................... 43 40 36
-------- -------- --------
Gross profit................................. 57 60 64
Operating expenses:
Course development............................ 6 10 5
Sales and marketing........................... 32 29 25
General and administrative.................... 12 13 11
-------- -------- --------
Total operating expenses..................... 50 52 41
-------- -------- --------
Income from operations......................... 7 8 23
Other income (expense), net.................... 2 2 3
-------- -------- --------
Income before provision for income taxes....... 9 10 26
Provision for income taxes..................... 3 3 9
-------- -------- --------
Net income..................................... 6% 7% 17%
======== ======== ========
</TABLE>

21
<PAGE>

Fiscal 2000 Compared With Fiscal 1999

For the fiscal year ended September 30, 2000, revenues increased by 18% to
$224.0 million from $189.3 million for the fiscal year ended September 30,
1999. Income from operations for the fiscal year ended September 30, 2000,
increased by 242% to $50.4 million versus $14.7 million for the fiscal year
ended September 30, 1999. Net income for the fiscal year ended September 30,
2000 increased by 199% to $37.1 million compared to $12.4 million for the
fiscal year ended September 30, 1999.

Excluding the effect of the write-off of capitalized CBT development costs
and equipment in the third quarter of fiscal 1999, income from operations for
the fiscal year ended September 30, 2000 increased 144% and net income
increased 127% compared to fiscal 1999.

The growth in revenues for the fiscal year ended September 30, 2000 resulted
primarily from a 23% increase in the Company's core instructor-led business.
This increase is due primarily to a 21% increase in the number of multi-day
instructor-led course participants to 137,311 compared to 113,114 in the
corresponding period of the prior year. The Company believes that the increase
in participants in fiscal 2000 reflects the growth in Learning Tree's share of
the IT training market and the adoption of new technologies and projects by
the Company's customers as they completed their Y2K compliance projects. In
addition, the growth in revenues in fiscal 2000 reflects an increase in
average revenue per multi-day course participant of 1%. The increase in
average revenue per multi-day course participant reflects increases in prices,
partially offset by the effect of changes in foreign exchange rates. The
increase in instructor-led course revenues was partially offset by a reduction
in CBT revenues.

A significant portion of the Company's revenues is denominated in foreign
currencies that have been translated into US dollars based upon the exchange
rates prevailing when the revenues were earned. Accordingly, exchange rate
fluctuations may impact the US dollar value of reported revenues. Changes in
exchange rates during the year reduced revenues by approximately $5.2 million
in fiscal 2000 compared to what fiscal 2000 revenues would have been at the
exchange rates prevailing during fiscal 1999.

The Company's cost of revenues for its instructor-led courses primarily
includes the costs associated with course instructors, course materials and
equipment, freight, classroom facilities and refreshments. For the fiscal year
ended September 30, 2000, the cost of revenues improved to 36.1% of revenues
compared to 40.5% in fiscal 1999. The improvement in the cost of revenues as a
percent of revenue reflects the combined effect of a 5% decrease in costs per
multi-day course event and a 2% increase in revenue per multi-day course
event, as well as the elimination of the amortization of CBT development
costs. The increase in revenue per multi-day course event is due to the 1%
increase in average revenue per multi-day course participant and a 1% increase
in the average attendees per multi-day course event.

For the fiscal year ended September 30, 2000, the cost of revenues increased
by 6% to $80.8 million from $76.6 million for fiscal year ended September 30,
1999. The increase in the cost of revenues in fiscal 2000 compared to fiscal
1999 primarily reflects a 20% increase in the number of course events during
fiscal 2000, partially offset by the elimination of the amortization of CBT
development costs and lower costs per multi-day instructor-led course event.
During fiscal 2000, the number of multi-day instructor-led course events was
8,574 compared to 7,126 in fiscal 1999.

The average cost per course event declined 5% primarily due to lower costs
for classroom facilities, course materials and freight, and the favorable
effect of changes in foreign exchange rates. The decrease in classroom
facility costs reflects a reduction in the Company's use of more expensive
hotel facilities as it has increased its education center capacity in several
locations. In July 1999 the Company moved to a new education center facility
in Ottawa; in June 2000 the Company expanded the size of its Los Angeles
education center; and in September 2000 moved to a new, larger education
center facility in Toronto.

Course development expenses include 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 the fiscal year ended September 30, 2000,
course development expenses

22
<PAGE>

were 4.6% of revenue compared to 10.2% in fiscal 1999. For the fiscal year
ended September 30, 2000, course development expenses decreased by 47% to
$10.3 million from $19.3 million for fiscal 1999. The decline primarily
reflects the write-off of deferred CBT course development costs of $7.1
million in fiscal 1999 and the termination of new CBT course development
activities in July 1999. There were no such CBT development expenses in fiscal
2000.

The Company offered 148 multi-day course titles as of September 30, 2000,
compared to 143 a year earlier. The Company has recently released additional
multi-day course titles on topics such as Windows 2000, Exchange 2000,
Internet administration and web development. New courses under development
include additional courses on Windows 2000, SQL Server 2000, Oracle-8, Web
development, e-commerce, security, IT management, UNIX, Java, and XML. The
change 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.
The actual number of instructor-led 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, and the
availability of subject matter experts who are also responsible for teaching
the Company's instructor-led courses. There can be no assurance that the
Company will develop more titles than it retires in any period. Course
development costs may increase in the future as the Company continues to
expand its instructor-led training course library and explores the development
of Internet distance learning approaches and technologies.

Sales and marketing expenses include 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 by 3% to $56.6 million from $55.0 million for
fiscal 1999. The increase primarily reflects increased selling commissions due
to the higher level of sales, increases in the number of sales and marketing
personnel and increased marketing activities, partially offset by a reduction
in CBT sales and marketing costs. Sales and marketing expenses for the fiscal
year ended September 30, 2000 decreased to 25.3% as a percentage of revenues
compared to 29.0% for fiscal 1999. This improvement primarily reflects the
fiscal 2000 revenue growth and the measures taken to increase the Company's
return on its marketing investments. The Company adjusts its marketing
activities to correspond with its expected growth rate in course participants.
The Company expects to increase its marketing expenditures in fiscal 2001.
However, there can be no assurance that the Company's revenues will continue
to grow in fiscal 2001.

In fiscal 2000, general and administrative expenses increased by 9% to $25.9
million from $23.7 million for fiscal 1999. The increase in general and
administrative expenses reflects increases in administrative staff and related
costs and increases in incentive compensation costs. As a percentage of
revenue, these costs decreased to 11.6% in fiscal 2000 from 12.5% in fiscal
1999.

Other income (expense) is primarily comprised of interest income and foreign
currency transaction gains and losses. For the fiscal year ended September 30,
2000, other income (expense) increased to $6.7 million from $4.3 million for
fiscal 1999. The increase in net other income (expense) is primarily
attributable to additional interest income in fiscal 2000 compared to fiscal
1999. The increase was partially offset by foreign exchange losses of $462,000
in fiscal 2000, compared with foreign exchange gains of $285,000 in fiscal
1999. These transaction gains and losses arose from receivables and payables
denominated in currencies other than the functional currencies of Learning
Tree'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. Fluctuations in exchange rates may also have an effect on the
Company's results of operations. Since both revenues and expenses are
generally denominated in the subsidiary's local currency, changes in exchange
rates which have an adverse effect on the Company's foreign revenues are
partially offset by a favorable effect on the Company's foreign expenses. The
impact of future exchange rates on

23
<PAGE>

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. See Exhibit 99,
"Risk Factors."

In fiscal 2000, the income tax provision increased to $20.0 million from
$6.6 million in fiscal 1999. This increase primarily reflects an increase in
income before taxes in fiscal 2000 compared to fiscal 1999 and a slight
increase in the effective tax rate in fiscal 2000 compared to 1999. Learning
Tree International, Inc. operates as a holding company with operating
subsidiaries in several countries. Each subsidiary is taxed based on the laws
of the jurisdiction in which it operates. Since taxes are incurred at the
subsidiary level, and tax rates vary from country to country 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 2 of the Notes to Consolidated Financial Statements.

The increase in revenues in fiscal 2000 compared to fiscal 1999 primarily
reflects increases in both the United States and Europe. The United States
recorded revenues of $117.1 million in fiscal 2000 compared to revenues of
$95.7 million in fiscal 1999. Europe recorded revenues of $90.4 million in
fiscal 2000 as compared to $80.7 million in fiscal 1999, primarily due to
growth in the United Kingdom. See Note 7 of Notes to Consolidated Financial
Statements.

In 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 138 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective date of FASB
Statement No. 133--an amendment to FASB Statement No. 133" and the Securities
and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101
"Applying Generally Accepted Accounting Principles to Revenue Recognition in
the Financial Statements". The Company believes that these statements will not
have a material effect on its reported financial position or results of
operations.

Fiscal 1999 Compared With Fiscal 1998

For the fiscal year ended September 30, 1999, revenues increased by $2.1
million or 1% to $189.3 million from $187.2 million for the fiscal year ended
September 30, 1998.

The decision announced July 13, 1999 to discontinue development of CBT
courses and to write-off approximately $6.0 million in capitalized development
and equipment costs in the third quarter of fiscal 1999 had an adverse effect
on income from operations and net income for the year ended September 30,
1999. Despite the write-off of the deferred CBT development costs, income from
operations increased $1.4 million or 11% to $14.7 million versus $13.3 million
for fiscal 1998. Net income for fiscal 1999 increased $1.9 million or 18% to
$12.4 million from $10.5 million in fiscal 1998. Excluding the effect of this
write-off, when comparing fiscal 1999 with fiscal 1998, income from operations
increased by $7.3 million or 55% to $20.6 million from $13.3 million and net
income increased $5.8 million or 55% to $16.4 million ($0.75 per share) from
$10.5 million ($0.48 per share).

The modest growth in revenues for fiscal 1999 reflected a 2% increase in
average revenue per multi-day course participant. The increase was
attributable to an increase in the average course duration, increases in
prices, and the introduction and expansion of the 4-course Passport program.

The number of multi-day instructor-led course participants was virtually
unchanged at 113,114 in fiscal 1999 as compared to 113,108 in fiscal 1998. The
rate of growth in the number of course participants had declined during 1999.
The Company believes that the declining growth rate of course participants may
have been be due to a number of causes, including the pace of introduction of
major new software technologies, the effect of its clients' Y2K Compliance
programs, and other possible factors.

24
<PAGE>

A significant portion of the Company's revenues is denominated in foreign
currencies that have been translated into US dollars based upon the exchange
rates prevailing when the revenues were earned. Exchange rate changes during
the year reduced revenues by approximately $1.5 million in fiscal 1999
compared to the exchange rates prevailing during fiscal 1998.

For fiscal 1999, the cost of revenues decreased to 40.5% of revenues
compared to 42.7% in fiscal 1998. The improvement in the cost of revenues
primarily reflected higher margins in the Company's multi-day instructor-led
courses and, to a much lesser extent, the write-off of deferred CBT
development costs.

For the fiscal year ended September 30, 1999, the cost of revenues decreased
$3.4 million or 4% to $76.6 million from $80.0 million for fiscal 1998. The
decrease in the cost of revenues was primarily the result of lower costs per
multi-day instructor-led course event. These savings were partially offset by
a 1% increase in the number of multi-day instructor-led course events. The
number of course events was 7,126 in fiscal 1999 as compared to 7,066 in
fiscal 1998.

Costs per multi-day instructor-led course event decreased by 3% in fiscal
1999 as compared to fiscal 1998. The change in the average cost per course
event primarily reflected decreases in costs for classroom facilities, course
materials and freight. In order to control the costs of classroom facilities,
the Company replaced its use of more expensive hotel facilities with increased
education center capacity in several locations. In April 1998, the Company
opened a new larger education center in Boston and in October 1998, the
Company opened new education centers in London and New York. In addition, the
Company moved to a new education center facility in Ottawa in July 1999.

For fiscal 1999, course development expense was 10.2% of revenue compared to
6.4% in fiscal 1998. For the fiscal year ended September 30, 1999, course
development expenses increased by $7.4 million or 61% to $19.3 million from
$11.9 million for fiscal 1998. The increased costs reflected the write-offs of
deferred CBT product development costs of $5.9 million in the third quarter
and $1.2 million earlier in the fiscal year. The $5.9 million write-off
occurred as a result of the Company's decision to shift its focus in
technology-based training from CD-ROM based courses to other distance learning
methodologies using the Internet. The $1.2 million write-off reflected
deferred CBT product development costs estimated to be non-realizable, as well
as costs for certain CBT courses which were terminated while still under
development.

The number of multi-day instructor-led course titles decreased to 143 as of
September 30, 1999 compared to 149 a year earlier. The change in the size of
the multi-day instructor-led course library reflected the net effect of the
introduction of new titles and the retirement of old titles.

Sales and marketing expenses decreased $4.4 million or 7% to $55.0 million
in fiscal 1999 from $59.4 million in fiscal 1998. The decrease in sales and
marketing expenses, for the 1999 fiscal year, occurred primarily as a result
of a decrease in direct mail marketing costs per piece and reductions in other
marketing costs and sales personnel costs. The Company reduced its marketing
expenditures for fiscal 1999 compared to fiscal 1998 because the rate of
growth in the number of course participants had declined from earlier periods.
Sales and marketing expenses for fiscal 1999 decreased as a percentage of
revenues to 29.0% as compared to 31.7% in fiscal 1998.

In fiscal 1999, general and administrative expenses increased $1.2 million
or 5% to $23.7 million from $22.5 million for fiscal 1998. The increase in
general and administrative expenses reflected increases in information systems
and other administrative staff and related costs, and increases in facilities
related costs over the prior year. As a percentage of revenue, general and
administrative expenses were 12.5% for fiscal 1999 compared to 12.0% in fiscal
1998.

For fiscal 1999, other income increased $1.6 million to $4.3 million from
$2.7 million for fiscal 1998. This increase was primarily attributable to
additional interest income and foreign exchange gains. The Company recorded
foreign exchange gains of $285,000 in fiscal 1999, compared to foreign
exchange losses of $288,000 in fiscal 1998.

25
<PAGE>

In fiscal 1999, the income tax provision increased $1.2 million to $6.6
million from $5.4 million in fiscal 1998. This increase primarily reflected an
increase in income before taxes in fiscal 1999 compared to fiscal 1998 and a
slight increase in the effective tax rate in fiscal 1999 compared to 1998.

The increase in revenues in fiscal 1999 compared to fiscal 1998 primarily
reflected increases in Europe, partially offset by a decrease in the United
States. Europe recorded revenues of $80.7 million in fiscal 1999 compared to
revenues of $75.3 million in fiscal 1998, primarily due to growth in France
and Sweden. The United States recorded revenues of $95.7 million in fiscal
1999 as compared to $98.8 million in fiscal 1998. See Note 7 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, 2000, 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,
1998 1999 1999 1999 1999 2000 2000 2000
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $45,152 $46,520 $49,129 $48,520 $49,399 $52,997 $63,024 $58,588
Cost of revenues........ 19,840 19,460 19,418 17,880 18,207 18,862 22,261 21,509
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 25,312 27,060 29,711 30,640 31,192 34,135 40,763 37,079
Operating expenses
Course development..... 3,377 3,721 9,139* 3,030 2,395 2,504 2,699 2,696
Sales and marketing.... 13,298 14,016 13,503 14,179 12,349 14,787 14,036 15,431
General and
administrative........ 5,796 5,897 5,902 6,125 5,901 6,098 6,520 7,394
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 22,471 23,634 28,544 23,334 20,645 23,389 23,255 25,521
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 2,841 3,426 1,167 7,306 10,547 10,746 17,508 11,558
Other income (expense),
net.................... 1,104 835 830 1,516 1,277 1,634 1,433 2,365
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 3,945 4,261 1,997 8,822 11,824 12,380 18,941 13,923
Provision for income
taxes.................. 1,341 1,449 679 3,142 4,138 4,333 6,629 4,873
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 2,604 $ 2,812 $ 1,318 $ 5,680 $ 7,686 $ 8,047 $12,312 $ 9,050
======= ======= ======= ======= ======= ======= ======= =======
As A Percentage of
Revenues:
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues........ 44 42 40 37 37 36 35 37
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 56 58 60 63 63 64 65 63
Operating Expenses
Course development..... 7 8 19* 6 5 5 4 5
Sales and marketing.... 30 30 27 29 25 28 22 26
General and
administrative........ 13 13 12 13 12 11 11 12
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 50 51 58 48 42 44 37 43
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 6 7 2 15 21 20 28 20
Other income (expense),
net.................... 3 2 2 3 3 3 2 4
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 9 9 4 18 24 23 30 24
Provision for income
taxes.................. 3 3 1 6 8 8 10 9
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 6% 6% 3% 12% 16% 15% 20% 15%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
--------
* Includes $5.9 million write-off of deferred CBT development costs.

26
<PAGE>

Historically, the Company's quarterly operating results have fluctuated, and
it expects that fluctuations could continue in the future. The Company tries
to base expenditures for course development and sales and marketing expenses
on its expectations of future customer demand. Specifically, the Company
intends to increase the amount of its expenditures for sales and marketing in
the future. However, if the Company's assumptions regarding future customer
demand prove to be wrong, and revenues fall short of expectations, the Company
may not be able to adjust its expenditures quickly enough to compensate for a
lower revenue base. Any significant revenue shortfall would therefore have a
material adverse effect on the Company's results of operations. See Exhibit
99, "Risk Factors."

The Company's quarterly 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 and size of, and response to the Company's direct mail marketing and
advertising campaigns; the timing of the introduction of new course titles;
the mix between course events held at customer-sites and course events held in
the Company's education centers and hotels; competitive forces within current
and anticipated future markets served by the Company; the Company's ability to
attract customers and meet their expectations; currency fluctuations and other
risks of international operations; natural disasters, external strikes, and
other external factors; and general economic conditions and industry-specific
slowdowns. Fluctuations in quarter-to-quarter results may also occur as a
result of differences in the timing of the Company's spending on development
and marketing of its courses and receiving revenues from its customers.

The Company's quarterly revenues and income typically reflect seasonal
patterns. Generally, the Company's revenue and operating income are greater in
the second half of its fiscal year (April through September) than in the first
half (October through March). This is due in large part to seasonal spending
patterns of the Company's customers, which are affected by factors such as:
their budgetary considerations; factors specific to their business or
industry; and weather, holiday and vacation considerations. 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 $116.2 million at September 30, 2000
from $33.1 million at September 30, 1999. Cash and cash equivalents combined
with short-term interest-bearing investments increased to $154.1 million at
September 30, 2000 from $91.4 million at September 30, 1999. The increase in
the combined total of cash and cash equivalents and short-term interest-
bearing investments in fiscal 2000 primarily reflects the cash provided by
operations and the exercise of stock options, partially offset by cash used
for additions to course equipment, computer equipment and leasehold
improvements.

For fiscal 2000, cash provided by operations was approximately $65.4 million
compared to $37.5 million during fiscal 1999. The increase in cash provided by
operations primarily reflects the increase in profitability and advance
payments by customers for future courses. At September 30, 2000, the Company
had a net working capital balance of $101.5 million.

During fiscal 1999, the Company repurchased approximately 358,800 shares of
Common Stock for approximately $3,106,000. In November 2000, the Board of
Directors reinitiated the stock repurchase plan. Through December 7, 2000, the
Company had repurchased approximately 390,500 shares of Common Stock for
approximately $14,741,000. The Company may make additional purchases through
open-market transactions based upon market conditions and pursuant to the
requirements of Rule 10b-18 of the Securities Exchange Act of 1934. There can
be no assurance that the Company will repurchase additional shares of Common
Stock.

During fiscal 2000, the Company invested $7.9 million in equipment and
facilities compared to $8.2 million in fiscal 1999. The investment during the
prior year reflects the build-out of education center facilities in New York
and London, and the continuing upgrade of course equipment. During fiscal
2000, the Company expanded the size of its Los Angeles education center and
moved to a larger facility in Toronto. In addition, in September 2000, the
Company leased additional space at its primary New York City education center,
and agreed

27
<PAGE>

to sublease the space in its secondary New York City education center to a
third party. When the build-out of the New York education center is complete,
the Company plans to have 22 classrooms in New York City, compared to 15
classrooms in fiscal 2000. In November 2000, the Company opened its first
education center in Chicago. In October 2000, the Company signed a lease for
its first education center in Atlanta. Additionally, the Company plans to
expand certain of its other education centers. Although the Company expects to
continue to invest in additional and upgraded equipment, and facilities in
fiscal 2001, as of September 30, 2000, the Company had no other material
future purchase obligations, capital commitments or debt. Accordingly,
management believes that its cash and cash equivalents and short-term
interest-bearing investments and the cash provided by its operations will be
sufficient to meet the Company's cash requirements for the foreseeable future.

It is contemplated that part of the Company's cash and 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, on occasion, to evaluate
acquisition opportunities that appear to fit within its overall business
strategy. Acquisitions involve many risks, including: the difficulty of
integrating acquired technologies, operations and personnel with existing
operations; the difficulty of developing and marketing new products and
services; the diversion of management's attention as a result of evaluating,
negotiating and integrating acquisitions; exposure to unforeseen liabilities
of acquired companies; and the loss of key employees of an acquired operation.
In addition, an acquisition could adversely impact cash flows and/or operating
results and dilute shareholder interests, for many reasons, including: charges
to income to reflect the amortization of acquired intangible assets, including
goodwill; interest costs and debt service requirements for any debt incurred
in connection with an acquisition; and any issuance of securities in
connection with an acquisition which dilutes or lessens the rights of current
common stockholders. The Company has had no significant 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. See Exhibit 99, "Risk Factors."

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

Quantitative and Qualitative Disclosures About Market Risk

The Company's cash equivalents and short-term investment portfolio is
diversified and consists primarily of investment grade securities. Investments
are held with high-quality financial institutions, government and government
agencies, and corporations, thereby reducing credit risk concentrations. The
fair value of the Company's portfolio of marketable securities would not be
significantly impacted by either a 10 percent (65 basis point) increase or
decrease in the rates of interest due primarily to the short-term nature of
the portfolio. The Company does not hold or issue derivative financial
instruments.

The Company's consolidated financial statements are prepared in U.S.
dollars, while the operations of its foreign subsidiaries are conducted in
their respective local currencies. Consequently, changes in exchange rates can
result in exchange losses. The Company does not hedge against the risks
associated with fluctuations in exchange rates and therefore continues to be
subject to such risks. The Company may use hedging techniques in the future.
However, 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. See Exhibit 99, "Risk Factors."

Outlook For Fiscal 2001

Backlog. At September 30, 2000, the Company had a backlog of orders for
instructor-led courses of $38.9 million, which represented a 29% increase
compared to the backlog of $30.2 million at September 30, 1999. There can be
no assurance that the rate of growth in enrollments will continue. Only a
portion of the Company's backlog is funded. There can be no assurance that
orders comprising the backlog will be realized as revenue.

28
<PAGE>

Fiscal 2001 Outlook. Throughout this document, there have been various
forward-looking statements. However, all of the statements in this section are
forward-looking and are subject to various risks and uncertainties, including
those detailed from time to time in the Company's filings with the Securities
and Exchange Commission, and in "Risk Factors," filed as Exhibit 99 which is
incorporated by reference. As conditions change at any time during fiscal
2001, the Company's future revenues, plans and expenditures will vary from the
observations below, and these differences may be material.

Approximately 40% of the Company's business is conducted in European
currencies. Accordingly, fluctuations in European currency exchange rates will
impact its future revenues and expenses. European currency exchange rates have
recently weakened significantly compared to the exchange rates that prevailed
during fiscal 2000. If current exchange rates continue for the remainder of
fiscal 2001, the Company believes that its revenue growth rate in fiscal 2001
would be approximately 4% to 5% less than it would otherwise achieve based on
fiscal 2000 exchange rates.

Changes in exchange rates which have an adverse effect on the Company's
foreign revenues have a favorable effect on the Company's foreign expenses. If
the current exchange rates continue through the remainder of fiscal 2001, the
Company estimates that net income for the year would be approximately $1.0 to
$1.5 million lower than the Company would otherwise achieve based on fiscal
2000 exchange rates.

The Company's historical long-term revenue growth rate has been
approximately 22%. In the absence of the exchange rate risks discussed above,
the Company believes that it would achieve a similar growth rate in fiscal
2001. In addition to the impact of European currency exchange rates, some of
the other key factors and assumptions that could affect the Company's revenues
in fiscal 2001 include the following:

. During periods of strong economic and technology growth, the Company has
been able to grow its instructor-led training business faster than its
long-term growth rate. If the current strong market conditions for IT
training continue throughout fiscal 2001, the Company may grow its
instructor-led training business faster than its average long term
growth rate,

. The Company expects to realize little or no revenues from selling its
CBT courses in fiscal 2001, as it largely discontinued this product line
at the end of September 2000, and

. During the second through fourth quarters of fiscal 2001, the Company
will be comparing its revenues to stronger prior year periods than in
the first quarter, because the Company believes that the first quarter
of fiscal 2000 (the December quarter) was adversely affected by the
effect of Y2K on the Company's market.

In the first quarter of fiscal 2001, even after factoring in the recent
adverse changes in European exchange rates and the discontinuation of the
Company's CBT sales, the Company believes that its overall revenue growth will
meet its historical growth rate of approximately 22%. Among the factors
considered are:

. At September 30, 2000, Learning Tree's backlog was 29% higher than at
September 30, 1999. However, the Company believes that last year the
Company's backlog was adversely affected by the effect of Y2K on its
market, and

. Because of the timing of holidays, Learning Tree will be able to run
courses approximately one additional week during the first quarter of
fiscal 2001 compared with the same quarter of fiscal 2000.

The Company believes that the following factors will impact revenues in the
later quarters of fiscal 2001:

. During the third quarter of fiscal 2001, the Company will effectively
have approximately one-half week less of course delivery than in the
comparable quarter of fiscal 2000, primarily because of the timing of
European holidays.

. Since the fourth quarter of fiscal 2000 already reflected a significant
portion of the recent changes in European exchange rates the adverse
effect of exchange rates would be reduced by as much as $2.0 million on
a comparative basis during the fourth quarter of fiscal 2001.

29
<PAGE>

Based on current trends, the Company estimates that its fiscal 2001 cost of
revenues for instructor-led training as a percentage of revenues will
approximate those in comparable periods in fiscal 2000. However, it is
estimated that the elimination of CBT sales in fiscal 2001 will increase the
overall cost of revenues as a percentage of sales by approximately one
percentage point over fiscal 2000. In addition, during the second quarter of
fiscal 2001, the Company plans to spend an amount that is in excess of
historical averages for instructor training. These increased expenditures are
a result of above average instructor recruitment activities in the first
quarter of fiscal 2001.

In recent quarters, course development expenses have been approximately $2.7
million per quarter, and the Company estimates that they will remain at
approximately that level during fiscal 2001.

For fiscal 2001 as a whole, the Company is targeting sales and marketing
expenses to be approximately 26% of revenues as reflected in its long term
operating model. However, the Company must incur these costs before knowing to
what extent the related revenue will be realized. Thus, sales and marketing
expenses as a percentage of revenues could vary materially from the Company's
expectations. In the first quarter of fiscal 2001, the Company plans to
maintain sales and marketing expenditures at an amount that approximates its
expenditure of $15.4 million on these items in the fourth quarter of fiscal
2000.

If Learning Tree's revenues increase, it may achieve leverage on its general
and administrative expenses which, as a percentage of revenues for fiscal
2001, could improve by as much as one percentage point from the 11.6% of
revenues in fiscal 2000. Typically, general and administrative expenditures
for the quarters are relatively level, with slight increases during each
succeeding quarter.

Interest income is expected to continue to rise if Learning Tree's cash
balances continue to increase. Interest income could also vary depending on
any changes in interest rates. During fiscal 2000, Learning Tree's cash and
cash equivalents combined with short-term interest-bearing investments
increased by $62.7 million to $154.1 million, primarily generated by cash from
operations as well as the exercise of stock options.

The Company estimates that its tax rate in fiscal 2001 will increase
slightly to approximately 35.5%.

30
<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................................. 32

Consolidated Balance Sheets at September 30, 1999 and 2000............... 33

Consolidated Statements of Operations for the fiscal years ended
September 30, 1998, 1999 and 2000....................................... 34

Consolidated Statements of Stockholders' Equity for the fiscal years
ended September 30, 1998, 1999 and 2000................................. 35

Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 1998, 1999 and 2000....................................... 36

Notes to Consolidated Financial Statements............................... 37
</TABLE>

31
<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, 1999 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 1999 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States.

Arthur Andersen LLP

Los Angeles, California
November 3, 2000

32
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
September 30,
--------------------------
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 33,059,000 $116,231,000
Short-term interest-bearing investments......... 58,357,000 37,882,000
Trade accounts receivable, less allowances of
$743,000 and $499,000, respectively............ 17,227,000 25,565,000
Prepaid marketing expenses...................... 1,620,000 1,723,000
Prepaid expenses and other...................... 4,075,000 5,251,000
------------ ------------
Total current assets.......................... 114,338,000 186,652,000
------------ ------------
Equipment, property and leasehold improvements:
Education and office equipment.................. 38,050,000 37,561,000
Transportation equipment........................ 204,000 184,000
Property and leasehold improvements............. 14,810,000 15,035,000
------------ ------------
53,064,000 52,780,000
Less: accumulated depreciation and
amortization................................... (27,829,000) (30,028,000)
------------ ------------
25,235,000 22,752,000
Long-term interest-bearing investments............ 9,959,000 8,824,000
Other assets...................................... 1,249,000 2,125,000
------------ ------------
Total assets.................................. $150,781,000 $220,353,000
============ ============
LIABILITIES
Current liabilities:
Trade accounts payable.......................... $ 13,383,000 $ 15,283,000
Deferred revenue................................ 37,618,000 53,327,000
Accrued payroll, benefits and related taxes..... 4,096,000 6,168,000
Other accrued liabilities....................... 3,223,000 5,652,000
Income taxes payable............................ 3,927,000 4,729,000
------------ ------------
Total current liabilities..................... 62,247,000 85,159,000
------------ ------------
Deferred income taxes............................. 154,000 82,000
Deferred facilities rent.......................... 2,740,000 2,317,000
------------ ------------
Total liabilities............................. 65,141,000 87,558,000
------------ ------------
Commitments and Contingencies

STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value, 75,000,000 shares
authorized, 21,636,000 and 22,119,000 shares
issued and outstanding, respectively............. 2,000 2,000
Preferred Stock, $.0001 par value, 10,000,000
shares authorized, 0 shares issued and
outstanding...................................... -- --
Additional paid-in capital........................ 39,888,000 52,649,000
Notes receivable from stockholders................ (6,000) --
Cumulative foreign currency translation........... (1,300,000) (4,007,000)
Retained earnings................................. 47,056,000 84,151,000
------------ ------------
Total stockholders' equity.................... 85,640,000 132,795,000
------------ ------------
Total liabilities and stockholders' equity.... $150,781,000 $220,353,000
============ ============
</TABLE>

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

33
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................ $187,174,000 $189,321,000 $224,008,000
Cost of revenues.................... 80,016,000 76,598,000 80,839,000
------------ ------------ ------------
Gross profit........................ 107,158,000 112,723,000 143,169,000
------------ ------------ ------------
Operating expenses:
Course development................ 11,942,000 19,267,000 10,294,000
Sales and marketing............... 59,422,000 54,996,000 56,603,000
General and administrative........ 22,509,000 23,720,000 25,913,000
------------ ------------ ------------
93,873,000 97,983,000 92,810,000
------------ ------------ ------------
Income from operations.............. 13,285,000 14,740,000 50,359,000
------------ ------------ ------------
Other income (expense):
Interest expense.................. (18,000) (9,000) (13,000)
Interest income................... 3,528,000 4,180,000 7,391,000
Foreign exchange.................. (288,000) 285,000 (462,000)
Other............................. (546,000) (171,000) (207,000)
------------ ------------ ------------
2,676,000 4,285,000 6,709,000
------------ ------------ ------------
Income before provision for income
taxes.............................. 15,961,000 19,025,000 57,068,000
Provision for income taxes.......... 5,427,000 6,611,000 19,973,000
------------ ------------ ------------
Net income.......................... $ 10,534,000 $ 12,414,000 $ 37,095,000
============ ============ ============
Earnings per common share........... $ 0.48 $ 0.57 $ 1.70
============ ============ ============
Earnings per common share assuming
dilution........................... $ 0.48 $ 0.57 $ 1.65
============ ============ ============
Weighted average number of shares
outstanding........................ 21,995,000 21,833,000 21,771,000
============ ============ ============
Diluted shares outstanding.......... 22,015,000 21,898,000 22,504,000
============ ============ ============
</TABLE>

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

34
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Notes Foreign
Additional Receivable Currency Total
Common Paid-in From Deferred Translation Retained Stockholders'
Stock Capital Stockholders Compensation Adjustment Earnings Equity
------ ----------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1997................... $2,000 $42,992,000 $(14,000) $(127,000) $ (1,066,000) $24,108,000 $ 65,895,000
Comprehensive income:
Net income.............. -- -- -- -- -- 10,534,000 10,534,000
Foreign currency
translation............ -- -- -- -- 314,000 -- 314,000
------------
Comprehensive income.... 10,848,000
Amortization of deferred
compensation........... -- -- -- 80,000 -- -- 80,000
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
Comprehensive income:
Net income.............. -- -- -- -- -- 12,414,000 12,414,000
Foreign currency
translation............ -- -- -- -- (548,000) -- (548,000)
------------
Comprehensive income.... 11,866,000
Amortization of deferred
compensation........... -- -- -- 47,000 -- -- 47,000
Stock repurchases....... -- (3,106,000) -- -- -- -- (3,106,000)
Stock option exercises.. -- 2,000 -- -- -- -- 2,000
Collections on notes
receivable from
stockholders........... -- -- 3,000 -- -- -- 3,000
------ ----------- -------- --------- ------------ ----------- ------------
Balance, September 30,
1999................... 2,000 39,888,000 (6,000) -- (1,300,000) 47,056,000 85,640,000
Comprehensive income:
Net income.............. -- -- -- -- -- 37,095,000 37,095,000
Foreign currency
translation............ -- -- -- -- (2,707,000) -- (2,707,000)
------------
Comprehensive income.... 34,388,000
Stock option exercises.. -- 9,647,000 -- -- -- -- 9,647,000
Tax benefit related to
stock option
exercises.............. -- 3,114,000 -- -- -- -- 3,114,000
Collections on notes
receivable from
stockholders........... -- -- 6,000 -- -- -- 6,000
------ ----------- -------- --------- ------------ ----------- ------------
Balance, September 30,
2000................... $2,000 $52,649,000 $ -- $ -- $(4,007,000 ) $84,151,000 $132,795,000
====== =========== ======== ========= ============ =========== ============
</TABLE>

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

35
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows--operating activities:
Net income.......................... $ 10,534,000 $ 12,414,000 $ 37,095,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 13,019,000 12,841,000 8,402,000
Write-off of deferred CBT
development costs................. 92,000 7,104,000 --
Unrealized foreign exchange losses
(gains) .......................... 88,000 (418,000) 819,000
Losses on disposals of equipment
and leasehold improvements........ 601,000 307,000 174,000
Deferred facilities rent charges... (159,000) 1,469,000 (307,000)
Amortization of deferred
compensation...................... 80,000 47,000 --
Change in net assets and
liabilities:
Trade accounts receivable......... 5,126,000 696,000 (9,510,000)
Prepaid marketing expenses........ 208,000 (477,000) (138,000)
Prepaid expenses and other........ 1,181,000 (463,000) (1,531,000)
Income taxes...................... 886,000 210,000 4,352,000
Trade accounts payable............ (3,548,000) (1,032,000) 2,773,000
Deferred revenue.................. 5,718,000 4,606,000 18,093,000
Accrued payroll, benefits and
related taxes.................... (347,000) 975,000 2,691,000
Other accrued liabilities......... 1,762,000 (767,000) 2,441,000
------------ ------------ ------------
Net cash provided by operating
activities.......................... 35,241,000 37,512,000 65,354,000
------------ ------------ ------------
Cash flows--investing activities:
Purchases of equipment, property and
leasehold improvements............. (10,358,000) (8,154,000) (7,934,000)
Retirements of equipment and
leasehold improvements............. 630,000 75,000 845,000
Proceeds from short-term interest-
bearing investments:
Investments held to maturity....... 27,889,000 48,319,000 94,106,000
Investments held for sale.......... 5,100,000 4,500,000 81,850,000
Purchases of short-term interest-
bearing investments:
Investments held to maturity....... (30,195,000) (74,390,000) (94,781,000)
Investments held for sale.......... (9,600,000) (5,650,000) (60,700,000)
Purchases of long-term interest-
bearing investments held to
maturity........................... (9,934,000) (122,000) --
Other, net.......................... (5,289,000) (1,839,000) (806,000)
------------ ------------ ------------
Net cash provided (used) in
investing activities............... (31,757,000) (37,261,000) 12,580,000
------------ ------------ ------------
Cash flows--financing activities:
Proceeds from exercise of stock
options............................ -- 2,000 9,647,000
Repurchases of Common Stock......... -- (3,106,000) --
Collections of stockholder notes
receivable......................... 5,000 3,000 6,000
Principal payments of debt and
capital leases..................... (19,000) -- --
------------ ------------ ------------
Net cash provided (used) in financing
activities.......................... (14,000) (3,101,000) 9,653,000
------------ ------------ ------------
Effects of exchange rates on cash.... 144,000 (146,000) (4,415,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 3,614,000 (2,996,000) 83,172,000
Cash and cash equivalents at the
beginning of the period............. 32,441,000 36,055,000 33,059,000
------------ ------------ ------------
Cash and cash equivalents at the end
of the period....................... $ 36,055,000 $ 33,059,000 $116,231,000
============ ============ ============
Supplemental disclosures:
Income taxes paid................... $ 5,214,000 $ 5,937,000 $ 14,218,000
============ ============ ============
Interest paid....................... $ 2,000 $ 2,000 $ 7,000
============ ============ ============
</TABLE>

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

36
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDARIES

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,
market 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, United Kingdom, 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, programming languages,
databases, object-oriented technology, IT management and related topics. In
addition to its instructor-led courses, the Company has delivered certain of
its courses by using a computer-based training method ("CBT") on CD-ROMs. In
fiscal 1999 the Company announced that it intended to shift its focus in
technology-based training from these CD-ROM based courses to other distance
learning methodologies using the Internet (See Note 10.)

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.)
Technology for Business and Industry, Inc. (U.S. Virgin Islands)

c. Financial Statement Classifications:

Certain prior period balances have been reclassified to conform with the
current period presentation.

d. Capital Stock:

The Company has 75,000,000 authorized shares of $.0001 par value Common
Stock ("Common Stock"). In addition, the Company's authorized capital stock
includes 10,000,000 shares of $.0001 par value preferred stock ("Preferred
Stock"). No shares of Preferred Stock have been issued nor have the terms,
conditions or preferences for such Preferred Stock been established.

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

37
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 Training
Passport program. The Training 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 Training 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 Training Passport and the
estimated average number of courses passport holders will actually attend.
Upon expiration of a Training Passport, the Company records the difference, if
any, between the revenues previously recognized and the Training Passport
selling price. The estimated attendance rate is based upon the historical
experience of the average actual number of course events Training Passport
holders have been attending. The average of the actual attendance rate for all
expired Training Passports has closely approximated the estimated rate
utilized by the Company. If the Training Passport attendance rate changes,
based upon this historical data, the Company adjusts the revenue recognition
rate for all active Training Passports and for all Training 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 Training 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.

The Company also offers a sales discount program referred to as the Voucher
program. Under this program, the Company's customer buys the right to send a
specified number of attendees to a Learning Tree course or courses over a one-
year period for a fixed price. Revenue is recognized on a pro rata basis for
each attendance. If a Voucher expires, unused, the Company records the selling
price of the expired voucher as revenue.

f. Revenue Recognition--CBT Courses:

The Company generally recognizes revenue from CBT courses upon shipment if
there are no significant vendor obligations. If significant vendor obligations
exist at the time of shipment, revenue is deferred and recognized ratably over
the term of the license agreement. Unearned license revenues are recorded as
deferred revenues in the accompanying consolidated balance sheets.

g. Deferred Revenues:

Deferred revenues primarily relate to unearned revenues associated with the
Training Passport and Voucher programs and refundable advance payments
received from customers for course events to be held in the future.

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, 1998,
1999 and 2000 were $38,812,000, $35,849,000 and $34,544,000, respectively.

i. Course Development Costs:

Instructor-led IT training course development costs are charged to
operations in the period incurred. CBT development costs were historically
capitalized upon the establishment of technological feasibility, and 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

38
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

economic life of the product which was 24 months. All capitalized CBT
development costs were written off during fiscal 1999 (see Note 10.)

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>

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.

l. Intangible and Long-Lived Assets:

The Company periodically reviews the carrying value of its intangible and
long-lived assets to identify and assess any impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
assets.

m. 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.

n. Computation of Earnings per Common Share and 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. Earnings per common share assuming dilution are
computed by including the dilutive effect, if any, of all outstanding options
to purchase Common Stock using the treasury stock method. To calculate the
number of diluted shares outstanding,

39
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

20,000 shares, 65,000 shares and 733,000 shares were added to the weighted
average number of shares outstanding for the fiscal years ended September 30,
1998, 1999 and 2000, respectively. Approximately 1,067,000 stock options and
930,000 stock options were excluded from the calculation of earning per common
share assuming dilution for the fiscal years ended September 30, 1998 and
1999, respectively, because they were antidilutive.

o. Comprehensive Income:

The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
October 1, 1998. SFAS No. 130 requires disclosure of total non-stockholder
changes in equity in interim periods and additional disclosures of the
components of non-stockholder changes in equity on an annual basis. For each
of the fiscal years ended September 30, 1998, 1999 and 2000, the only non-
stockholder changes in equity were related to the translation of balance
sheets which were denominated in foreign currencies. The Company has restated
the information for the fiscal year ended September 30, 1998 in the
accompanying Statements of Stockholders' Equity to reflect the retroactive
adoption of SFAS No. 130.

p. 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. 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,
-----------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Domestic............................... $ 1,757,000 $ 4,524,000 $34,185,000
Foreign................................ 14,204,000 14,501,000 22,883,000
----------- ----------- -----------
Total................................ $15,961,000 $19,025,000 $57,068,000
=========== =========== ===========
</TABLE>

40
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
September 30,
---------------------------------
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Current tax provision:
U.S. Federal.......................... $ 120,000 $1,175,000 $11,451,000
State................................. 190,000 383,000 1,020,000
Foreign............................... 4,389,000 4,917,000 7,320,000
---------- ---------- -----------
4,699,000 6,475,000 19,791,000
---------- ---------- -----------
Deferred tax provision:
U.S. Federal.......................... 374,000 14,000 62,000
State................................. 40,000 1,000 5,000
Foreign............................... 314,000 121,000 115,000
---------- ---------- -----------
728,000 136,000 182,000
---------- ---------- -----------
Total provision for income taxes........ $5,427,000 $6,611,000 $19,973,000
========== ========== ===========
</TABLE>

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

<TABLE>
<CAPTION>
September 30,
-----------------------------------
1998 1999 2000
---------- ---------- -----------
<S> <C> <C> <C>
Income taxes at the statutory rate.. $5,587,000 $6,468,000 $19,973,000
Permanent differences............... (214,000) 39,000 40,000
Effect of foreign taxes and tax
credits............................ (71,000) (149,000) (710,000)
State income taxes.................. 125,000 253,000 670,000
---------- ---------- -----------
Total provision for income taxes.... $5,427,000 $6,611,000 $19,973,000
========== ========== ===========
</TABLE>

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. Deferred
income tax assets arise from expected reductions in taxes payable in future
periods. Deferred tax assets reflect management's estimate of the amounts that
will be realized from future profitability and can be predicted with
reasonable certainty. Deferred income tax liabilities represent taxes the
Company expects to pay in future periods.

41
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred income tax liabilities and assets consist of the following:

<TABLE>
<CAPTION>
September 30,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Domestic operations:
Deferred tax assets:
Deferred facilities rent charges................ $ 497,000 $ 432,000
Other........................................... 324,000 308,000
Deferred tax liabilities:
Depreciation and amortization................... (563,000) (548,000)
Other........................................... (17,000) (18,000)
--------- ---------
Net domestic deferred tax assets................ 241,000 174,000
--------- ---------
Foreign operations:
Deferred tax assets:
Depreciation and other.......................... (395,000) (256,000)
--------- ---------
Net foreign deferred tax liabilities............ (395,000) (256,000)
--------- ---------
Net deferred tax liabilities........................ $(154,000) $ (82,000)
========= =========
</TABLE>

3. 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 are as follows:

<TABLE>
<S> <C>
2001.......................................................... $ 11,078,000
2002.......................................................... 12,335,000
2003.......................................................... 12,695,000
2004.......................................................... 12,968,000
2005.......................................................... 12,862,000
Thereafter.................................................... 82,157,000
------------
$144,095,000
============
</TABLE>

The minimum future rental payments have not been reduced by future minimum
sublease rentals of $3,666,000 due in the future under noncancelable
subleases. For the years ended September 30, 1998, 1999 and 2000, rent expense
was $5,296,000, $9,680,000 and $10,238,000, respectively. The agreements
generally require the payment of property taxes, insurance and maintenance in
addition to the minimum base rent.

4. STOCKHOLDERS' EQUITY:

Common Stock Sold to Employees--

During fiscal 1995, the Company recorded deferred compensation of $321,000,
which represented the excess of the appraised value (as determined by an
independent appraisal) over the initial issue price of common stock sold to
certain employees during fiscal 1995. The deferred compensation was reflected
as a reduction of stockholders' equity in the accompanying financial
statements and was amortized as additional compensation expense over the
related service period that ended during fiscal 1999. During the fiscal years
ended September 30, 1998 and 1999, the Company recorded $80,000 and $47,000 of
additional compensation expense relating to the amortization of the deferred
compensation, respectively.

42
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Repurchase of Company Stock--

On March 8, 1999, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 shares of the Common Stock of the Company.
During fiscal 1999, the Company repurchased approximately 358,800 shares of
its Common Stock on the open market at a total cost of approximately
$3,106,000.

5. EMPLOYEE STOCK OPTION PLAN:

In March 1999, the Company and its shareholders adopted the Learning Tree
International, Inc. 1999 Stock Option Plan (the "1999 Plan") and in October
1995, the 1995 Stock Option Plan (the "1995 Plan") was adopted. The 1999 Plan
and the 1995 Plan provide 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 1,500,000 shares and 2,250,000
shares of Common Stock, respectively. Both plans permit the grant of options
to officers, employees and directors of the Company.

Under the plans, the exercise price of incentive stock options granted will
be greater than or equal to their fair market value at the date of grant, and
the maximum term of all options may not exceed ten years. The vesting schedule
and the period required for full exercisability of the stock options is at the
discretion of the Board of Directors, but in no event can it be less than six
months.

During the year ended September 30, 1998, non-qualified options were granted
under the 1995 Option Plan to certain employees. In 1999, options were granted
to certain employees under both of the plans. In fiscal 2000, options were
granted to certain employees under the 1999 Option Plan. The exercise price of
all options granted was equal to their fair market value at the dates of the
grants and the terms of the options are generally five years. The options are
generally 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
plans:

<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
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
Options Granted................................ 1,411,000 9.82
Exercised during the year...................... -- --
Forfeited during the year...................... (334,000) 15.82
--------- ------
Outstanding at September 30, 1999............ 2,144,000 16.37
Options Granted................................ 448,000 29.19
Exercised during the year...................... (483,000) 19.97
Forfeited during the year...................... (145,000) 18.01
--------- ------
Outstanding at September 30, 2000............ 1,964,000 $18.28
========= ======
</TABLE>

43
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes stock options outstanding and exercisable at
September 30, 2000:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted Weighted
Exercise Average Remaining Average
Price Ranges Shares Exercise Price Life (Years) Shares Exercise Price
------------- --------- -------------- ------------ ------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.63--16.56 1,160,000 $10.74 2.8 209,000 $ 8.46
23.50--29.50 610,000 24.97 1.6 289,000 24.94
35.50--48.50 194,000 42.31 4.6 -- --
------------- --------- ------ --- ------- ------
$ 6.63--48.50 1,964,000 $18.28 2.6 498,000 $18.00
============= ========= ====== === ======= ======
</TABLE>

The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" in accounting for the stock option plans. Accordingly, no
compensation cost has been recognized for options granted during fiscal 1998,
1999 and 2000. 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 would have been reduced to the pro forma amounts
below:

<TABLE>
<CAPTION>
September 30,
-------------------------------------
1998 1999 2000
----------- ------------ ------------
<S> <C> <C> <C>
Pro forma Net Income............... $ 9,762,000 $ 11,400,000 $ 35,741,000
Pro forma earnings per common
share............................. $0.44 $0.52 $1.64
Pro forma earnings per common share
assuming dilution................. $0.44 $0.52 $1.59
</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, 1998, 1999 and 2000 with the following
assumptions: risk-free interest rates of 5.8%, 4.7% and 6.0%; a dividend yield
of zero; an expected life of two and one-half years; and a volatility of 41%,
58% and 63%. Based upon these assumptions, the pro forma weighted average fair
value of the options granted during fiscal 1998 was $7.27, during fiscal 1999
was $3.27 and during fiscal 2000 was $12.51.

6. 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 401(k) 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. The Company
makes contributions at a rate of 75% of elective contributions up to 4.5% of
the compensation of such contributors. The Company contributed $697,000,
$738,000 and $687,000 to the Plan for the fiscal years ended September 30,
1998, 1999 and 2000, 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, 1998, 1999 and
2000, the cost to the Company of these plans was approximately $194,000,
$264,000 and $303,000, respectively.

44
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. OPERATING SEGMENT INFORMATION:

In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Previously reported
geographic information has been restated to conform with SFAS No. 131
requirements.

The Company has only one material operating segment, the design and delivery
of advanced technology training courses and related services, which is managed
on a geographic basis. There were no sales to any individual customers that
accounted for 10% or more of revenue in fiscal 1998, 1999 or 2000.

The table below presents information by geographic location:

<TABLE>
<CAPTION>
September 30,
--------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
United States................... $ 98,776,000 $ 95,685,000 $117,117,000
Canada.......................... 11,059,000 11,202,000 14,011,000
Europe.......................... 75,310,000 80,738,000 90,421,000
Asia............................ 2,029,000 1,696,000 2,459,000
------------ ------------ ------------
Consolidated revenues......... $187,174,000 $189,321,000 $224,008,000
============ ============ ============
Long-lived assets:
United States................... $ 17,538,000 $ 14,333,000
Canada.......................... 767,000 2,058,000
Europe.......................... 7,970,000 7,316,000
Asia............................ 209,000 104,000
------------ ------------
Consolidated long-lived
assets....................... $ 26,484,000 $ 23,811,000
============ ============
</TABLE>

Revenues are attributed to countries based on the location in which the sale
originated. Long-lived assets principally consist of net equipment, property
and leasehold improvements.

8. VALUATION AND QUALIFYING ACCOUNTS:

Activity with respect to the Company's allowance for doubtful accounts
receivable is summarized as follows:

<TABLE>
<CAPTION>
September 30,
-------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Beginning balance......................... $ 312,000 $ 408,000 $ 743,000
Charged to expense........................ 408,000 610,000 198,000
Amounts written off....................... (312,000) (275,000) (442,000)
--------- --------- ---------
Ending balance............................ $ 408,000 $ 743,000 $ 499,000
========= ========= =========
</TABLE>

9. 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.

45
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Short-Term Interest-Bearing Investments--

Investments held to maturity mature between one and twelve months. 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.

Following is a summary of the Company's short-term interest-bearing
investments:

<TABLE>
<CAPTION>
September 30,
------------------------
1999 2000
----------- ------------
<S> <C> <C>
Investments held to maturity:
Commercial paper............................... $37,207,000 $103,103,000
Less investments included in cash equivalents.. -- 65,221,000
----------- ------------
Total held to maturity........................ 37,207,000 37,882,000
Investments held for sale:
State and local government debt................ 21,150,000 --
----------- ------------
Total short-term interest-bearing
investments.................................. $58,357,000 $ 37,882,000
=========== ============
</TABLE>

Long-Term Interest-Bearing Investments--

Included in the balance of long-term interest-bearing investments is
$8,824,000 (6,000,000 British Pounds) which 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. The investment is carried at cost, which
approximates market value. The Company receives interest earned by the cash
deposit. The required level of the cash deposit or letter of credit will
decline if certain financial ratios have been met.

10. WRITE-OFF OF DEFERRED CBT PRODUCT DEVELOPMENT COSTS:

On July 13, 1999, the Company announced that it intended to shift its focus
in technology-based training from CD-ROM based courses to other distance
learning methodologies using the Internet. As a result, the Company
discontinued further development of its CBT courses, and substantially reduced
its CBT sales efforts during fiscal 2000. As of September 30, 2000, sales of
CBT courses were largely discontinued.

As a result of this decision, the Company wrote-off all capitalized CBT
product development costs, approximating $5,893,000, on June 30, 1999. Earlier
in fiscal 1999, the Company wrote-off CBT product development costs in the
amount of $1,211,000 which were estimated to be non-realizable, as well as for
costs for certain CBT courses which were terminated while still under
development. In addition, in fiscal 1999, the Company recognized $2,337,000 of
CBT product development costs. These costs are included in course development
expense in the accompanying consolidated statements of operations.

For the fiscal year ended September 30, 1998, $2,621,000 of CBT product
development costs was charged to course development expense in the
accompanying consolidated statements of operations.

11. RELATED PARTY TRANSACTIONS:

In September 2000, Dr. David Collins, the Company's Chief Executive Officer,
Eric Garen the Company's President, and certain of their related entities,
sold an aggregate of 3,000,000 shares of Common Stock of the Company. In
connection with the transaction, the Company made standard representations and
warranties, and

46
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

agreed to certain covenants (including the filing of a registration statement
on Form S-3) which are typical in transactions of this type. As part of the
transaction, the selling shareholders have agreed to reimburse the Company for
all costs incurred by it in connection with the transaction or registration
statement and to indemnify the Company against any claims based on or related
to the transaction or the registration statement.

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 amended and extended for one year from
September 30, 1998. In September 1999, the employment agreements with the
Chief Executive Officer and the President of the Company were amended and
extended for an additional three years and one year, respectively. In
September 2000, the employment agreement with the President of the Company was
amended and extended for one additional year.

During fiscal 2000, the Company paid $182,000 for legal services performed
by Guth|Chrisopher LLP, a law firm in which one of the Company's Directors is
a partner. During fiscal 2000, the Company paid $161,000 for financial
consulting services to M. Kane & Company, Inc. The president of M. Kane &
Company, Inc. is a Director of the Company.

12. LITIGATION:

47
<PAGE>

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

If the Judgment approving the Settlement Stipulation does not become final,
Learning Tree cannot estimate the outcome of further proceedings or any
potential liabilities it may incur. In such circumstances, Learning Tree may
incur legal and other defense costs in an amount that it cannot 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 Learning Tree's business, financial condition, results of
operations and cash flows. Learning Tree has agreements with its officers and
directors under which it is indemnifying them in these proceedings.

48
<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, 2000. 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 2001 Annual
Meeting of Shareholders.

<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
David C. Collins(1)..... 59 Chairman of the Board of Directors and Chief
Executive Officer
Eric R. Garen........... 53 President and Director
James E. Furlan......... 49 Chief Operating Officer and Director
Gary R. Wright.......... 43 Chief Financial Officer and Secretary and Director
Mary C. Adams........... 44 Vice President, Administration, Investor Relations
and Assistant Secretary and Director
W. Mathew Juechter(2)... 67 Director
Michael W. Kane(2)...... 49 Director
Alan B. Salisbury....... 63 Director
Theodore E. Guth........ 46 Director
</TABLE>
--------
(1) Member of the Compensation Committee.
(2)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. 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 as Executive Vice
President and as President of the Company since the Company's business began
in 1974. Mr. Garen holds a Bachelor of Science degree in Electrical
Engineering from the California Institute of Technology and a Masters degree
in Computer Science from the University of Southern California, earning both
degrees with honors.

Mr. Furlan joined the Company in February 1999 as Chief Operating Officer.
Prior to joining the Company, Mr. Furlan was employed by the Xerox Corporation
from July 1974 to February 1999. From 1991 to 1999, Mr. Furlan was Vice
President, General Manager of various Xerox business units, the most recent
being Distributed Printing and Publishing Systems. Prior to these positions,
he held a series of senior management positions in sales, marketing, finance
and strategic planning in Xerox's printer and copier divisions. Mr. Furlan
holds a Bachelor of Science degree in engineering and a Master of Business
Administration from the University of Illinois. Mr. Furlan became a Director
of the Company in August 1999.

Mr. Wright has been Vice President, 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

49
<PAGE>

accounting firm of Arthur Andersen LLP. Mr. Wright is a certified public
accountant. Mr. Wright became a Director of the Company in December 1999.

Ms. Adams has served as Vice President, Administration and Investor
Relations since September 1995. She began her association with the Company in
September 1975 and has held a variety of key positions in the Company. Ms.
Adams is also the President of Advanced Technology Marketing, Inc., a wholly
owned subsidiary of the Company. Ms. Adams became a Director of the Company in
December 1999.

Mr. Juechter has been a director of the Company since June 1987. He is
President and Chief Executive Officer of IRA, Inc., a management consulting
company that works primarily in the areas of strategy, structure and executive
development. From 1991 to 1999, he was Chief Executive Officer of ARC
International Ltd., a management consulting and training company. From 1986 to
1991, Mr. Juechter was Managing Director of IRA, Inc. in St. Paul, Minnesota.
Mr. Juechter served as President and Chief Executive Officer of Wilson
Learning Corp., a multi-national training organization, from 1977 to 1986.
From 1989 to 1997, he was President of the Board of Governors of the American
Society for Training and Development (ASTD). Mr. Juechter is a graduate of
Boston University and Harvard Business School.

Dr. Kane has served as a director of the Company since February 1995. Since
1991, he has served as President and Chief Executive Officer of M. Kane &
Company, Inc., an investment banking firm focusing primarily on technology
companies. From 1987 to 1988, he was an investment banker with L.F. Rothschild
& Co., Inc. and from 1988 to 1991 he was an investment banker with Oppenheimer
& Co., Inc. From 1984 to 1987, Dr. Kane practiced primarily corporate and
securities law with the law firm of Irell & Manella LLP 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 earned 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 is an independent management consultant in the information
technology field. He retired from Learning Tree in 1999, where he had served
as President and General Manager, and later Chairman, of Learning Tree
International USA, Inc., the Company's operating subsidiary in the United
States, since April 1993. From 1991 until he joined the Company, 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 Contel
Corp, an independent telephone company located in Chantilly, Virginia.
Dr. Salisbury is a director of Sybase, Inc., an enterprise software vendor,
and chairman of Avilar Technologies, an eLearning infrastructure and services
provider. 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.

Mr. Guth has served as a director of the Company since March 1999. He is a
partner at Guth|Christopher LLP, a law firm he co-founded in 1997. Mr. Guth
was previously a partner at the law firm of Irell & Manella LLP from 1985 to
1993 and from 1995 to 1997. From 1993 to 1995, he was the President of
Dabney/Resnick, Inc., a 100-person investment banking and brokerage firm. Mr.
Guth was a full-time professor at the UCLA School of Law from 1981 to 1983. He
holds a JD from Yale Law School and a Bachelor of Science degree from the
University of Notre Dame (summa cum laude, Phi Beta Kappa).

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.

50
<PAGE>

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 2001 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 2001 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 2001 Annual Meeting of
Shareholders.

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, 2000.

51
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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

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

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**

10.9 Employment Agreement dated as of February 25, 1999, between Learning
Tree International, Inc. and James E. Furlan****

10.10 1999 Stock Option Plan dated as of January 29, 1999*****

10.11 Reimbursement and Indemnification Agreement dated as of September
15, 2000, between Learning Tree International, Inc. and David
Collins, Eric Garen and related entities

21.1 Subsidiaries of the Registrant

23.1 Consent of Arthur Andersen LLP

27.1 Financial Data Schedule

99 Risk Factors
</TABLE>
--------
* Previously filed on October 6, 1995.
** Previously filed on November 13, 1995.
*** Previously filed on December 23, 1999.
**** Previously filed on May 13, 1999.
***** Previously filed on January 29, 1999.

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 15th day of December, 2000.

Learning Tree International, Inc.

/s/ David C. Collins, Ph.D.
By: _________________________________
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 and December 15, 2000
______________________________________ Chief Executive Officer
David C. Collins, Ph.D. (principal executive
officer)

/s/ Eric R. Garen President and Director December 15, 2000
______________________________________
Eric R. Garen

/s/ Gary R. Wright Chief Financial Officer and December 15, 2000
______________________________________ Secretary (principal
Gary R. Wright financial officer and
principal accounting
officer) and Director

/s/ James E. Furlan Chief Operating Officer and December 15, 2000
______________________________________ Director
James E. Furlan

/s/ Mary C. Adams Vice President, December 15, 2000
______________________________________ Administration, Investor
Mary C. Adams Relations and Assistant
Secretary and Director

/s/ W. Mathew Juechter Director December 15, 2000
______________________________________
W. Mathew Juechter

/s/ Alan B. Salisbury, Ph.D. Director December 15, 2000
______________________________________
Alan B. Salisbury, Ph.D.

/s/ Michael W. Kane, Ph.D. Director December 15, 2000
______________________________________
Michael W. Kane, Ph.D.

/s/ Theodore E. Guth Director December 15, 2000
______________________________________
Theodore E. Guth
</TABLE>