Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
Learning Tree International, Inc. (the "Company"), is a leading worldwide provider of education and training for corporate 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, Internet/intranets, local and wide area computer networks, operating systems, programming languages, database systems, graphical user interfaces, object-oriented technology, and IT management. The Company tests and certifies IT professionals in 22 IT job functions. The Company's instructor-led courses are recommended for college credit by the American Council on Education. In addition to its instructor-led courses, the Company develops, produces and markets a line of interactive computer-based training courses incorporating audio and graphical elements ("multimedia CBT") that are designed for both stand-alone CD-ROM and network-based delivery.

NEW DEVELOPMENTS
During the quarter ended March 31, 1997, the Company expanded the breadth of its instructor-led training activities through the formation of two new divisions. The new Power Seminars Division presents multi-day conferences comprised of a number of 1-day, multimedia lecture-style courses in key information technologies that are undergoing rapid change. The Company delivered its first Power Seminar conference in March 1997, which was attended by over 500 IT professionals.

The new Learning Solutions Division provides custom-developed training programs for larger clients who need to train large numbers of their IT professionals and end-users. The initial focus of this new division is on training that supports the roll-out and use of new organization-wide information systems, tools and applications. The division's first contract was initiated with General Motors Corporation in March 1997 for the training of 20,000 GM employees and dealer personnel in courses scheduled in 60 cities across the United States, primarily between June and December of this year.

RESULTS OF OPERATIONS
In the second fiscal quarter ended March 31, 1997, revenues increased by $13.1 million or 57% to $35.8 million from $22.7 million for the corresponding quarter of the prior year. Income from operations for the quarter ended March 31, 1997 increased $814,000 or 52% to $2.4 million from $1.6 million for the same quarter of fiscal 1996. Net income for the quarter ended March 31, 1997, increased $703,000 or 50% to $2.1 million from $1.4 million for the quarter ended March 31, 1996.

For the six month period ended March 31, 1997, revenues increased by $25.9 million or 56% to $71.8 million from $45.9 million for the six months ended March 31, 1996. Income from operations for the six months ended March 31, 1997, increased $3.3 million or 70% to $8.0 million from $4.7 million for the corresponding period of the prior year. Net income for the six months ended March 31, 1997 increased $2.4 million or 65% to $6.2 million from $3.8 million for the corresponding period of the prior year.

Revenues increased primarily because the number of course participants increased to 22,998 in the quarter ended March 31, 1997, from 15,971 participants in the corresponding quarter of the prior year. For the six months ended March 31, 1997, the number of course participants was 47,027 compared to 32,330 in the corresponding six month period of the prior year. The additional course participants are primarily attributable to increased marketing and sales expenditures and an increase in the net number of instructor-led course titles to 124 in the second quarter of fiscal 1997 compared to 95 in the same period a year earlier. Revenues for the three and six month periods ended March 31, 1997, also reflect higher average revenues per course participant as well as revenues from the Company's multimedia CBT product line. As of March 31, 1997, the Company had expanded its multimedia CBT course library to 30 titles.

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 its multimedia CBT courses, cost of revenues primarily includes the costs of amortized development, manufacturing, distribution and support. The cost of revenues for the second quarter of fiscal 1997 increased $6.4 million or 72% to $15.4 million from $9.0 million for the same quarter in 1996. For the six months ended March 31, 1997, the Compant's cost of revenues increased $11.6 million or 64% to $29.8 million from $18.2 million for the corresponding period in the prior year. The increased cost of revenues compared to the same periods in the prior year, are primarily the result of increases in the number of instructor-led course events, costs per event and costs of sales associated with the increased sales of the multimedia CBT product line. The number of instructor-led course events increased 41% in the quarter ended March 31, 1997 to 1,446 course events from 1,023 course events in the quarter ended March 31, 1996. For the six month period ended March 31, 1997, the number of instructor-led course events increased 40% to 2,931 from 2,089 for the corresponding period in the prior year. Costs per instructor-led course event increased approximately 17% and 14%, respectively, compared to the corresponding periods in the prior year. The change in the average cost per instructor-led course event primarily arises from a) the need to conduct more events in hotels to handle increasing demand which frequently exceeds the Company's education center capacity, b) increased instructor fees, c) the recruitment and training costs to expand the instructor force, and d) costs of acquiring, maintaining and shipping course equipment for hands-on courses which have increased as a percentage of all courses. To accommodate the growth in course enrollments, the Company has increased the number and size of its education center facilities and is seeking additional education center facilities in certain locations.

In response to the continued strength in market response for its training programs, the Company intends to continue to: a) expand its library of instructor-led course titles, including the further development of titles for its new Power Seminar Division; b) expand its multimedia CBT course library; c) expand the activities of its new Learning Solutions Division d) further expand its sales, advertising and marketing expenditures to capture additional market share; e) recruit and train additional instructors for both new and existing course titles and f) add new education centers and expand the number of classrooms in its existing education centers. Accordingly, the Company's cost of revenues, course development and sales and marketing expenditures are expected to increase. There can be no assurance that the Company will be able to achieve increased market share after making the expenditures required by these activities.

Course development expenses include the costs of developing new instructor-led courses, Power Seminars, multimedia CBT course titles and Learning Solutions programs, as well as the cost of updating the Company's existing course libraries. The principal costs are for internal product development staff and independent consultants who serve as subject matter experts. Course development expenses increased by $940,000 or 66% to $2.4 million for the quarter ended March 31, 1997 from $1.4 million in the quarter ended March 31, 1996. For the six months ended March 31, 1997, course development expenses increased $2.1 million or 78% to $4.8 million from $2.7 million for the corresponding period in the prior year. These increases reflect the costs associated with the Company's expansion of its library of instructor-led and multimedia CBT courses as well as the development costs for the new Power Seminar and Learning Solutions courses.

Sales and marketing expenses consist of salaries, commissions and travel-related costs for sales and marketing personnel, the costs of designing, producing and distributing direct mail marketing and media advertisements, and the costs of information systems to support these activities. Sales and marketing expenses increased $3.5 million or 44% to $11.4 million for the quarter ended March 31, 1997 from $7.9 million for the quarter ended March 31, 1996. For the six months ended March 31, 1997, sales and marketing expenses increased $7.2 million or 51% to $21.3 million from $14.1 million for the corresponding period in the prior year. The increase in sales and marketing expenses is due to an increase in telemarketing and field sales staff and increased direct mail marketing intended to reach a broader range of potential customers, to expand business with current customers, to expand the Company's presence in certain U.S. cities, to promote the new Power Seminar and the CBT product lines and to communicate the availability of new course titles.

General and administrative expenses increased $1.4 million or 48% to $4.2 million for the quarter ended March 31, 1997 compared to $2.8 million in the same quarter of the prior year. For the six months ended March 31, 1997, general and administrative expenses increased $1.7 million or 28% to $7.9 million from $6.2 million for the corresponding period in the prior year.

Other income (expense) is primarily comprised of interest expense, interest income and foreign currency gains and losses. Other income increased $340,000 to $810,000 for the quarter ended March 31, 1997 from $470,000 for the corresponding quarter in the prior year. For the six months ended March 31, 1997, other income increased by $770,000 to $1.4 million from $627,000 for the corresponding six month period in the prior year. These increases were primarily attributable to additional interest income arising from higher cash balances which have been generated by operations and from the proceeds of the Company's initial public offering in December 1995 and secondary offering in September 1996.

The provision for income taxes increased $451,000 to $1.1 million for the quarter ended March 31, 1997, from $634,000 for the quarter ended March 31, 1996. For the six months ended March 31, 1997, the provision for income taxes increased $1.6 million to $3.2 million from $1.6 million for the corresponding period in the prior year. The increase in the income tax provision reflects an increase in income before taxes as well as an increase in the Company's effective tax rate for fiscal 1997. The effective tax rate for fiscal 1996 reflected the utilization of certain foreign tax loss carryforwards and all of the Company's remaining tax loss carryforwards were used in that year.

BACKLOG
At March 31, 1997, the Company had a backlog of orders for instructor-led courses in the amount of $24.9 million, which represented a 33% increase over the backlog of $18.8 million at March 31, 1996. Only a portion of the Company's backlog is funded. There can be no assurance that the growth in the backlog will continue or that orders comprising the backlog will be realized as revenue.

FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate based on various factors, including the frequency of course events, 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 and alternate delivery methods, the mix between customer-site course events and Learning Tree-site course events, competitive forces within the current and anticipated future markets served by the Company, the spending patterns of its customers, currency fluctuations, inclement weather and general economic conditions. Fluctuations in quarter-to-quarter results may also occur depending on differences in the timing of, and the time period between, the Company's expenditures on the development and marketing of its courses and the receipt of revenues.

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

LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term interest-bearing investments increased to $66.9 million at March 31, 1997 from $61.5 million at September 30, 1996, primarily as a result of cash provided by operations. For the six months ended March 31, 1997, cash provided by operations was approximately $16.0 million compared to $6.9 million during the same period in the prior year. The increase in cash provided by operations reflects the increases in profits and deferred revenues arising from prepaid multi-enrollment programs. As of March 31, 1997, the Company had a net working capital balance of $41.3 million.

During the six months ended March 31, 1997, the Company invested $10.0 million in equipment and facilities compared to $3.2 million in the same period of the prior year. This increase is primarily related to the build-out of office and classroom facilities and the purchase of additional course equipment to support the growth of course events and the upgrade of course equipment capabilities. While the Company expects to purchase additional course equipment and to enter into leases for additional facilities during fiscal 1997, as of March 31, 1997, the Company had no material future purchase obligations, capital commitments or debt and believes that its cash and cash equivalents, its short-term interest-bearing investments and the cash provided by its operations will be sufficient to meet its cash requirements for the foreseeable future.

FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, the Company's dependence on the timely development, introduction and customer acceptance of new courses and products, the impact of competition and downward pricing pressures, the effect of changing economic conditions, risks in technology development, the risks involved in currency fluctuations, and the other risks and uncertainties detailed from time to time in the Company's filings with the Securities and Exchange Commission, including the Company's 1996 Annual Report on Form 10-K.